Private equity

Return of the Locusts

  • Why it matters

    Why it matters

    The increasingly high amounts paid by private equity firms for big companies at the moment is reminiscent of the situation before the 2008 financial crisis.

  • Facts


    • Investor Bain and Cinven has just paid €5.3 billion ($5.6 billion) for German pharmaceutical firm Stada.
    • Pre-2008 private equity firms embarked on so-called financial engineering, buying debt-laden firms with little equity capital and reselling them at a high price.
    • Restructuring the firms often meant job losses.
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Stada Arzneimittel
Bain and Cinven paid top price for pill maker Stada. Source: Frank Rumpenhorst/dpa

By 5 o’clock last Monday morning, all the legal hurdles had been overcome for the second biggest deal ever by financial investors in Germany.

The executive and supervisory boards of the pharmaceutical company Stada recommended shareholders accept the offer of the investment companies Bain and Cinven. The company is worth €5.3 billion ($5.6 billion) to the private equity investors. That corresponds to a good 13 times adjusted operating profits before amortization. This was a high price indeed, reviving memories of times before the financial crisis when prices and debt were going sky high until reality caught up with the private equity market.

This was also the era of mega takeovers. The most daring deal of all time was by a purchasing syndicate, including private equity giants KKR and TPG in February 2007. In the euphoric climate of the time, the bidders spent $45 billion on the utility company TXU from Texas. The takeover ended seven years later in insolvency, leaving a $40 billion mountain of debt and a bitter lesson to stay away from such transactions in future.

Such events triggered the debate about so-called locusts, an expression used by the then chairman of Germany’s center-left Social Democratic Party, Franz Müntefering. He spoke of an irresponsible swarms, which devoured everything in their path, leaving companies to go broke. His colorful words got the attention of everyone in Germany’s federal election campaign of 2005.

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