Private Equity in The 1980s - Beginning of The LBO Boom

Beginning of The LBO Boom

The beginning of the first boom period in private equity would be marked by the well-publicized success of the Gibson Greetings acquisition in 1982 and would roar ahead through 1983 and 1984 with the soaring stock market driving profitable exits for private equity investors.

In January 1982, former US Secretary of the Treasury William E. Simon, Ray Chambers and a group of investors, which would later come to be known as Wesray Capital Corporation, acquired Gibson Greetings, a producer of greeting cards. The purchase price for Gibson was $80 million, of which only $1 million was rumored to have been contributed by the investors. By mid-1983, just sixteen months after the original deal, Gibson completed a $290 million IPO and Simon made approximately $66 million. Simon and Wesray would later complete the $71.6 million acquisition of Atlas Van Lines. The success of the Gibson Greetings investment attracted the attention of the wider media to the nascent boom in leveraged buyouts.

Between 1979 and 1989, it was estimated that there were over 2,000 leveraged buyouts valued in excess of $250 million Notable buyouts of this period (not described elsewhere in this article) include:

• Malone & Hyde, 1984

KKR completed the first buyout of a public company by tender offer, by acquiring the food distributor and supermarket operator together with the company's chairman Joseph R. Hyde III.

• Wometco Enterprises, 1984

KKR completed the first billion-dollar buyout transaction to acquire the leisure-time company with interests in television, movie theaters and tourist attractions. The buyout comprised the acquisition of 100% of the outstanding shares for $842 million and the assumption of $170 million of the company's outstanding debt.

• Beatrice Companies, 1985

KKR sponsored the $6.1 billion management buyout of Beatrice, which owned Samsonite and Tropicana among other consumer brands. At the time of its closing in 1985, Beatrice was the largest buyout completed.

• Sterling Jewelers, 1985

One of Thomas H. Lee's early successes was the acquisition of Akron, Ohio-based Sterling Jewelers for $28 million. Lee reported put in less than $3 million and when the company was sold two years later for $210 million walked away with over $180 million in profits. The combined company was an early predecessor to what is now Signet Group, one of Europe's largest jewelry retail chains.

• Revco Drug Stores, 1986

The drug store chain was taken private in a management buyout transaction. However, within two years the company was unable to support its debt load and filed for bankruptcy protection. Bondholders in the Revco buyout ultimately contended that the buyout was so poorly constructed that the transaction should have been unwound.

• Safeway, 1986

KKR completed a friendly $5.5 billion buyout of supermarket operator, Safeway, to help management avoid hostile overtures from Herbert and Robert Haft of Dart Drug. Safeway was taken public again in 1990.

• Southland Corporation, 1987

John Thompson, the founder of convenience store operator 7-Eleven, completed a $5.2 billion management buyout of the company he founded. The buyout suffered from the 1987 stock market crash and after failing initially raise high yield debt financing, the company was required to offer a portion of the company's stock as an inducement to invest in the company's bonds.

• Jim Walter Corp (later Walter Industries, Inc.), 1987

KKR acquired the company for $3.3 billion in early 1988 but faced issues with the buyout almost immediately. Most notably, a subsidiary of Jim Walter Corp (Celotex) faced a large asbestos lawsuit and incurred liabilities that the courts ruled would need to be satisfied by the parent company. In 1989, the holding company that KKR used for the Jim Walter buyout filed for Chapter 11 bankruptcy protection.

• BlackRock, 1988

Blackstone Group began the leveraged buildup of BlackRock, which is an asset manager. Blackstone sold its interest in 1994 and today BlackRock is listed on the New York Stock Exchange.

• Federated Department Stores, 1988

Robert Campeau's Campeau Corporation completed a $6.6 billion merger with Federated, owner of the Bloomingdale's, Filene's and Abraham & Straus department stores.

• Marvel Entertainment, 1988

Ronald Perelman acquired the company and oversaw a major expansion of its titles in the early 1990s before taking the company public on the New York Stock Exchange in 1991. The company would later suffer as a result of its massive debt load and ultimately the bondholders, led by Carl Icahn would take control of the company.

• Uniroyal Goodrich Tire Company, 1988

Clayton & Dubilier acquired Uniroyal Goodrich Tire Company from B.F. Goodrich and other investors for $225 million. Two years later, in October 1990, Uniroyal Goodrich Tire Company was sold to Michelin for $1.5 billion.

• Hospital Corporation of America, 1989

The hospital operator was acquired for $5.3 billion in a management buyout led by Chairman Thomas J. Frist and completed a successful initial public offering in the 1990s. The company would be taken private again 17 years later in 2006 by KKR, Bain Capital and Merrill Lynch.

Because of the high leverage on many of the transactions of the 1980s, failed deals occurred regularly, however the promise of attractive returns on successful investments attracted more capital. With the increased leveraged buyout activity and investor interest, the mid-1980s saw a major proliferation of private equity firms. Among the major firms founded in this period were:

• Bain Capital founded in 1984 by Mitt Romney, T. Coleman Andrews III and Eric Kriss out of the management consulting firm Bain & Company;
• Chemical Venture Partners, later Chase Capital Partners and JPMorgan Partners, and today CCMP Capital, founded in 1984, as a captive investment group within Chemical Bank;
• Hellman & Friedman founded in 1984;
• Hicks & Haas, later Hicks Muse Tate & Furst, and today HM Capital (and its European spinoff Lion Capital), as well as the predecessor of Haas, Wheat & Partners, founded in 1984;
• Blackstone Group, one of the largest private equity firms, founded in 1985 by Peter G. Peterson and Stephen A. Schwarzman;
• Doughty Hanson, a European focused firm, founded in 1985;
• BC Partners, a European focused firm, founded in 1986; and
• Carlyle Group founded in 1987 by Stephen L. Norris and David M. Rubenstein.

Additionally, as the market developed, new niches within the private equity industry began to emerge. In 1982, Venture Capital Fund of America, the first private equity firm focused on acquiring secondary market interests in existing private equity funds was founded and then, two years later in 1984, First Reserve Corporation, the first private equity firm focused on the energy sector, was founded.