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Tuesday, September 12, 2006

Private Equity Madness: Texas Instruments, Home Depot, And Microsoft


Andrew Ross Sorkin, who writes the DealBook articles for the New York Times business section recently floated the opinion that Wall St's appetite for private equity deal may be so insatiable that the list of "potential targets being bandied about" now included Viacom, Gap, Nike, Dell, Home Depot, Texas Instuments, EchoStar, Liz Claiborne, and Microsoft.

We may be reaching "a bridge too far" in private equity's aspirations.

Instead of refuting the list one-by-one, it may be instructive to look at Microsoft. According to the company's filings, the company has about $3 billion in free cash flow a quarter. The company has $46 billion in current assets and $18 billion in current liabilities. Microsoft has no long-term debt. So, $28 billion that could come right out of the purchase price.

The problem is that Microsoft has a $260 billion market cap. With the balance sheet positives backed out, the number is still north of $230 billion. And annual cash flow is about $12 billion. Would anyone pay nearly 20 times cash flow. Only if they were crazy.

When papers like the New York Times begin to write about private equity deals on this basis, investors have to wonder if there is a "bubble" developing the private equity. If so, the institutions that invest in these funds are going to get burned. Badly.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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