KKR, a major private equity firm, has been on a buying spree. This month they announced four major technology deals, claiming their stake in growth equity. Next they’ll raise $100 billion to double down on it.
Founded in 1875, Toshiba is one of the oldest Japanese conglomerates in the world. You may remember them from their clunky computers and consumer electronics. They compete with brands like Sony and Samsung.
Well they’ve run into some problems.
An activist shareholder is seeking suitors to compete with a $20 billion buyout bid from a private equity firm. Yes, $20 billion. Imagine how that conversation would go down.
“Yes, I need $20 billion to take Toshiba private.”
“Sure, no problem, Vijar. Where should we wire the funds?”
Hedge funds vs Private equity
Farallon Capital, a U.S. based hedge fund, is the third-largest shareholder in Toshiba and vocal against the private equity bid from CVC Capital Partners. CVC is offering a 30% premium to Toshiba’s current value.
Like most greedy shareholders, Farallon wants to start a bidding war and include more interested parties.
It’s worth noting that the former Toshiba CEO Kurumatani once served as chairman of CVC’s Japan unit. So this private equity offer did not come out of the blue. Kurumatani resigned last week because of a conflict of interest with new bidders. More below.
You see, as a public company Toshiba is required to deliver quarterly earnings and disclose operating results. Going private would improve governance and reduce regulatory burdens.
I’m not opposed to the buyout and do think the shareholders need to find suitable targets.
But let’s not forget this is a Japanese company. And the major investors are from Luxembourg and the United States.
The Japanese don’t take capital interference lightly. In fact, they have stopped previous dealings in the past like the Chinese authorities. It’s within their rights since privatization from an outside party may change Toshiba’s culture.
But I have a feeling that the Board can be persuaded if they receive an attractive offer.
KKR is considering its own buyout offer with Bain Capital. But again foreign investment laws may become a hurdle to close a deal.
AppLovin will get no IPO love
Mobile apps are still hot.
AppLovin the software company helps video game developers monetize their mobile apps. The company also owns a portfolio of mobile games. A lucrative yet competitive business.
Let’s talk about the challenges with their upcoming IPO.
Distribution costs are increasing
You see, the mobile app market is dominated by Apple and Google. They own the operating systems and smartphones.
And during the pandemic, everyone went digital. Mobile advertising costs skyrocketed.
For Applovin, the costs jumped 130% to $555m with $112m coming from payment processing fees. You may remember that the creator of Fortnite, Epic Games, had a payment dispute with Apple because of its monopolistic manners. Well those distribution costs are rising and not going away anytime soon.
Going Public to Raise Capital
AppLovin is a mobile app developer in desperate need of cash. Its upcoming IPO will raise $1.74 billion in cash, where $400 million will be used to paydown debt. The company currently has $1.6 billion in debt.
The rest will be used to fund development and acquisitions.
But you see, this is not the first time AppLovin has had a capital problem.
In fact, the company failed to be acquired in 2016 by a Chinese private equity for $1.4 billion because of customer data concerns. Instead AppLovin raised almost $1 billion in debt and equity from the investment firm instead.
Then KKR entered the picture in 2018 to invest $400 million for a minority stake. With a $28 billion IPO valuation, KKR’s stake will be worth more than $8 billion or 20x. Not bad for a three year investment.
But I have my doubts about this business. It’s unstable and will struggle like previous mobile gaming companies. There’s simply too much competition and even more supply.
KKR saves Box.com
Everyone's favorite cloud provider needs cash now. $500m to be exact.
At the moment, Box.com is feeling the heat from an activist hedge fund, Starboard Value.
So the company may execute a Dutch auction in May to buy out specific shareholders like Starboard. KKR will sponsor this.
The activist position comes at no surprise. Box.com has not performed well for the past decade. The company continues to lose money in a commoditized cloud business.
So KKR is coming to the rescue with a $500m check. This is not free money.
It is a convertible preferred stock investment with a $27 strike price and 3% dividend. Once converted, KKR will own 11% of Box. I repeat, this is not cheap or free.
John Park, the head of KKR’s tech unit, will also be joining the Box board of directors. I suspect a lot more changes will come here.
My guess is Box will go private in the future and shutter its money losing divisions in the future. Other document cloud providers like DropBox and Microsoft, have been taking away market share from Box and will continue to do so.
Another Billion Dollar IT Buyout
KKR will acquire Ensono, a global IT service provider, for $1.7 billion. This is one of +250 IT service deals that have been in 2021.
The current private equity owners bought Ensono for $190 million in 2015! Now enters KKR.
Ensono like other IT companies provides IT infrastructure and digital transformation projects. They had $650 million in 2020 from clients such as Travelodge and the Guinness World Records.
This private equity buyout will do three things: 1) give KKR complete control, 2) recapitalize Ensono’s balance sheet and 3) provide additional capital to fund growth.
Ensono has three primary initiatives set for 2021. This gives us more insight into the IT industry.
First they will add new cloud services with native app developments. Second they will focus on security, specifically compliance and auditing, a major concern for clients. And last will be to build their IT infrastructure management platform to improve the customer experience.
KKR is raising billions more to do deals
As if four major deals are not enough. KKR will be raising $100 billion by 2022 because of new pipeline opportunities. The demand to invest is the greatest it has ever been. And the big private equity firms continue to get bigger.
The fundraising demand is coming most from Limited Partners (LPs). KKR expects to reach its goal by raising $40 billion to $50 billion in private equity, $15 billion to $20 billion in infrastructure, $10 billion to $15 billion in real estate and $20 billion to $25 billion in credit.
It’s a very exciting time to be in private equity.
My first attempt at a Bitcoin Business
In 2013, I emailed someone about launching a Bitcoin business for online gambling in NJ!!
I sent similar emails to others but never made any traction.
Kudos to Brian Armstrong and the Coinbase team who had more conviction on this.
It takes a lot of courage to think ahead of everyone and take action on it.
There are many opportunities like this still available today.
If you have a clear vision of the future, don't give up on it!
Thinking about investing now?
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