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As the American money pours in, the deals are larger, more frequent and more highly leveraged. Five years ago, the largest European buyout transactions had a value of about $1 billion. Today's biggest deals are three times as large, and several private-equity groups are poring over at least one transaction involving a telecommunications firm in Spain that is worth more than $12 billion. One reason Europe is attractive: such huge firms as electronics giant Siemens, automakers DaimlerChrysler and Fiat and the French media company Vivendi Universal have shed operations they deem no longer core to their fundamental business. Also, investors have been buying medium-size companies whose family owners are looking to sell. Once the Americans take over, they move fast, prodding the firms to make their operations leaner and frequently reshuffling management. The worse off an operation is, the more money the investors stand to make from selling after turning it around. "We like the complexity of Europe," says Jim Coulter, a San Francisco--based founding partner of Texas Pacific. "It often means there is more inefficiency."
That's where the controversy kicks in. In their drive to reduce working capital and improve cash flow to pay off the debts incurred during the buyout, managers can't afford to be sentimental about businesses that don't do well. They spin off, reorganize or shut down poorly performing subsidiaries. Thousands of workers can lose their jobs in the process. But what's bad for the workers is good for the company's financials.
MTU Aero Engines is a recent example. The Munich-based company, which builds and services civil and military aircraft engines, used to be a part of Daimler. But after that company merged most of its aircraft operations with a French rival in 2000, MTU was left behind, an orphan inside the huge automaker. To make matters worse, the market for air engines nose-dived after the terrorist attacks of Sept. 11, 2001. Daimler soon looked for a buyer. KKR stepped in and took MTU private in November 2003. Since then it has replaced several top managers, including the chief executive; put the screws to the new bosses to improve operating performance; and, more quickly than initially anticipated, cashed out.
MTU's June public offering on the Frankfurt stock exchange set off a stampede by investors. The shares were more than seven times oversubscribed, not least because MTU's sales are rising briskly and its cash flow more than doubled in the first quarter as the aircraft industry picked up again. KKR's total equity investment in MTU was $326 million. Following the IPO, KKR has returned $590 million to its investors, and it continues to hold a 29% stake, valued at $390 million. KKR tripled its money in 19 months.