For private-equity firms, it's no longer a done deal

Private-equity buyers didn't see a company they didn't want to own last year. Now, some don't want to see the ones they agreed to buy.

Amid a credit crunch that makes it harder for private-equity firms to borrow money needed to pay for takeovers, a weaker economy and other concerns, some deals are stalling.

Alliance Data adssaid Monday that its $6.4 billion buyout by private-equity firm Blackstone bx may not proceed. Also Monday, Sallie Mae, the nation's top student lender, said it's giving up on collecting a $900 million fee owed by J.C. Flowers, ending a dispute started when the private-equity firm pulled its $25.6 billion buyout in December.

"Due to reality or panic, deals may not be worth quite as much," says Randy Katz, partner of law firm Bryan Cave. "Buyers may have remorse or cold feet," he says.

All this is part of a retrenchment by private equity. Last year, 25 private-equity deals worth $84.2 billion were withdrawn, Dealogic says. That's up from 16 busted deals worth $42.5 billion in 2006. Also this year, Blackstone and GE Capital withdrew their $1.8 billion bid for financial firm PHH. phh

Meanwhile, private-equity investors are shying away from new deals. Just 28 private-equity buyouts worth $2 billion have been announced this year, Thomson Financial says, the slowest start to a year since January 2005.

Hurting private-equity deals:

•Tighter lending. Last year, when private-equity firms were signing blockbuster deals, credit was plentiful and the economy was solid, says Josh Lerner, investment banking professor at Harvard Business School. But the tighter market for loans and slower economy make it harder for private-equity firms to finance and justify the deals, he says. "A lot of deals were done in one era, and now we're in another era," he says.

•Regulatory hitches. Given the tougher environment, private-equity firms will back away at surprises, including demands by regulators, says Greg Peterson, a partner at professional service firm PricewaterhouseCoopers.

In a statement, Blackstone says demands forced by the Office of the Comptroller of the Currency connected to the buyout of Alliance are "unprecedented and unacceptable" and were the hitch. Blackstone says it is still interested in doing the deal. Alliance disagreed with Blackstone's characterization of the regulator's position in a press release. Shares of Alliance fell $23.12, or 35%, to $42.48 on Monday.

•Hangover from record-breaking buyout activity. After a record-breaking boom in private-equity buyouts in 2007, it's only natural to see the number of withdrawn deals increase, says John Rose, partner at business consulting firm Boston Consulting.

More than $437.5 billion in private-equity deals were announced in 2007 in the USA, Dealogic says.

"There isn't a wholesale movement away from deals," Rose says. "There were more deals, more dollars, so there are more deals that people are walking from."

Maybe so, but Katz expects it'll take at least another six months before private-equity firms get less eager to walk away. Some firms are deciding, "It's better to get out from under (some deals) rather than horribly overpaying."