Page 3 of
3 The highs and lows of
buyouts By Julian Delasantellis
these deals is to improve a
supposedly inefficient management structure, in
most cases there is frequently little or no change
in that management structure. In fact, the only
change for the managers is that they go from being
employees to part owners of the new concern, since
usually the deal is structured to provide the
management with equity packages and stock options
in the new company. Thus, now with proper
incentives, the management can go about doing
their proper corporate function, namely,
maximizing the return for the now private
stockholders, among
which now includes
themselves.
Wait a minute. If corporate
management is now properly concerned with
maximizing returns for the private owners, what
were they doing when they were pulling down those
big fat salary paychecks from the public
shareholder owners of the company? If the
management can now think up all these great ideas
to maximize return for the private owners,
couldn't they have done the same, as was their
fiduciary duty, when they were working or the
public owners?
Were they just slackers,
were they, to paraphrase the sports cliche, not
leaving it all on the floor of the office park? Or
is it the fact that, by its very existence, the
private equity phenomenon sets up an inherent
conflicts of interest, whereby these slothful
managers come to realize that it is not in their
best interests to maximize public shareholder
value - it's better to wait for the company to be
taken private, where they will be much more richly
rewarded for doing the exact same management acts
they should have done for the public shareholders.
Going back to the academic theories of the
Efficient Markets Hypothesis, markets are
efficient when all investors possess the same
information, not, as in these cases, when the
private equity firms and management collude to
steal private information that, as anybody who
ever did time for insider trading knows, rightly
belongs to the public shareholders.
Besides the fact that it does not do a
whole lot of good for public confidence in a
country's capital markets when its structure
allows for one group of investors in them to
regularly get royally shafted, what are the
general social implications of this phenomenon?
It represents the absolute end of
shareholder democracy, as the ownership of
America's corporate assets passes from millions of
little guy and girl shareholders, many through
their public employee pension funds, to a small
number of these multi-billion dollar buyout firms.
As Willie Sutton robbed banks because that's where
the money was, private equity, acting as the
transfer agents for the American plutocracy, is
stealing corporate ownership from the stockholder
class because, yes, that's where the money is, or,
these days, was.
What happens to these
companies over the long term? Many of them stay
private for years, as the buyout firms milk them
dry with fees and charges, but, increasingly, many
of these firms are being brought back to the stock
market, as "new" initial public offerings, another
hot phenomenon in today's stock market.
Since the stated reasons for most of the
buyouts in the first place was to improve
corporate efficiency by removing the
inefficiencies of public ownership, this might
seem a bit curious. But to the buyout firms this
makes perfect sense.
For the buyout firms,
these deals, specifically called reverse leveraged
buyouts (RLBOs) are the cashing in of their chips
after a good night at the table. These RLBOs are
brought back to market as companies, or parts of
companies, valued at many times what the buyout
firms paid to take them private in the first
place. In the case of the late 2006 RLBO of Hertz,
a consortium of Merrill Lynch, Carlyle and Clayton
Dubilier & Rice sold 27.5% of Hertz for $5.8
billion, a very nice profit over the $2.3 billion
they paid for this interest in the company a few
months earlier.
The buyout companies
defend the huge profits they take out of RLBOs by
stating that it is just their fair share of the
increased corporate value they have created by
streamlining and maximizing the previously
inefficient management structure.
However,
these days the turnaround time between the buyout
(the LBO) and the RLBO is becoming ever more
brief. Both the Hertz RLBO, and a similar one for
Burger King, occurred after the new firms spent
less than a year as private entities. Are we
really expected to believe that these previously
supposedly dullard managements have now created
these unprecedented increases in value in this
unprecedented brief amount of time?
Of
course, inherent in the very structure of these
RLBOs is the continuing slow impoverishment of the
public stockholder class, since what the public is
buying back in these deals is ownership interests
in companies they sold away a short time ago for a
lot less. Selling low and buying high - far and
away just about the worst prosperity strategy
there is.
What seems to be happening here
is another instance of what happens when you allow
the capitalist world to create massive amounts of
cash liquidity (through low interest rates,
especially low Japanese interest rates), and then,
through tax and regulatory regulations that favor
upper income brackets, channel that wealth into
fewer and fewer hands. Much like hedge funds, the
buyout funds are flush with financial firepower,
as super-rich investors have come to see private
equity buyouts, due to the favorable regulatory
treatment that winks at the conflicts of interest
described above, as essentially a fixed game.
For the buyers of the RLBOs, getting
caught up in the general IPO mania now existent is
a last chance to get back what once was their
birthright, a small piece of the wealth contained
in the ownership of corporate America, before it
is all taken away and secured behind the locked
gates of the private community that is the
American plutocracy.
"They were careless
people," F Scott Fitzgerald said in The Great
Gatsby about the financial elite of his day.
"They smashed up things and creatures and then
retreated back into their money or their vast
carelessness, or whatever it was that kept them
together, and let other people clean up the mess
they had made." The buyout firms and their
management fellow travelers are careless too, they
break up companies, ruin lives and communities,
then sell the companies back, as if their lives
were just those of children riding on a
never-ending merry-go-round on a soft spring day,
every so often reaching out to gleefully grab a
brass ring of another billion dollars or so.
"Operator, I'm trying to call the repair
shop that stole my TV, but I hear the number is
now unlisted."
"Sir, that number is now
private. You can't talk to them."
You sure
can't.
Julian Delasantellis is a
management consultant, private investor and
professor of international business in the US
state of Washington. He can be reached at
juliandelasantellis@yahoo.com
(Copyright
2007 Asia Times Online Ltd. All rights reserved.
Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
