Compared to strategic mergers, LBOs – particularly those not led by managers – are relatively easy for target companies to understand and evaluate. Generally speaking, shareholders are paid out in cash, so you don’t need to figure out what the merger currency is worth. You don’t have to negotiate “cultural” issues like whose name and/or irritating punctuation goes first in the surviving company’s name. You don’t have to figure out whose employee benefit plans will continue in force because everyone will be fired anyway.
And, because there won’t be any synergies and you won’t be taking stock in the acquirer, you don’t have to care about how they’ll run the business going forward. If your only goal is maximizing shareholder value, you just compare the expected value of your plan for the company’s independent operations to the actual cash value that a sponsor is offering. You don’t care if they’re going to make their 30% IRR by bringing in an operational genius to improve your products, or by the usual method of 8x leverage and mass firings. Maybe that’s an exaggeration – you care about things like “will they be able to sell the acquisition debt?” and “will my employees cause me physical harm between the time we announce this deal and the time I escape to a tropical island?” – but their long-term value creation plans aren’t really your concern. And, on their side, the sponsor has no interest in telling you, since their plans to improve your business just give you leverage to jack up the price.
Aaaaaand then there’s Yahoo! They figure, what the heck, they have all these smart people around, maybe they can get some free tips on how to improve things:
Almost every major U.S. private-equity firm, including Silver Lake Partners, Blackstone Group, TPG Capital, KKR & Co., Bain Capital, Carlyle Group, Hellman & Friedman, Providence Equity Partners and Warburg Pincus, has a team doing preliminary work on Yahoo, according to people familiar with the matter. …
For its part, Yahoo is eager to hear suggestions on what it should do, the people said, adding that a deal isn’t a foregone conclusion. Yahoo bankers Allen & Co. and Goldman Sachs Group Inc. have invited potential bidders to pitch their turnaround strategies, people familiar with the matter said.
We can at least hope that the board isn’t walking out of these pitches mid-sentence. But these pitches feel like a pretty obvious opportunity for a sponsor to sandbag. Providing a convincing way forward to improved profitability as an independent company is not the way to buy Yahoo! at an attractive price, if there is such a thing. I’m envisioning a lot of slides saying “yeah, you’re screwed, we’ll give you $16 and you’ll be lucky to get it.”