Management Buyouts

Deal Scuttling: A New Problem For Management Buyouts?

Management buyouts have been a favorite target of corporate governance types for years but the critics may have a new line of attack—criticizing managers for scuttling deals.
The traditional criticism of management buyouts—where a company’s senior executives cooperate with financiers to buy a company from public shareholders and take it private—has been that management could exploit shareholders by buying the company on the cheap and discouraging other bidders. When the buyout market was firing on all cylinders, objecting to management buyouts on these grounds was a favorite past-time of self-styled shareholder advocates. (One particular lunatic who happens to have a column in the New York Times even proposed outlawing them.)
But now that the buyout market has ground to a crawl—if not a complete halt—the conflicted role of buying and selling a company at the same time could be working the other way. This morning our own Joe Weisenthal, who also writes over at PaidContent.org, points out that the collapse of the deal to take radio operator Cumulus Media private has collapsed, and unlike some recently failed deals, Cumulus seems to have no plans to sue the buyers to force them to close the deal.
“A question that shareholders might be wondering about: Was the agreement to amicably drop the deal made easier by the fact that CEO Lew Dickey was on both sides of the transaction?” Weisenthal writes.
Cumulus shareholders will get a break-up fee of $15 million but it hardly seems likely that the company could sue its chief executive to force the sale. Think of it as an agency cost of a bear market.
Cumulus Take-Private Deal Falls Through; Stock Off Over 20 Percent [PaidContent.org]

Ben Stein Still Calls Bullshit On Management Buyouts

clownfacebenstein.JPGWell Ben Stein certainly is tenacious. When he called for a ban on management buyouts in The New York Times in September, he caught a lot of flack. The Going Private blog spilled a lot of pixels tearing apart Stein’s argument. And Larry Ribstein basically called Stein an idiot in a clown suit. Even DealBreaker felt compelled to join in on the action. But somehow Stein withstood the sound and fury of the blogs and is sticking to his position.
Today, on the refurbished PEHub website (still no RSS feed though!), Daniel Primack interviews Stein on his anti-MBO stance. If anything, Stein seems even more convinced in the interview than he does in print. Management buyouts are a “scam against the ordinary investor,” Stein says. He calls some of the ordinary rationales for buyouts “bullshit.”
It’s worth listening to the whole clown-suited thing.
Ben Stein Q&A [PEHub via Going Private]

Win Ben Stein’s Money

benstein.jpgBen Stein’s proposal to outlaw management buyouts is not getting a very nice reception from some of our favorite finance and economics blogs. Going Private penned several hundred words tearing down Stein’s argument. Larry Ribstein advised Stein to “take off your clown suit for a minute and listen to some questions.”
We’re hardly going to defend Stein’s anti-MBO position. It would be hypocritical—we put together too many of these deals during our time in the industry to come out in opposition now. But we think both Going Private and Ribstein are a little off-point in their critiques of Stein. Not totally off point—both posts bear reading and consideration—but both are at least slightly off target.
Of course management buyouts really do create serious “agency costs”—most particularly the risk that management may manipulate the share price of their company using inside information to reap windfall profits. So the best response to Stein is not that these risks are not real, that the alternatives are worse or that the risks can be corrected by disclosure requirements or lawsuits. The best response is that after decades of experience with management buyouts, the agency costs (and, of course, possible premiums) are already priced-in by the market. Stein shouldn’t complain about the MBOs because he bought his shares under the risk of an MBO and should have appropriately discounted for the risk. This is pretty basic stuff. Even Ferris Bueller’s economics teacher should be able to get it.
On Buyouts, There Ought to Be a Law [New York Times]
Voodoo Economics [Going Private]
Ben Stein on management buyouts [Ideoblog]