Private Equity

Carlyle Group’s IPO Lays The Groundwork For An Abusive, Coercive MBO In About Five Years

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Okay so you’re a private equity fund and you’ve filed to go public. GOTCHA:

Q. You tout the managerial-discipline, incentive-alignment and cost-saving benefits of taking companies out of the public equity markets. Yet you’re going public with your own company. Aren’t you just obviously destroying value to top-tick the market???
A. No, no, it’s not like that, see …
Q. TOP. TICK. THE. MARKET.
A. You got me. Never mind.

If this line of thinking resonates with you – and, like, I guess, right? – then you should get a certain amount of joy out of this:

Carlyle Group LP, the Washington- based buyout company that’s preparing to go public, is seeking to bar its future shareholders from filing individual and class- action lawsuits.

The firm revised its governing documents last week to say that investors who purchase company shares must settle any subsequent claims against Carlyle through arbitration in Wilmington, Delaware. That could limit the ability of stockholders to win big awards for securities-law violations such as fraud, several attorneys said.

Bloomberg, and Steven Davidoff at DealBook, have some fun with the question: can they do that? (Answer: maybe not!) Also with the question: isn’t that kind of mean? Davidoff writes:
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Area Man Still Upset That Mitt Romney Snubbed Him Decades Ago

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At many, many points in your Wall Street career, you will encounter a basic quandary, which is, “should I behave like a douchebag here, or should I not behave like a douchebag at this one particular moment in time?” This question is hard because, on the one hand, behaving like a douchebag often brings immediate cash rewards, and can be fun; but on the other hand, there are longer-term reputational consequences to frequent douchebag behavior. Goldman Sachs has a name for its position on this trade-off, which is “long-term greedy,” and you can go think your thoughts about whether and in what circumstances “long-term douchebag” is a relevant substitution.

Speaking of long-term douchebags, William Cohan can NURSE A GRUDGE, man:

Yet, there is another version of the Bain way that I experienced personally during my 17 years as a deal-adviser on Wall Street: Seemingly alone among private-equity firms, Romney’s Bain Capital was a master at bait-and-switching Wall Street bankers to get its hands on the companies that provided the raw material for its financial alchemy. … I never negotiated directly with Romney; he was too high-level for any interaction with me. Rather, I dealt often with other Bain senior partners, who were very much in his mold. In my experience, Bain Capital did all that it could to game the system by consistently offering the highest prices during the early rounds of bidding — only to try to low-ball the price after it had weeded out competitors.

The complaint here is that Bain would put in high bids in early rounds of an auction for a company, and then when other bidders have been eliminated and Bain’s negotiating position was stronger, it would find ways to re-trade on price. And if you’ve ever worked in M&A, or, um, anywhere else, you are laughing hysterically right now at the notion that Bain partners are the only people who re-trade on price.*
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If Only Twinkies Maker Had Had Someone Whose Job It Was To Remember Not To Go Bankrupt

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Stephen Lubben at DealBook noticed something kind of amazing in the Hostess Brands bankruptcy case:

Turns out that Hostess has no treasury department. Indeed, it apparently doesn’t have anyone who can perform treasury functions at all.

The company has asked the bankruptcy court for permission to hire FTI Consulting to do the work. Apparently Hostess does not have much of a finance department either, since FTI is also providing employees for that department.

If approved, FTI will provide three people to staff Hostess’ treasury department. The interim treasurer gets monthly fees that work out to an annual salary of $780,000. His two deputies get $660,000 per year, each.

The finance department group gets paid hourly rates that top out at $895 per hour. You might think that would supplant the need for a financial adviser in the case, but Hostess is asking to retain one of those, too.

Now that maybe goes a little overboard on the grave-dancing (lots of, really all, companies with full honest-to-goodness treasury and finance staffs still hire advisers in bankruptcy) but, still: that is kind of weird! If you read Hostess’s motion and the attached engagement letter, it appears that they’re just seeking signoff on an arrangement they struck in June. So they’ve been operating for at least six months or so with an outside consultant as their contract treasurer – and with the rest of their treasury roles filled either by other consultants or by nobody. That’s somewhat unusual for a company with 19,000 employees, a pension plan, and something like $1bn in enterprise value.*

I don’t really know what’s going on here but just for fun let’s blame private equity! In this connection, it’s worth noting that Hostess has been down this road before and was acquired out of bankruptcy in 2009 by Ripplewood Holdings. Private equity firms are, of course, rapacious scum put on earth solely to destroy the jobs of innocent hard-working Americans, so sayeth Newt, and if you like you can put that interpretation on Ripplewood here, or not, whatever. That will be determined by a series of campaign ads and op-eds, though it’s worth noting that Ripplewood had the decency to pluck Hostess out of Chapter 11 and keep it alive for over two years before re-bankrupting it.

But I think this oddity illustrates another aspect of private equity firms, which is that their deals-’n'-finance operations tend to be comically lean and intensively supported by outside advisers. Read more »

  • 31 Oct 2011 at 11:20 AM

Lynn Tilton: Ask And Ye Shall Receive

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“For many years I had men asking me on the phone each day what I was wearing and what color my underwear was,” Tilton said. “And so I sent out a Christmas card with me in a red lace sort of teddy, and red cowboy boots and a Santa hat, wishing them a Merry Christmas.” [ABC, earlier]

Yahoo Gives Up, Why Don’t You Just Tell It How To Run Its Business

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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:
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  • 07 Sep 2011 at 5:24 PM

Cerberus-Owned Paper Maker Files For Bankruptcy, Saves Some Money On Taxes

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Apparently selling buggy whips paper for newspapers, magazines and coupons is not as profitable as – wait, who thought it was profitable? Cerberus? Sadly, that did not work out for them:

NewPage Corp., the largest North American maker of coated papers, filed for bankruptcy six years after being bought by Cerberus Capital Management LP.

NewPage had $3.4 billion in assets and $4.2 billion in debt as of June 30, according to today’s Chapter 11 filing in Wilmington, Delaware. The Miamisburg, Ohio-based company was bought by New York-based Cerberus for $2.3 billion in January 2005, and issued $900 million in junk bonds to fund the purchase. It has been unprofitable since 2006.

A 2005-vintage leveraged buyout company crushed by an unsustainable debt load and operational failure is a good excuse to mention a neat paper posted today on Harvard Law School’s Forum on Corporate Governance and Financial Regulation. The authors, three UT-Austin business professors, use tax return data to examine what happens to 1995-2007 vintage U.S. LBO targets. And they are pretty confident that they can dismiss many of the traditional explanations for how private equity firms make money – both the flattering and the unflattering ones. From the paper: Read more »

  • 06 Sep 2011 at 7:18 PM

Carlyle Group Spends Too Much Time Being A Private Equity Firm For Some People’s Liking

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Eeevil conspiracy theory source The Carlyle Group filed for its IPO today, which makes sense because the best time to file for an IPO is during a global financial meltdown (better than filing in normal times and launching your roadshow into a meltdown, or not). The not so great news: they’re too private equity-y for some people. Bloomberg reports:
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  • 01 Sep 2011 at 5:06 PM

Cerberus Doesn’t Want To Have To Tell Innkeepers What It Did Wrong, It Wants Innkeepers To Know What It Did Wrong

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The cheery infernal canines at Cerberus Capital Management have been pretty consistent in saying that (1) they’d rather not close on their deal to buy Innkeepers out of bankruptcy, (2) it’s because there’s been a material adverse effect, and (3) no, thanks, they’d rather not tell anyone what that MAE was. And in “anyone” they’re going to include the bankruptcy court, as they demonstrated yesterday. The judge remains curious, however, and set a trial for October:

Judge Chapman sympathized with Innkeepers’ desire to resolve the MAE issue as quickly as possible, citing widespread media coverage about the uncertainty of the deal.

She rejected Cerberus lawyer Adam Harris’ argument that Innkeepers should have done more to affirm its readiness to close the deal in August.

“Come on, Innkeepers was ready to close,” she said. “They were there. It’s not like asking a girl to dance. You didn’t need to hear from them the next day, saying: ‘We’re really, really ready to close.’”

Cerberus is not gambling everything on its strategy of never, ever saying what the MAE was. It released a statement saying:
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  • 29 Aug 2011 at 7:36 PM

Innkeepers Just Wants Cerberus To Tell It What It Did Wrong

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Three-headed hell-dog of a private equity firm Cerberus recently backed out of a deal to buy hotel operator Innkeepers out of bankruptcy because … uh … well, it’s been a bit of an intriguing mystery so far. Turns out it’s still a mystery to Innkeepers as well, so they’ve decided to sue and find out:
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  • 17 Aug 2011 at 1:22 PM

Carlyle Group IPO Is An Eeeeevil Conspiracy But There Are Some Nice Things About It Too

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If you love a good conspiracy theory but find Ron Paul’s and Rick Perry’s calls to kill Ben Bernanke for counterfeiting a little played out, do we have some good news for you. The Carlyle Group, a mild mannered private equity firm by day that at night transforms into an evil conspiracy among George Bush, Skull & Bones, the Saudi royal family annd the Illuminati, is about to get a lot more public attention.

Bloomberg reports that Carlyle is shopping an IPO. While we do worry that IPOs by smart private equity managers have a pretty solid tradition of top-ticking (Blackstone IPOed in June 2007 and the market has never been the same since), we like David Rubenstein’s efforts to get valued for making good investments instead of just for having a ton of money:
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  • 03 Aug 2011 at 4:53 PM

Genius Not Smart Enough To Realize Once Wealthy He’d Let His Dick Do The Talking

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Henry Silverman is a billionaire investor and a certified genius. His genius is evident in Cedant Corporation, the company he built with his bare hands that made him a rich many many times over. His genius is less evident in his decision to leave his wife for a yoga instructor he hooked with the line “Google me,” and thinking he wasn’t going to have to pay his ex big time, despite having no pre-nuptial agreement. Read more »