Win Ben Stein's Money

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Ben 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]

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