Sloan Sessions: Private equity groups

Allan Sloan

SCOTT JAGOW: Several shareholders of HCA are suing the hospital company to stop a huge takeover. A group of private equity firms is buying HCA for $21 billion. This kind of deal, taking a big public company private, is popular right now. I asked Newsweek's Allan Sloan why.

ALLAN SLOAN: The benefit to the public shareholders is they get some sort of premium price. The benefit for Wall Street and the companies involved in this is immense. The money is raised on Wall Street, which gets a fee for helping raise the money. Then there are, of course, the deal fees involved in advising and arranging the transaction. Then, because the transaction is done mostly with borrowed money, Wall Street gets all sorts of fees for placing the borrowed money. And, in a batch of cases, including HCA, Wall Street takes a piece of the buyout.

This is much more lucrative for Wall Street than if, say, another hospital company were buying HCA and trading its stock for HCA's stock. The fees and the potential profits to Wall Street are much higher this way than in a standard corporate-takeover-type thing.

JAGOW: Well, this HCA deal is basically a leveraged buyout. Maybe you could explain what that is, first of all.

SLOAN: It's a purchase of a company using borrowed money, is a leveraged buyout. And back in the late '80s, if you remember that long, there was another leveraged buyout boom. And now, we have big deals all over again. The difference is this time they use the term "private equity" for the most part. And, instead of one firm doing these deals . . . they gather in a pack like, I guess, like hyenas and they combine to buy these companies. And I guess that way there's less risk for everybody and they don't get into a bidding war with themselves.

JAGOW: But I seem to recall a lot of those leveraged buyouts you're talking about from the '80s, they failed. They didn't do so well. So, why is there a rebirth of this?

SLOAN: Because, A) Nobody remembers the '80s and '90s, and B) The stock market has not been too great in recent years. Private equity has earned much higher returns than the regular stock market has. So, various trend-surfing investors say, "Gee, private equity's made all this money. Let's put our money into private equity instead of the boring stock market."

So, all sorts of money is now going into private equity firms to invest and the firms have to invest it, so they've gotta buy something. So they buy this. But it's inevitable now that these deals are going to get bigger and bigger and then, one day, it's all going to come apart because this is the way Wall Street is. And the next story they'll be telling will be some new story about how you can make money in a new and different way on Wall Street, which will, in fact, be some form of an old and familiar way. They'll just dress it up with a new name.

JAGOW: Alright Allan, thanks a lot.

SLOAN: Anytime, Scott.

JAGOW: Allan Sloan is the Wall Street editor for Newsweek magazine.

Comments

I agree to American Public Media's Terms and Conditions.
With Generous Support From...