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Buy! Sell! Merge!

Steve Tripoli Nov 6, 2006

KAI RYSSDAL: People with a lot of money who apparently get restless on weekends showed up ready to deal this morning. And the deals were of every variety. Private equity firms. Regular mergers. Corporate buyouts. The major indices were up a percent or more. But there’s some worry all that gettin’ together will leave regular shareholders out in the cold.

Marketplace’s Steve Tripoli’s been following the story. Hi Steve


RYSSDAL: Who’s buying what today?

TRIPOLI: Well, without going into a lot of detail, Kai, let’s say the buyers range from Bill Gates to Abbott Laboratories to the private equity firm Bain Capital and to a Saudi prince as well. The targets are Four Seasons hotel chain; Kos Pharmaceuticals, that makes cholesterol drugs; and the parent company of the Outback Steakhouses. Altogether, Kai, seven big deals or potential big deals today worth about $17 billion.

RYSSDAL: You know, Steve, I mentioned earlier that we’ve seen today regular mergers and acquisitions, a corporate buyout or two. Also, something called private equity deals that have been raising a lot of eyebrows. What are those, exactly, and why are people concerned?

TRIPOLI: Well, a lot of investors are throwing money into these private equity firms that are out there on the hunt to buy companies. There’s been a worry . . . BusinessWeek magazine recently reported on how private equity deals often let the buyers feast on all sorts of fees and charges in these deals. Now, they get this money from the takeover target, the takeover company, and they also can load these companies up with debt, which at times they use to pay their own fees. And that can weaken a corporate balance sheet. Finance professor Steven Kaplan at the University of Chicago told me today that there can be problems when private equity firms take fees from investors they represent and from the companies they’re buying:

STEVEN KAPLAN: That’s a situation where I think there is a misalignment of interests between the private equity firms and everybody else. Their investors in the companies sign off on it but interests are misaligned and there will be situations where the private equity firms make a lot of money and the companies don’t do well.

TRIPOLI: That also explains, Kai, why stock-market reaction can be initially positive even if the long-term outcome is no winner for shareholders.

RYSSDAL: So private equity deals obviously take a public company and take it off the market. The other way that that’s been happening lately is something called a management-led buyout.

TRIPOLI: Right, Kai, management-led buyouts . . . there’s been a concern about these for some time and for a very simple reason: Management’s supposed to represent shareholders. That means when it’s time to sell they’re supposed to be looking for the very highest price. But when management is also the buyer, they have a stake in a low price, or even in the company not performing well before they bid on it. So, that’s a conflice of interest but it’s not one that runs afoul of U.S. law right now.

RYSSDAL: What does the law say? What are regulators doing about this?

TRIPOLI: Well, right now, I guess, the short answer is not much but maybe heading toward something. You should have seen, Kai, today, the scathing comments about the Four Seasons deal on one newspaper website. The folks writing in say the government’s asleep at the switch — both the Congress and the SEC. But just today, there is word that regulators here and in the United Kingdom, as well, may be starting to take notice of private equity deals. They’re said to be looking into what might be done but that’s as far as it goes right now. They’re just looking into what they might do.

RYSSDAL: Alright, Marketplace’s Steve Tripoli. Thank you, Steve.

TRIPOLI: You’re welcome, Kai.

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