A kinder, gentler corporate raider?

Bob Moon Jun 20, 2007

A kinder, gentler corporate raider?

Bob Moon Jun 20, 2007


Bob Moon: The firm that manages the world’s second-biggest buyout fund has moved up its much-anticipated initial public offering to this week. The Blackstone Group could take its place on the New York Stock Exchange after tomorrow. The move is already drawing fire from some members of Congress, who say its time to strip private equity firms of the lower tax rates they enjoy.

There’s been a flood of money behind a recent wave of takeovers. Just yesterday, Cerberus Capital Management got the regulatory go-ahead to buy Chrysler for $7 billion.

The cash for these big deals is coming from various sources — big pension funds, insurance companies and wealthy individuals — all of whom are looking to see their money grow. They pool their riches to invest in companies that can later be sold at a profit.

Critics complain that, too often, the turnarounds result in big job losses. But lately, the “corporate raider” image is giving way to a kinder, gentler style.

Consider this: What most of us know about private equity investors we learned from Hollywood, in movies like “Pretty Woman.”

Vivian Ward played by Julia Roberts: So what do you do with the companies once you buy them?
Edward Lewis played by Richard Gere I sell them.
Roberts: You sell them?
Gere: Well, I don’t sell the whole company. I break it up into pieces, and then I sell that off. It’s worth more than the whole.
Roberts: Sort of like, um, stealing cars and selling them for the parts, right?
Gere: Yeah, sort of — but legal.
Roberts: Um-hum.

But private-equity deal-maker Stewart Kohl says times have changed. He says with a smile that there isn’t a lot of pillaging left to do, and his firm, the Riverside Company, considers the small to mid-size businesses it buys as partners.

Stewart Kohl: Frankly, what I do on a daily basis has nothing to do with the way Hollywood has depicted it. What we spend our time doing is trying to identify wonderful little companies that, with access to more capital, can be more successful, can grow faster. In some cases that leads to creating more jobs.

It’s the recent wave of big corporate takeovers that shareholder attorney Arthur Abbey questions. He asks why publicly-run businesses seem to be in such a rush to go private.

Arthur Abbey: The same management that’s running the public companies is going to be in charge of putting the company in shape, and if they can do it for the new owners, I don’t know why they can’t do it for the old owners.

Dartmouth professor Colin Blaydon says there are very practical reasons for taking a company out of the hands of public investors to whip it into shape. The whole idea is to sell down the road at a profit, he says, without shareholders getting in the way.

Colin Blaydon: If you’re really going to transform a company, you may have to make some pretty aggressive changes that would cause the earnings in the short run to not look so good, but where the long-term value would be greatly improved.

Boston University professor James Post agrees private-equity plays a valuable role improving many companies, but he worries the recent mega deals are being leveraged with lots of borrowed money.

James Post: If we go into a recession, many of these companies are now so deeply in debt that if there’s any failure to meet their payments there’s not much of a cushion for them, and that we will see the collapse of the companies. That has a downward spiraling effect, because it very quickly then leads to layoffs and all of the follow-on consequences.

Post says it’s impossible to know if the recent corporate takeover frenzy will end up being a good thing. We won’t really know that, he says, for some time to come.

And in Los Angeles, I’m Bob Moon. Many thanks for investing some of your time with us this morning.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.