PeHUB.com is our newly launched web site where the staffs of Buyouts and Venture Capital Journal combine with bloggers from around the private equity industry to sound off on all things LBO venture capital. Below is a sampling of the best content from the last few weeks:
Interview with Ben Stein
Economist, actor and popular speaker Ben Stein penned an editorial recently in the New York Times saying that management buyouts ought to be regulated due to unavoidable conflicts of interest. In an interview with peHub.com Editor Dan Primack, Ben Stein tore up MBOs, saying they should be outlawed, and if they are not, then shareholders should be able to participate in the deals on the same terms as management. Will anything ultimately be done about MBOs by lawmakers? Stein says only if Eliot Spitzer becomes president. Below are some of Stein’s quotes from the interview, which was available for audio download on the Web site.
- “By definition [in an MBO] management thinks it is getting the asset or the whole company for less than it’s worth. Otherwise they wouldn’t do the deal at all….If they truly feel there’s an arbitrage between the stock market price and the real value of the company it is their job to liquidate and realize that arbitrage in favor of the stock holders, not in favor of the management.”
- “The analogy that comes to mind is if a mother and father died and left their farm to their son in high school or college, and leave it in the care of a local lawyer who is a trustee. Then oil is discovered on the farm, and [the trustee] doesn’t tell the young person that there’s oil there but he just buys the farm from him. He says ‘Look I’m going to have the farm appraised,’ and doesn’t tell the appraiser there’s oil there, or the appraiser’s in on it, and says, ‘OK its worth $10,000 and acre and it’s a 100 acres so therefore I’m going to pay you a million dollars.’ And then there’s all this oil under it that’s not been disclosed. That’s the exact same situation as is happening in management buyouts.”
- “There’s no way management can make money on a deal unless they underpay for the assets. If they paid the full value it would be a wash….By definition management is signing off on a deal which is a scam against the ordinary investor.”
Middle GroundAndrew Ross Sorkin of NY Times Dealbook has developed some middle ground between Ben Stein’s call for banning management buyouts and the private equity market’s calls for continued regulatory indifference. Specifically, he has a four-part plan for fixing certain problems inherent in management buyouts. According to a posting on PeHub.com, it goes like this:
1. Require that a majority of minority shareholders approve the transaction. If senior management holds a control position, don’t let its vote be the only one that matters.
2. Use independent advisors–real ones without either existing company relationships or a financial stake in the deal (i.e., stapled financing agreements).
3. Set aside up to 10% of the newly-private company for public shareholders. In other words, pre-empt the whining.
4. Provide some detail of the business plan for the company once it becomes private. Let shareholders decide if management can best add value as a public or private entity.
Also on peHUB.com: Five Questions with Neal Aronson, managing partner of Roark Capital and chairman of Focus Brands:
Real estate plays a major role in restaurant buyouts. Are you worried that the real estate market seems to be softening?
I actually think that today’s real estate market is still very vibrant in the restaurant sector—and think it’s a supply and demand equation. There are a lot of chains looking for similar sites and locations….There could be some negative impact if the cost of construction continues to increase, but not from the softening residential real estate market.
Given what you said before about some worrisome consumer trends, are lenders getting any more selective or hard-nosed when it comes to restaurant buyouts?
It’s a great question, but the answer is no. In fact, the lending universe has gotten even more aggressive. These softening trends have not had a major impact yet, so lenders haven’t yet reacted. If they do continue with the consumer getting more fickle and a flattening of profits—and I’m not predicting that one way or the other—you’ll probably see lenders react.
Bonus SeasonDenise Palmieri, director of client relations with executive search firm The Pinnacle Group, posted comments on the site about bonus season. A study published recently found that more than 80% of job seekers believe they are “underpaid” their current jobs but, in actuality, less than 18% really were, she writes. Here’s an excerpt from her blog, which included a link to compensation data points:
“Remember that the primary difference between the various classes of investment firms is in how they see their investments and the timelines that they use when predicting returns. For banking, that horizon of return (and consequently the compensation for its employees) is shorter than for venture capital firms. Buyout firms, funds of funds, secondary funds, hedge funds and the entire gamut of alternative investment firms each see their horizon of returns differently….. When transitioning between the asset classes, it’s important to note that compensation is frequently quite different among and between the sectors and the firms depending upon the size of the fund, the number of investment professionals and the proportion of management fees allocated to personnel costs.”
Also on peHUB.com: Mezzanine lender Lawrence Golub explains how Bush’s war on medical research defeated the Republicans in the November elections. And readers discuss, was the Hertz IPO the “BFE”…best flip ever?
Read it now on pehub.com.