Lessons from Buyouts West speakers

Bigger is not always better, especially when it comes to media conglomerates, says Barry Schuler, former CEO of AOL and current managing director of the growth equity practice at Draper Fisher Jurvetson.

Schuler, who spoke last week in San Francisco at the 4th Annual Buyouts West Conference (hosted by Thomson Financial, publisher of Buyouts magazine and PE Week), said that one of the many lessons he learned from the AOL-Time Warner merger is that many of the big media companies operating today should be broken up by their investors. Not because of antitrust concerns, but to improve operations, he said.Among the other speakers last week at Buyouts West were Barry Gonder, general partner of Grove Street Advisors, who participated on the LP panel, which also included Tom Bradley, partner of Pomona Capital, Jamie Hale, partner of Oak Hill Investment Management, and Peter Martenson, president of Macquarie Funds Management USA.

The panel was asked about LPs backing ever-growing mega-funds, while simultaneously predicting a decline in mega-buyout opportunities. Their reply was to bow at the portfolio diversification alter, although Gonder said that the LP community is bifurcating, and that certain public LPs need a place where they can invest large sums (between $100 million and $400 million), and at least top the public markets by a few basis points. `

Alec Gores, founder and chairman of the buyout firm The Gores Group. Gores, speaking to a standing-room only crowd, said that he prefers carveouts to buying from private owners, because “private owners can run companies better than we can.”

Gores, who said that his firm has never had a portfolio company go bankrupt, cautioned that many fund managers are too anxious to get a fund invested too soon. He said that he is disciplined enough in the bidding process to walk away if a deal gets too expensive or prohibitive. Some GPs have forgotten about exercising discipline and buying a company with potential for a decent price, he said.

The Israeli-born Gores had everyone in the crowd amused by his story of how, in 1993, he acquired the customer-service arm of a struggling maker of word-processing machines. One of the assets he got was the company’s 800 number, (800-CALL-NBI). The last three letters, the company’s initials, also happened to spell MCI on a telephone keypad.

A year later, a representative of new MCI owner, AT&T, called Gores and offered to buy the phone number for a reported $550,000. AT&T wanted to buy the number before any rivals scooped it up. Gores took the money, which was 3x what he had paid for the entire business.

Says Gores: “There are hidden assets in every company.”