MacFadyen: Taking Notes
August 31, 2009
So you leave your job, and a few years later hear that your former employer went out of business. Do you:
A) Send out notes of condolences, offering words of hope to your former colleagues.
B) Simply keep your nose to the grindstone and mind your own business.
C) Head over to the company to taunt your former colleagues, taking pictures of workers exiting the building.
If you answered C, then congratulations, Polaris Direct, in Hookset, NH, probably has a spot for you.
The Concord Monitor ran story yesterday covering the shutdown of printer Precision Technology, a company in a greying industry that became overlevered after a management buyout two years ago. Here’s the part of the story that caught my attention:
Tempers flared at one point yesterday, when a handful of ex-employees, who left the company years ago to form another printing business – Polaris Direct in Hooksett – stood across the street and taunted the newly jobless Precision Technology employees… The former employees laughed and took pictures with their cell phones.
I grew up about 30 miles southeast of Hooksett, so I’m going to take an educated guess and say that the Polaris Direct employees in question drove about a half hour out of their way to carry this out. Assuming they went back to work, that’s a full hour of their day dedicated to rubbing salt in the wounds of people who just found out they didn’t have a job. It takes a special kind of donkey to put in that kind of effort.
I talked briefly with Polaris Direct’s Judith Maloy, who confirmed that “anyone who lost their jobs and got locked out of their place of employment would be very upset.” She called the Concord Monitor story a mischaracterization and wondered why I would be interested.
Full disclosure, my brother in law worked at Precision. But I can say with some certainty that that has no bearing on my reaction to the Monitor’s story – I’m pretty sure I’d find it disgusting either way.
The FDIC relaxed rules for private equity firms investing in failed banks. There will be a portion of the PE crowd that applauds the news, but I’m not sure I’d want to put my money anywhere so subject to the whims of Washington.
The ruling seems like a fair enough compromise, but there’s a good chance private equity investors could be sitting in the back seat, perhaps on the hump, for this ride. When you add in the fact that you’ve got the FDIC’s Sheila Bair and the OCC’s John Dugan engaged in a power struggle that is likely to bury reason under other interests, be it personal or political, it just seems like a lot of headaches.
Five years down the road, if the profits prove me wrong, there will probably be a political backlash that comes along with any overwhelming IRR. I’m not saying our legislators are capable of doing what South Korean lawmakers did to Lone Star Funds, but they probably won’t be patting the investors on their backs either. That’s just not in their nature.
I talked briefly with NPR’s Jeff Tyler earlier this week about the Warner Chilcott deal. (A transcription and link can be found here.)
You know it’s slow news day when Thomson Reuters’ Felix Salmon turns a comment about the state of the debt markets into a platform about tax havens and "private equity types".
I get it. Salmon’s the voice of reason, whereas the rest of us are just stooges for big business. The fact is the combined company is going to be generating between $800 million and $900 million in annual cash flow. Warner Chilcott also bought the assets at a revenue multiple roughly half of historical norms. All debt or not, this is hardly a return to 2006.
I’m also not sure what Salmon means by saying he would rather see the money go into “the real economy.” That’s exactly the sort of non-point that usually ends any discussion, so I’ll just leave it at that.
Felix Salmon, “Not Anonymous, Not Neutral, Not Against Mailing One In.”
As a Yankees fan, one of my favorite memories was the famous pine tar game in the early Eighties. I was barely seven years old, but I still managed to appreciate the brilliance of Billy Martin, who had been sitting on the arcane rule, waiting for the right moment.
I was talking with a distressed investor the other day about the idea of debt reinstatement and Apollo’s efforts to use the concept in its bargaining for Charter Communications. Basically, Apollo, Crestview and Oaktree Capital bought up the junior debt with aims of exchanging it for equity, and then plan to keep the senior debt in place upon Charter’s emergence from bankruptcy. The sticking point -- at least one of the sticking points -- is this idea of reinstatement, which would force the senior debt to stay put at pre-bankruptcy (ie, very favorable) terms as long as all other non-bankruptcy related defaults are cured.
If the senior lenders' reaction to the ploy mirrored that of George Brett's it wouldn't be inappropriate.
I realize this is old news to some, especially as negotiations have reportedly stalled, but I’m curious to see how this works out. If history provides any guidance, the initial ruling that negated Brett’s homerun was overturned, and the Yankees and Royals resumed the game from that point on a few months later.
This past weekend, I had the pleasure of moderating a panel at the David N. Deutsch Saratoga Weekend exploring “The ‘New’ New Thing in Private Equity.” As I mentioned in a previous posting, I went into it a little uncertain about what could be new in a stalled market.
Turns out there are plenty of things. Credit should go the panelists, Gordon Brothers’ Jeffrey Bloomberg, Palladium Equity Partners’ Eric Scott, and Bela Musits, of High Peaks Venture Partners, who had no shortage of ideas.
My tape recorder, ran out of power, so the details are in short supply. Either way, here’s a quick rundown of the key points raised. My comments are in parenthesis.
- PE is actively looking to aid good companies with bad balance sheets, but has little interest in turnaround efforts involving bad companies with bad balance sheets. (The difference between bad and good is presumably left to the eye of the beholder).
- Banks are interesting to PE investors; startup banks, without lingering legacy issues, are even more interesting.
- This will not be a consumer-driven recovery. (Someone please tell my wife).
- The early-stage VC space is actually seeing more dealflow these days, as the downturn (and lost jobs) tends to be the kick in the pants that spurs entrepreneurs into action. More dealflow, however, won't necessarily translate into more deals.
- How are LBOs getting done? All equity, seller paper, buyer-backed bridge loans are a few of the ways.
- The regulatory overhang is tough to avoid in this market.
Regarding that last point, the first panel of the weekend had some interesting thoughts on the new regulatory landscape.
Marc Hodak, a managing director of Hodak Value Advisors, doesn’t see over-indulgence necessarily as the villain of this market.
“Blaming greed for the financial meltdown is like blaming oxygen for a warehouse fire.”
He added that the market, despite some signs pointing to renewed stability, is far from being out of the woods.
“The abyss is still there. It isn’t a measure of the amount of public or private debt. The abyss should be measured in the amount of federal debt.”
So how do we regulate it? Hugh Johnson of Johnson Illington Advisors offered up one idea and one challenge.
“You can have a central regulator, but it is one thing to have the right structure in place and it’s another thing altogether to have the right regulator… The only person to have the imagination and courage to do anything was Paul Volcker.”
Hodak, meanwhile, downplayed the role of regulation altogether, noting that all the fuss is over rules designed to “deal with problems from the past.”
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