MacFadyen: Where's the Smoke?
October 26, 2009
The new trend in business reporting seems to be picking apart sponsor-to-sponsor deals. The New York Times' article dissecting what went wrong with mattress maker Simmons started this fad, but other outlets have since picked up on it. I'm still not sure of the connection, but the implication I'm sensing is that these deals are somehow nefarious. The more flips, the better, if you're a reporter trying to root out corruption.
The problem is that I don't get the connection. A private equity firm of a certain size buys a company, grows it and sells it to a larger firm at a premium. The assets, as they grow, basically move up the food chain. Like any other company -- whether it's PE-backed, publicly held or family owned -- valuation multiples are going to expand as Ebitda grows, and as the company builds scale the capital markets open up. So yeah, larger companies are going to be able to take on more debt and firms with bigger funds will try to buy them.
To invent a metaphor for the sake of dismissing it, this isn't like the mercury that builds up in large game fish. Every change of ownership provides the chance to retool the capital structure or implement a new strategy altogether. Basically, any toxin introduced by one investor can be wiped clean by the succeeding owner or at least addressed in the negotiations. Too much leverage? Add additional equity. Bad management? Change it up.
Likewise, bad deals can come from any source. Whether it's a sponsor-to-sponsor deal or a taking private, if a buyer pays too much, takes on too much debt, and doesn't monitor what's going on, they'll take it on the chin. When there's a dislocation in a particular end market, it's only going to be uglier. But whether or not a company was owned by a string of private equity firms doesn't have any relevancy on the outcome other than that it's something that plays well in soundbites. Use "flipped" or "cashed in" for verbs and suddenly it sounds like something that violated the RICO Act.
The last thing I want is to be considered an apologist for private equity, believe me. And I'm not trying to excuse anyone from culpability. TH Lee, between Nortek, Clear Channel, Hawkeye, Univision and Simmons, seems to be engaged in a value destroying game of Centipede. They've got some blood on their hands. But I don't think blame extends to the other owners.
And if we're going to try to attack something, let's at least start looking for smoke before we start shouting fire.
Ever since the New Yankee Stadium was erected, the empty seats that have gone unfilled in the vaunted Legends Section have served as a reminder that things still aren't right in finance. The bankers, who usually show up three or four innings late, refuse to stand when Yankee pitchers get two strikes, and in general seem more interested in their hotdogs, never caved to Hal Steinbrenner's $2,500-plus asking price. This was even true during the first few games of the American League Championship Series.
(I realize I'm making a huge, sweeping generalization to assume these fans are bankers, but, really, who else -- excluding Southern fraternity pledges -- goes to the game in suit?)
I'm not going to read too much into it, but it was nice to see there weren't any open seats during Sunday night's game. If it weren't the playoffs, I'd say this was the surest sign of a rebound post TARP. Unfortunately, since it was the ALCS-clinching game with Andy Pettitte making a scheduled start, we can only chalk it up to informed buyers making a smart investment.
There's new research that shows laid off workers may actually have greater peace of mind than those who manage to avoid the axe. Business Week, citing a new study from the book "Turbulence: Boeing and the State of American Workers and Managers," reported the researchers found that the unemployed were often "happier than those left behind."
Many had new jobs, even if they didn't always pay as well. Over and over, [Turbulence co-author Sarah] Moore says, average depression scores were nearly twice as great for those who stayed with Boeing vs. those who left. The laid-off were less likely to binge drink, often slept better, and had fewer chronic health problems.
It seems like a pretty big leap to make using just one example. Having lived through a layoff, I can vouch that there is a sense of impending doom that is lifted with the arrival of a pink slip. But there may be some caveats to the other conclusions. You don't binge drink, because you've got a budget to maintain. That means you find the draught on special and nurse it. You do sleep better, no doubt about it. You can sleep in. And chronic health problems -- just a guess -- are probably linked to how well you're insured. COBRA's favorite two words are "preexisting condition."
I've got no answer for the depression scores, and the book, I'm sure, goes a lot deeper, but I'm just trying to provide some food for thought. There may be some decision makers out there who might otherwise clean their consciences with the study.
Paul Weiss released a survey looking at the terms of strategic mergers completed in the wake of the credit crisis. The law firm identified characteristics that ranged from the obvious -- certainty was paramount -- to the more obscure, such as a tendency for cash-only deals and the disappearance of mergers of equals.
One of the more interesting discoveries was that only two of the 50 transactions analyzed could be considered hostile deals. In both cases too, the boards of the targets eventually came around and recommended the transactions following negotiations.
The rationale Paul Weiss gave was that buyers were wary about relying solely on publicly available data. Moreover, the law firm speculated that the stocks were trading at such discounts that shareholders wouldn't bite at a hostile offer without the support of the target's board of directors.
I realize we're partly to blame, but now that I've been confronted with this stat, it seems like hostile transactions generate a lot more attention than actual dealflow.
I keep running across Ivanka Trump, who has apparently found a niche marketing herself as a leading business woman. She was even on Good Morning America pimping her new book and passing along advice to other entrepreneurs. I guess I'm on board, considering she doesn't have the bankruptcies or hair cut eating away at her credibility that her father does.
With that said, I'm curious how long the Trump brand has left and whether it will sustain another generation. I'm reminded of a quote from Gordon Brothers' Jeffrey Bloomberg, who in our most recent roundtable noted that the greatest value for brands can be realized by taking them down market. He used Champion as an example, but I don't see why it wouldn't apply to Trump too. After a long run, the name is basically returning to its Brighton Beach roots. It can be found on discounted clothing, cheap vodka and of course real estate classes for budding entrepreneurs.
Ivanka might be the right person to carry the torch, but I'm not convinced that the Trump name has enough lives to build a career around it. She might want to put in some more time at the office before writing her next book.
4 Comments
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Posted by: shane w | January 2, 2012 1:10 AM
Thanks for sharing, I'm interested in seeing sponsor-to-sponsor deals are like now. With the recession and unemployment I wonder what behind the scenes offerings are going on. Florida Insurance
Posted by: Jessica S | November 16, 2011 9:34 AM
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