Equity: More Private, Less Public?

Yesterday’s news that DaimlerChrysler is selling the second half of its name to Cerberus, a private equity firm, didn’t come as a complete surprise. Recent private equity deals have included other household names like Qantas, Clear Channel, Gillette, Hertz, Toys “R” Us, and Neiman Marcus, along with a whole slew of huge companies whose names are less familiar. More than a thousand companies were taken private last year alone, in deals worth $371 billion.

But this buyout frenzy hasn’t emptied private equity’s coffers: they still have close to $1 trillion of “firepower looking for a home,” according to Merrill Lynch analyst Andrew Fowler. That money, which used to come from super-rich individuals now streams in from state pension funds (think CalPERS), university endowments (think Harvard), or overseas governments (think Dubai).

Even if all of these deals still represent only a small fraction of the companies on public exchanges, do they signal a broad shift in the private-public equity balance? In this age of Sarbanes-Oxley paperwork, government oversight, and daily shareholder demands (or, even worse, litigation), is the corporate dream not to go public but to remain private — or, even better, to get bought out?

And what happens to the companies that do? Their managers? Their employers? How will Cerberus’s Chrysler be different from Daimler’s? And how long before it’s public again?

Daniel Primack

Blogger, Private Equity Hub

Editor-at-large, “Private Equity Week”

Josh Lerner

Professor of Investment Banking, Harvard Business School

Robert Reich

U.S. Secretary of Labor, 1993-1997

Professor of Public Policy, U.C. Berkeley

Blogger, Robert Reich’s Blog

Author, Reason:Why Liberals Will Win the Battle for America and The Work of Nations, among many others

Extra Credit Reading
Micheline Maynard, In Deal, a Test for the U.A.W., The New York Times, May 15, 2007: “The most obvious way for Cerberus to make money off its investment is to cut costs — especially by reducing the benefits that workers hold sacred, including medical benefits for workers and their immediate families for life, with only modest co-payments or deductibles.”

Robert Reich, Private-Equity Baloney, Robert Reich’s Blog, May 8, 2007: “What exactly do private-equity partners do? They use the investment money of pension funds and college endowments and wealthy investors to buy up publicly-held companies and turn them briefly into privately-held companies. Then they do what you might do when you want to resell your home – redecorate, refurbish, knock out some walls, apply fresh paint, sell the furniture.”

Dan Primack, Gut Reactions on Chryslerus, PE Hub, May 14, 2006: “This is not even remotely the largest-ever buyout, but it will be the most discussed in the past decade. Chrysler is an iconic company, which means every move Cerberus makes will be dissected and used to paint the overall LBO market as either good or evil. For at least a while, Cerberus has become more consequential than Blackstone.”

Chris Shunk, Jeep employees pissed about Chrysler sale, Autoblog, May 15, 2007: “The members were also angered by Ron Gettlefinger’s comments that the sale to Cerberus was “in the best interest of the membership” only a few weeks after stating that the UAW was opposed to any sale to a private equity group.”

meehray, On work and peons, It’s all about Meeh, May 15, 2007: “We’re a private equity firm that seeks out high-yielding investments in order to place capital… I’m the little peon being trained on project management,acquisition and financial analysis. I do everything; from paper pushing to crunching numbers. The work itself isn’t hard but like they say, it’s not how much you work but how smart you do it. For now, I still tend to make mistakes or have a brain fart here and there. Hopefully that will change.”

LaMont, Here Comes the Tough Medicine: A DL Lindsay Story , LaMont’s MySpace Blog, May 15, 2007: “So, it comes to this. Private-equity is going to gut Chrysler like a fish if the profits don’t come swiftly. That only means one thing. The UAW is in for the fight of it’s life! Chrysler management in Auburn Hills don’t seem too concerned and with good reason. They all know who has the large bullseye on their backs and it ain’t them!!!”

What’s Behind the Private Equity Boom?, Working Knowledge, December 22, 2006.

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  • orlox

    Sounds like a tax dodge for the ultra-rich and unlikely to go well for anyone but them.

  • tbrucia

    Chrysler is like the brother-in-law who claims to be down on his luck (but whose problem is that he can’t keep a job). He is shuffled from embarrassed relative to do-gooder relative, eventually wearing out his welcome. So off goes Chrysler again, looking for a place where it can rest in peace…

  • This show was a good insight into the gamesmanship of the big capital fund managers and how they work the system to make their millions and stay one step ahead of the regulators. It was important that Chris and Robert Reich were willing to ask some of the critical questions about the social value of this push for privatization. It didn’t sound like there was much. Further job cuts, tax avoidance, inflated share prices, debt risk, etc: if the “best and the brightest” are not blundering in Iraq they are plotting their unethical path to riches.

  • Sounds like a tax dodge for the ultra-rich and unlikely to go well for anyone but them.

    Right. As if wealth just sits in a huge money vault, with Scrooge McDuck pushing around bullion with a bull-dozer.

    Puh-lease. If companies do better as private firms then people do benefit – jobs are created, wealth spread around. Do the ‘ultra-rich’ (whomever they are) benefit? Sure. So do the rest of us.

  • rc21

    Thanks for bringing some sanity to the issue Brian.

  • Thanks for bringing some sanity to the issue Brian.

    I find it darkly amusing that some people are dead set against public companies going private when _last_ year (or so it seems) publicly held companies were the bogeymen what with sending jobs overseas ‘just’ to raise the stock price for a quarter or making short term choices that would work well for the short term and raise the stock but were long-term bad for the company.

    Robert Reich is .. well he’s singing the same tune that he always has, different chorus.

    “Why did the CEOs wait to apply their good ideas until they were part of the private equity system”.

    Because .. and Mr. Reich knows this .. the market would punish you for making choices that were bad in the short run, but good for the company as a whole. Mr. CEO makes such a choice, he lacks the backing of his board and bam he’s out. Or facing a shareholder lawsuit for devaluing their stock.

    Likewise the assertion that public companies have more social responsibility than private equity people have is .. well it’s rather absurd. Show me that this is the case, Mr. Reich, and not mutter about dark private secrets.

  • plnelson

    Sounds like a tax dodge for the ultra-rich and unlikely to go well for anyone but them.

    How is it a tax dodge? If they buy Chrysler at one price and sell it at a higher price they pay capital gains, the same as you or me.

    The question no one here (or in the show) asked is what was the alternative? Chrysler and its workers should be grateful that SOMEONE wanted to buy them because things sure weren’t working out as part of Daimler and there’s no way they could have lasted on their own.

  • Jeff Lints

    My first post, although I’ve been a long time listener – I think since the beginning.

    I too am confused about how private equity provides a tax dodge. Public or private companies pay the same rates on profit that they report to the IRS. Perhaps it is because private companies leverage debt so much that they reduce earnings and therefore their tax burden. Subsequently they increase the value of the business and make money off of the sale/IPO of the business… taxed as capital gains.

    Another scenario might be that they plow back earnings into the business to grow it long term, thus increasing expenses, reducing earnings, and reducing their tax burden. Still another is that the private equity firm charges “management fees” that equally reduce the business earnings.

    I thought the provocative questions about social responsibility were appropriate, but our good host’s biases for Robert Reich and against HBS MBA’s were palpable. I think the argument on social responsibility can be seen as the short term or long term value for society. Personally I believe that creative destruction / disruptive innovation driven by “shock therapy” drives greater long term value for our society than the short term costs. Most communities need an external stimulus to provoke evolution and change. Otherwise, we – and our country’s economy – will stagnate. It will always be painful, but that pain is the stimulus.

  • rc21

    Jeff, I’m just wondering how socialy responsible is it for governments to tax and impose growth restictions on corporations?

    By doing so we cause the companies to lose money thus forcing them to either curtail expansion or in the worst case down size.This leads to fewer people being hired and more people being fired.

    Who then picks up the cost of these people and their families being unemployed?

  • TEP492


    My take on taxes… they support the community (although also graft at times). Taxes are OK, but we will always debate more or less. I support a progressive tax. I think we could use more $$$ for social services. I also used to live in Colorado and was a fan of TABOR – a law eliminating tax increases unless approved by a majority vote of the citizens.

    Taxes provide community infrastructure and sometimes a helping hand. I could reverse the question and ask how would companies survive without this infrastructure? They rely on a functioning community from which they can draw employees. They rely on a relatively safe community, without debilitating crime. They rely on the roads to ship their goods, and to enable customers to travel to stores to buy said goods.

    The real question, in my mind, is how to strike a balance between too much or too little tax. Then that question leads to how we spend tax dollars, and are we using the funds wisely. Then that leads to politics and military power. Bigger questions… I have no concise answers.

  • Taxes provide community infrastructure and sometimes a helping hand. I could reverse the question and ask how would companies survive without this infrastructure?

    The Libertarian answer is ‘the market will provide the means’. I confess to being skeptical about this approach but it does have an appeal to me.

    That said I’m really of the Practical Politics persuasion. If it works, great. If it doesn’t work then we need to change the rules or stop doing it.

    I admit his isn’t attractive to people who have an ideological ax to grind. The upside is that if we all thought like this we could move on to bigger and better things.

  • rc21

    Brian the market with a few exceptions almost always does a better job than government.

    There is also another issue. As an American do you believe this country was founded on the premise of individual freedom? Do you believe that our founders wanted less government intrusion into our lives or more?

    I think we have gotten away from what made our country so great and truly free. We have allowed our selves to become dependent on a type of nanny state. We pay higher and higher taxes each year in the hopes that big govt will solve every little problem that comes our way. We no longer even have to think for our selves just let the govt handle it.

  • Brian the market with a few exceptions almost always does a better job than government.

    I agree. But you can’t be ideological about it. There are times when the market approach flat out doesn’t work. Times change and you have to be prepared to move with the times.

    We no longer even have to think for our selves just let the govt handle it.

    Whadda mean ‘we’, cowboy?

    I don’t think that a majority of people truly think that way or want the situation to be like that.

    But I am a hopeless optimist.

  • Should that be ‘hapless’ or ‘hopeless’? Grin.

  • rc21

    Thats why I said wth a few exceptions.

    “We” people in general. I must disagree with you on this point. Most people don’t consciously want the govt to run their lives, but through vast social engineering programs and other govt mandates, and an increase in rules and regulations that is exactly what is happening.

    I would go with hopeless optimist. Was it CSNY who sang it’s always darkest just before the dawn?

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