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.