During the past few weeks, I have heard more misinformation relating to the buyout business and Mitt Romney than I can stand. Politicians, activists, talking heads, liberals, and now, even Romney’s Republican opponents have built a huge bandwagon on which these people have propagated myths and populist nonsense concerning the investment industry.
In reality, buyout shops are willing acquirers of companies for sale for reasons ranging from incompatibility with current owners to financial problems to unsatisfactory public valuations. When companies are under duress, many jobs may be at risk; private equity companies frequently buy these assets, save jobs and keep companies from relocating. However, opponents of Romney have chosen to twist the facts and portray him and other private equity executives as corporate raiders who only care about stripping assets and making money. This could not be further from the truth.
Generally, buyouts evolve from four different scenarios: 1) Large corporations want to divest businesses that no longer meet their investment criteria; 2) Distressed companies must restructure themselves to survive; 3) Private company owners wish to sell out and retire; 4) Undervalued public companies seek buyers at prices substantially above their current stock prices.
Many buyouts emanate from large conglomerates that wish to divest businesses that no longer meet their standards, which could involve profitability, products, geography, etc. Potential buyers determine whether they can increase sales and/or decrease costs, which will then increase profits of the target company and justify a high purchase price. In any case, the employees of the target company are in jeopardy whether or not the company is sold. Decreased headcount, especially when profits are substandard, is the first place management looks to make cuts.
A distressed company is similar as its survival is also on the line. In many situations, management will either have to make cuts in headcount or sell all or part of the business to avoid bankruptcy. Once again, employees are at risk.
A private company sale can often create great opportunities for the selling stockholders and the employees prospectively, as both parties often invest in the buyout transaction. However, real productivity gains will almost always necessitate headcount and cost-cutting, especially in a private company that has operated without tight controls for an extended period of time.
If a public company is undervalued by the stock market, it may be a prime candidate for a buyout at a much higher stock price. This event will yield huge gains to the existing shareholders, which could very well include pensions and other investors that are funded by the middle class. Even in this scenario, expense control and cost-cutting is an important element in making the buyout successful.
When a company is “put into play” by its owner(s), strategic and financial buyers will analyze the assets for sale and consider whether they would like to make a bid for them. Bain and a number of other buyout shops seek out these opportunities every day. Their stated objective is to find undervalued assets for their investors, buy companies, restructure them by cutting costs and increasing demand for their products and sell them in five to seven years at a profit.
Is this business model beneficial to the economy, to workers and to investors? The answer is unequivocally yes. Allow me to present some of the reasons why this is so.
Companies that no longer fit into a large conglomerate and/or are distressed are in jeopardy. These companies will be restructured one way or the other. A new buyer, especially a buyout shop (also known as a “financial” buyer) will usually be more sensitive to the needs of the workers than the original owners. Financial buyers always court critical employees to become their partners; it is their best interests to do so. However, expense and cost control must be part of the arrangement. A few redundant employees may have to suffer to save the jobs of the vast majority of employees. Strategic buyers often terminate many more employees when they buy companies that are in the same businesses as their other subsidiaries when they consolidate operations. Financial buyers need the existing employees and usually do not have compatible businesses.
When private companies sell out, existing management almost always protects the interests of the employees. These workers are considered part of the family and the sellers would be ostracized in their community if they sold out and large terminations ensued. More often than not, employees are encouraged to invest in the new arrangement personally or through employee stock ownership plans . This gives the former employees a chance to participate in the success of the buyout and earn significant investment gains.
When public companies sell, almost everybody benefits if the deal is successful. The existing shareholders receive a price in excess of the current market, and the new shareholders will usually include the employees. Financial buyers are very sympathetic to employees and will not do deals unless they are on board with the transaction.
If you read Bain’s website, it states that pension funds are partners with Bain in its funds. These pension funds consist of teachers, firemen, police officers and city and state employees (all middle class workers dependent on future pension payments). When buyout shops are successful, many other, average people and jobs — “99%ers,” if you will — benefit. As stated previously, investors in public companies usually include pensions and funds with thousands of middle class participants. When these companies sell, their investors usually receive large premiums over the current stock price- thousands benefit.
Buyout shops clean up problems in the economy. They are very interested in fixing broken companies where they can expect to receive huge rewards if successful. In the meantime, distressed companies stay in business and very few employees are terminated.
So, you can see that by focusing on a limited number of companies that Mitt acquired and some relatively minor employee cuts does him a disservice. Bain did not earn significant fees by mismanaging acquisitions. They made investments, almost always risked their personal funds, cleaned up companies and sold them for a profit. These deals, for the most part, were good for Bain and also for the employees that worked for them.
Photo Credit: Aaron Webb