Going Private

words by > D. Heimpel

“Our board of directors unanimously recommends that you vote “FOR” the adoption of the merger agreement,” read a letter from Freescale Semiconductor to its stockholders.

A consortium—led by The Blackstone Group and its friends in private equity—was offering $17.6 billion to take the company, a spin-off of Motorola, off Wall Street. Less than a month later, 99 percent of Freescale stockholders went for the deal, marking yet another mammoth public company buyout in 2006.

Driven by private equity super-dollars, executives of publicly traded companies are increasingly going private. And the market is turning out bids that will make the Freescale deal look like a hamburger next to a Kobe beef steak.

Private equity firms put together a consortium of around 10 investors to create a fund. Those funds are then split up into various investments, including company buyouts. If a CEO wants to privatize his publicly traded company, there are increasing opportunities to link up with private equity funds willing to bank a buyout. The private equity firm and the executives can then turn huge profits by either selling to another consortium of private investors down the line or by releasing a new IPO and going public all over again. But in the profit frenzy, some caution that there is some shortsighted thinking.

“Nowadays, there is so much money chasing the good deal,” says Charles Oppenheimer, the CEO of Amvest, a financial banking firm that deals specifically in mergers and acquisitions. “Some deals aren’t good deals. I’m not sure privatization is good for everyone.”

The market is ripe for privatization because of a combination of unprecedented money in private equity and changed federal regulation. Industries as disparate as television networks and restaurant chains are all looking to private funds to rein in control of their companies and make cash.

Private equity firms have already beaten—and are set to smash—all fund raising records. In 2006, they surpassed the $177.75 billion mark set in 2000, according to the Dow Jones Private Equity Analyst, an industry newsletter.

“With the present momentum and almost two more months to go, we could see fundraising reach $225 billion before the year’s end,” said Jennifer Rossa, managing editor of the Private Equity Analyst, in late 2006. That’s about $10 billion shy of Greece’s GDP, according to the US State Department.

And nearly $120 billion, or two thirds of the totals so far, have come from funds raised for buyouts. With that much money floating around to spend on acquiring companies, the incentives to privatize for public company executives, stockholders and private equity firms are high.

CEOs who team up with a consortium of private investors can see the value in their private stocks jump up as much as 20 percent. Stockholders are also happy with a windfall of profit on investment.

Private equity firms, like Blackstone of the Freescale deal, raise money from institutional sources, like pension and insurance funds and the odd private investor. In the case of the Four Seasons’ $3.7 billion offer, that private investor was Mr. Bill Gates.

“You’re not going too get into a private equity fund with $100,000,” Oppenheimer says. “Maybe we can start talking if you can put in $5 million or $10 million.”

And Oppenheimer says that the onus is on private equity firms to make deals. They earn a commission of around 1% on the initial volume of the buyout, plus the profits anticipated five to seven years down the road when the company is flipped and resold either publicly or privately. After the deal is made, the private equity firm may bring in a new management team. But if the current executives are invested in the buyout or are good for the company’s bottom line, private equity firms have no problem holding on to them.

Thomas H. Lee, one of the nation’s leading private equity firms, hired Richard Bressler, the former chief financial officer of Viacom and Time Warner Digital Media, to help out in high-level media buyouts.

“Bressler will add tremendous value to our portfolio companies and to our development of attractive new investment opportunities in the media and publishing sectors,” said Scott Sperling, co-president of Thomas H. Lee, on Bressler’s hiring early this year.

“By and large, equity groups need the best and the greatest CEOs to run their investments,” Oppenheimer says. “All they care about is their money.” Whether it’s the top executive who was grandfathered in or a new managing director like Bressler, “they want the guy to eat, sleep and drink that company.”

Unlike in public companies, where the wrath of stockholders is felt immediately, managers can find privatization a good way to regain control of the company. Another benefit is escaping the cost and scrutiny of the Securities and Exchange Commission (SEC).

There are anywhere from 12,000 to 15,000 publicly traded companies, according to John Heine, a spokesman for the SEC. While Heine says it’s impossible to track how many have been turned private, some attribute the trend in part to the Sarbanes-Oxley Act of 2002. The act stipulates that both the CEO and CFO of a public company certify the truth of financial statements delivered to the SEC.

“I don’t agree with that,” Oppenheimer proclaims. “If you’re the CEO of a mega company, you can’t be responsible for all the numbers. Sure, the CEO should be guiding the ship correctly, but, if there is somebody down the road cooking the books, the CEO shouldn’t be responsible. The CEO winds up spending all his time doing oversight.”

A report delivered to the Public Company Accounting and Oversight Board (PCAOB), the organization set up to monitor Sarbanes-Oxley, found that 5% of CEOs would like to privatize their companies, while 20 percent had negative feelings about the legislation.

In addition to freedom from additional government oversight, companies are unburdened from the high level of legal and accountancy costs associated with SEC filings. And, of course, there won’t be any stockholders left to shout the execs down.

“As a result of the merger, Freescale will cease to be an independent, publicly traded company. You will not own any shares of the Surviving Corporation,” the Freescale proxy read.

With the incentives higher than ever before on both sides, there are few checks on the expansion of private equity buyouts. If you own stock, it may not be long before you too get a letter asking for your vote.