The New Face of Capitalism
Private buyers are gobbling up some of the premier names in corporate America
Time was, America's largest corporations would fight tooth and nail (and with poison pills) to remain public companies. No longer. Now many of the world's biggest and best-known brands clamor to be taken private by investors they once shunned. A parade of marquee names have sold out-Clear Channel Communications, Cablevision, Reader's Digest, Dunkin' Donuts, SunGard Data Systems, Freescale Semiconductor, Toys "R" Us, Neiman Marcus, Metro-Goldwyn-Mayer, and hospital giant HCA, to note just a few. And the deal making shows no sign of abating anytime soon, as the private Blackstone Group announced plans last week to buy Equity Office Properties Trust, the nation's largest owner of office buildings, in a record-breaking deal.
It is a significant turn not just in corporate thinking but in the way the private-equity buyers are viewed. They have never been so loved. What a difference a couple of decades can make. Nearly 20 years after Kohlberg Kravis Roberts's $30.6 billion hostile takeover of RJR Nabisco left private-equity firms tagged as the "barbarians at the gate" and their partners vilified by Hollywood's Gordon "Greed is good" Gekko, these firms have mainly shed the perception they are corporate raiders pillaging for profit. These days, private-equity firms like KKR and the Blackstone and Carlyle groups aren't feared so much as revered-as deep-pocketed saviors willing to pay a premium to take over companies feeling neglected and misunderstood by Wall Street or overburdened by securities regulations.
Gone are the days when other publicly traded companies, known as strategic buyers, were the usual buyout suitors. Private-equity firms now surface as the chief bidders in most deals, say investment bankers and others involved in the buyout business. And new funds pop up every week focused on industry niches such as aftermarket auto parts or specializing in geographic areas like Idaho or Montana.
This year, there have been more than 2,282 private-equity buyouts worldwide with a combined value of $601.3 billion, up from only 885 deals valued at $71.4 billion in 2001, according to researchers at Dealogic.
Dark side. But as the number and size of the private-equity deals have soared, uncomfortable questions have again been raised about whether the hot leveraged-buyout market they are fueling may end up leaving some companies and shareholders burned. Federal prosecutors are probing charges of collusion among various private groups. The Securities and Exchange Commission is looking into allegations of insider trading and multimillion-dollar fraud.
Shareholders have filed lawsuits to stop some deals, such as the recently successful buyout of hospital chain HCA, complaining they are being shortchanged. Stunningly large dividend payouts to private-equity buyers from companies such as Hertz have sometimes made the firms seem greedy. And overseas, where many of the best deals are to be had, private-equity partners have been called "locusts" and threatened with arrest.
For much of their history, private-equity firms existed in a quiet corner of the financial world, content with buying, building, and operating promising companies. Many still do just that. But what made them household names in the 1980s was the increased use of leveraged buyouts, where the groups added huge borrowings to their own cash, mainly because of debt-friendly laws that shield profits from the tax man.