The New Face of Capitalism
Private buyers are gobbling up some of the premier names in corporate America
More bad publicity for private-equity firms could come courtesy of the SEC,which has begun looking into whether people associated with or informed about some buyouts may have profited from trading on insider information before the deals were announced. SEC Chairman Christopher Cox said last month that his investigators were examining a host of suspicious trades.
A partner at one large firm has already fallen. Justin Huscher, a cofounder of Chicago-based Madison Dearborn, paid more than $116,000 in SEC fines this year to settle charges that he illegally profited by buying stock in Unisource Energy Corp. after learning that a private-equity club deal for the corporation was about to be announced.
There is also growing worry about fraud. The SEC recently charged Chicago-based AA Capital Partners with misappropriating more than $10.7 million in client funds. The firm, spun off from the Dutch financial powerhouse ABN Amro NV in 2001, was headed by John Orecchio, who had once helped run a $5 billion private-equity fund for Bank of America. Investigators allege some investor funds were used to spruce up Orecchio's horse farm, while others were funneled into a strip club.
Richer bids. Shareholders are also squawking about the prices offered in several deals, complaining that they have been shortchanged by an unholy alliance between management and the private-equity firms being favored. In several recent cases, shareholders have found that company management, smitten with deals that would leave them in charge, disregarded higher bids or took measures to dissuade them. Shareholders of the Tennessee-based regional retailer Goody's Family Clothing balked last year when management proposed a leveraged buyout. A later lawsuit revealed that the private-equity firm chosen was not the highest bidder. When the process was finally opened up, a three-way bidding war added 20 percent to the $327 million price tag.
Arthur Abbey, whose law firm, Abbey Spanier Rodd Abrams & Paradis, represented several of the shareholders, says that the higher bid proved that "both the price and the process was unfair." Saying management-led buyouts are "replete with conflicts," Abbey adds: "My view is that the only independent review these deals ever get is in a lawsuit by shareholders themselves."
Private-equity partners argue that they can't be accused of taking advantage of shareholders when they generally pay a high premium over a company's market value. And many of these lawsuits are being filed not by the individual investor but by hedge funds and other market sophisticates, they add. "These stocks are not being held by orphans and widows anymore," says one private-equity partner, who asked to remain anonymous. "These are the same type of 'deal people' looking out the windows in that skyscraper across from me."
Sometimes price shouldn't be the key factor for a company in choosing a suitor, say leveraged-buyout experts, adding that different buyout groups have expertise in certain areas and some will be more willing to take a long-term approach in turning companies around. Stewart Kohl, the co-CEO of the Riverside Co., says his firm tends to take relatively small companies, reinvest in them, and build them over the course of many years, often by combining them with other complementary acquisitions.
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