This morning’s Wall Street Journal reports that large institutional investors are opposing a proposal to take private Clear Channel Communications. Investors have nixed some other going private deals recently. At last it looks like we’ll have a public discussion about this. Why can’t CEOs do for their public shareholders what they intend to do after taking the company private?
Mind you, I have great respect for private equity investors. They bring efficiency, focus, and a high-performance orientation to the companies they buy. The tide of rising efficiency floats many boats in our society. But the private equity investors ignore the question at their peril. In a country that blames McDonalds for obesity, private equity stands to get tarred by the ethical conflicts their deals create.
In these deals, CEOs and other senior managers typically benefit significantly. At the same time, there is no proprietary claim on the efficiency enhancements they will implement when the firm is taken private. Why can’t the CEOs implement these enhancements when the firm is public? We hear some talk about needing to incent risk-taking; but in most of these cases that rings hollow—for more on this, see my recent article in this quarter’s Directors & Boards. Managers are agents of the public shareholders and have a duty to promote the shareholders’ welfare.
In 1987, Lynn Paine and I proposed a benchmark for directors to consider before voting to accept a bid to take a public company private. The benchmark estimates the value of the public company assuming it did everything to mimic the private deal (such as lever up, repurchase shares, sell redundant assets, ditch the corporate jets, and generally cut fat). If the private equity firm’s bid is higher than that estimate, then accept the offer and let the company go private. But that’s not the way it seems to happen: in most situations the directors just compare the offer to typical acquisition premiums in that industry—such a practice is a good way to leave money on the table.
In the case of Clear Channel and other going-private proposals for public companies, here is what I would like to see:
**A published and signed analytic report by an independent adviser (such as a consulting firm, not an investment bank whose fees depend on the closing of the deal) who has been retained by the independent directors of the firm. The report should present sufficient detail for a sophisticated investor to check the results.
**An estimate of the value of the public firm as if it had implemented all aspects of the deal and yet remained public.
**A discussion of restructuring and enhancement alternatives that the going-private bid does not contemplate. Are there better ways to serve the shareholders’ interests?
**A discussion of the uncertainties involved in realizing the economic benefits of this deal—backed up by solid analysis, not just opinion.
**An estimate of the changes in wealth of the CEO and other senior managers arising from the transaction.
**A comparison of the going-private offer to other going-private bids, not just to the mass of M&A transactions in general.
In short, I’d like to see a different—and much better—kind of “fairness opinion” than typically prevails in these deals.
Meanwhile, watch how the Clear Channel saga plays out. As journalists Dennis Berman and Sarah McBride wrote today in WSJ, “The deal has become a crucial referendum on whether shareholders are getting a windfall when publicly-traded companies are taken private—or whether investment firms are snatching up properties on the cheap.”
Posted by Robert Bruner at 01/27/2007 11:47:41 AM