Re: [A-List] Chrysler at the Private Equity Gates of Hell

[CeJ <jannuzi@xxxxxxxxx>]

The last article here -- about a failed private equity takeover of
Qantas in Australia -- shows that the limits to private equity are the
ability to debt-finance their deals. Does the Australian example show
that the credit bubble is coming unwound? These are firms afterall
that have a mainline to proprietary control of credit.

Australia is a good example to look at again. Afterall, Australia was
way out ahead of most of the OECD in financial deregulation and
liberalization. Key quote from the Australian story, the fourth
article pasted here ( four full articles and links follow):

> > Private-equity companies typically use large quantities of debt to
finance the purchase 100 percent of a listed company that they then
take private, guaranteeing the debt against the company's assets.
After restructuring the company, and typically paying themselves large
fees, the private-equity group then recoups its investment by selling
the company, either in a private sale or through an initial public
offering on the stock market.

Critics contend that this process endangers companies by loading them
up with debt and narrows the options for ordinary investors by
removing companies from the stock market.>>


1. http://www.npr.org/templates/story/story.php?storyId=10226401&ft=1&f=1006

Private Equity Deals Gain Clout, May Hurt Workers

Listen to this story... by Frank Langfitt

Morning Edition, May 17, 2007 Â The sale of Chrysler to the private
equity firm Cerberus highlights the increasingly powerful role private
equity firms play in today's economy. And on Wednesday, a House
committee looked at the explosive growth of private equity and the
impact it has on workers.

Private equity is just a fancy name for an investment firm that buys a
public company, changes management and then â ideally â sells it for a
big profit in a few years.

But critics at the hearing noted that some private equity firms slash
jobs and contribute to America's growing income gap. Among those
critics: Andy Stern, who runs the Service Employees International, one
of the country's biggest unions.

"For all the hundreds of millions of dollars of fees and billions of
dollars in profits taken out of these deals at private equity firms,
the workers at most of these companies have seen no increases in
benefits, no increases in wages," Stern said.

Jon Luther, who runs the company that owns Dunkin Donuts and Baskin
Robbins, painted a rosier picture.

He says when private equity took over his firm, the new owners didn't
fire workers. Instead, they helped him get cheaper financing so he
could expand and create more jobs.

Luther says that in the past two years, private equity money has
helped create "2,000 new stores â all brands â worldwide."

"They've enabled that growth," Luther said, crediting private equity
for making his company more entrepreneurial. Luther said private
equity took the following attitude: "Let's go into new markets, let's
seed that with new marketing and let's create incentives for
franchisees to be those great pioneers as we mark our march across the
country."

But the evidence for or against private equity endeavors is mostly
anecdotal. Nobody at the hearing could cite a single study on private
equity's net impact on jobs.

And the relationship between private equity and labor is complicated.

In fact, some of the money fueling private equity takeovers actually
comes from union pension funds.

That led Rep. Maxine Waters, a California Democrat, to Stern, the
union head, this:

"So, public employee pension funds and union funds could be investing
in deals where people are going to get laid off?"

His answer: yes.

"They are called limited partnerships because they have a limited role
in the decision-making process," Stern said.

And as Stern pointed out, pension fund managers have one key
responsibility: getting the best investment return for the people they
represent.


2. http://news.yahoo.com/s/bloomberg/20070516/pl_bloomberg/ajuek6i2ytq4_1

Frank Probes Private Equity's Impact on U.S. Workers

Alison Vekshin Wed May 16, 4:09 PM ET

May 16 (Bloomberg) -- U.S. House Financial Services Committee Chairman
Barney Frank (news, bio, voting record) questioned whether Congress
should weigh in to protect workers facing job or benefit cuts as a
result of private-equity firms buying public companies.
ADVERTISEMENT

It's unclear what steps Congress can take to address the issue, Frank
said today at a committee hearing in Washington. The Massachusetts
Democrat has used his leadership post to advocate shrinking the
economic gap between average families and the wealthiest Americans.

``When a small number of individuals benefit from a particular deal in
the tens and sometimes hundreds of millions of dollars and
concurrently workers are laid off, we have a situation which seems to
me wrong,'' Frank said. ``To the extent that we see gross imbalances,
then we're going to have to act.''

The growth in acquisitions by private-equity firms has sparked
criticism from worker advocates who say buyers generate profit through
reduced wages, job cuts, pared-down pensions and other measures
detrimental to employees.

The firms typically buy underperforming public companies and take them
private for a few years to improve profitability before selling them.
Private-equity firms have announced $372 billion in transactions this
year, Bloomberg data show.

In a deal announced this week, DaimlerChrysler AG handed control of
U.S. carmaker Chrysler Group to Cerberus Capital Management LP,
getting out of almost $19 billion in pension and medical liabilities
for retired U.S. employees.

`Overly Prescriptive'

Representative Spencer Bachus (news, bio, voting record) of Alabama,
the Financial Services Committee's top Republican, cautioned against
regulating the industry with an ``overly prescriptive'' approach,
which he said could drive private equity offshore and compromise the
competitiveness of U.S. capital markets.

Jon Luther, chairman and chief executive officer at Dunkin' Brands
Inc., told the panel his company has benefited from its acquisition
last year by a group of private-equity firms, including Boston-based
Bain Capital Partners LLC.

``Our new owners have never asked us to cut costs or reduce our
headcount,'' Luther said today.

The Canton, Massachusetts-based company, which franchises Dunkin'
Donuts, Baskin-Robbins and Togo's stores, plans to add 250,000 jobs in
the next 15 years, Luther said.

`Enough Wealth'

Unless private-equity firms change their practices on their own, ``we
think it is necessary that Congress should legislate,'' said Andrew
Stern, president of the Washington- based Service Employees
International Union.

``There's more than enough wealth in the buyout business for
private-equity firms to continue to prosper'' while expanding
``opportunities to communities, workers and our country,'' Stern said.
SEIU is the largest U.S. union.

Private-equity firms only succeed if they improve the performance and
increase the value of the companies in which they invest, said Douglas
Lowenstein, president of the Private Equity Council, a
Washington-based trade association representing some of the largest
U.S. private-equity firms.

``Firing workers, stripping assets is hardly the best way to show
future buyers that you've built something of greater value,''
Lowenstein said.

`Grand Bargain'

Frank has focused on ways to correct economic inequality and shift
more wealth to average American workers since taking the chairmanship
of the Financial Services Committee in January. His ``grand bargain''
initiative calls on corporate America to support labor unions and
increase wages in exchange for congressional support on trade and
other issues.

Today's hearing is the second in a series the lawmaker is holding on
the role of private-equity and hedge funds in the U.S. and global
financial markets.

In March, the committee explored the risks of pension-fund investment
in hedge funds, whose failure could jeopardize the retirement savings
of average Americans. Frank said he supports requiring hedge funds to
retain records of their financial transactions for law-enforcement
purposes.

After today's hearing, Frank said it is too soon to tell whether
legislation is needed to address private-equity deals.

Meanwhile, the AFL-CIO, the largest U.S. labor federation, urged the
Securities and Exchange Commission in a May 15 letter to investigate
New York-based Blackstone Group LP's initial public offering proposal,
which the union group says allows the New York-based private-equity
firm to skirt federal regulations.

The IPO would be organized as a limited partnership, which would allow
Blackstone to avoid corporate taxes on most of its income of as much
as 35 percent, the rate it would pay if it were regulated as an
investment company.

3. http://www.azcentral.com/business/articles/0517biz-stocks0517.html

Private equity pares public's stock choices

USA Today
May. 17, 2007 12:00 AM
Investors may not realize it, but private equity's public-company pig
fest is leaving them with fewer choices when it comes to U.S. stocks.

On Wednesday, Bausch & Lomb became the latest well-known U.S. company
and popular stock exiting the public market when it agreed to a $3.67
billion buyout by Warburg Pincus.

It joins a long line of companies going private.




So far this year, 217 U.S.-based publicly traded companies are no
longer available to public investors because of buyouts by private
equity firms and other companies, Standard & Poor's Capital IQ says.

Meanwhile, 107 U.S.-based companies have issued stock in initial
public offerings. That leaves the market with a net loss of 110
stocks, Capital IQ says.

The shrinkage is noticeable. There aren't 5,000 stocks anymore in the
Dow Jones Wilshire 5000, a measure of the entire stock market.

With fewer public companies, it has shrunk by 51 stocks, or 1 percent,
this year and is down 89 stocks, or 2 percent, since 2005 to 4,910
now, Wilshire Associates says. There is no sign of the evaporation
ending. "You're seeing a gradual shrinkage of the availability of
public companies," says Richard Peterson of Thomson Financial.

And it's not just small companies going away. This year, 12 members of
the S&P 500, a benchmark index of large-company stocks, have been
taken out by private buyouts and acquisitions, says Howard Silverblatt
of S&P. An additional 17, including Bausch & Lomb, will disappear once
their buyouts are completed, he says.

Investors could lose out. Many of the companies going private were
underperforming and battered.

Over the long term, such "value" stocks have tended to be strong performers.

Still, market observers say the trend is not a reason for concern because:


â Cash from buyouts trickles back into the remaining stocks. Investors
benefit immediately because most buyouts come with large premiums to
the existing stock prices, says Michael Buek, senior portfolio manager
at Vanguard. Investors benefit again after the cash raised from the
buyouts is reinvested and "pushes the rest of the market up," he says.




â Shares of remaining public companies become more valuable. Suddenly,
stock investors have something the buyout firms want, putting a floor
on their value, says Jack Ablin of Harris Private Bank. He estimates
the dollar value of stocks available to the public has shrunk 6
percent the past year.

Although the number of stocks is dwindling, there are thousands left,
Peterson says. Plus, there are new opportunities on foreign markets,
exchange-traded funds and new stocks with high interest, he says.

"The stock market isn't going away," Ablin says. "There will remain
investment opportunities and all sorts of ways to put savings to
work."

4. http://www.iht.com/articles/2007/05/16/business/equity.php

Australia rethinks value of private-equity buyouts
By Tim Johnston
Published: May 16, 2007

SYDNEY: The chaotic and ignominious end to the private-equity bid to
take over Qantas Airways nearly two weeks ago was greeted with
jubilation by many in its home country, part of a larger backlash
against what many here see as faceless foreign billionaires lining
their pockets with Australia's patrimony.

Debt-financed buyouts have been surging worldwide. Proposed and actual
global leveraged buyouts more than doubled in 2006, to some $800
billion, but the growth in Australia has been even more spectacular.
They rose from about 1.7 billion Australian dollars in 2005 to over 25
billion dollars in 2006, or from $1.44 billion to $30 billion,
according to the Australian Venture Capital Association and Thomson
Financial.

The relatively small size of the Australian market has magnified the
effect, creating opportunities for private-equity consortiums and
provoking opposition among the public, politicians and some bankers.

Private-equity companies typically use large quantities of debt to
finance the purchase 100 percent of a listed company that they then
take private, guaranteeing the debt against the company's assets.
After restructuring the company, and typically paying themselves large
fees, the private-equity group then recoups its investment by selling
the company, either in a private sale or through an initial public
offering on the stock market.

Critics contend that this process endangers companies by loading them
up with debt and narrows the options for ordinary investors by
removing companies from the stock market.

Supporters say that it can allow underperforming companies to be
restructured away from the short-term pressures of the market and that
the prospect of a private-equity takeover can encourage managers of
listed companies to manage their assets as efficiently as possible.

So far this year, excluding the Qantas bid, more than 35 billion
dollars in deals involving private equity have been proposed in
Australia. Private-equity groups have been stalking the country's
second largest retailer, Coles, which is thought to be worth about 20
billion dollars, and Australia's largest power distribution company,
Alinta, which is in play for about 8 billion dollars.

These are companies with huge local profiles, and the prospect of
their possible sale has led to public soul-searching.

"I think that what's causing a lot of public disquiet is the very fact
that private equity is less transparent than normal public firms,"
Glenn Withers, professor of Public Policy at Australian National
University in Canberra, said Wednesday in a telephone interview.

"We've always had to live with this distinction between publicly
listed and privately owned companies: it just seems that a lot more
money is pouring into the less transparent form in new ways, and money
that comes from sources that might appear opportunistic. People are
wondering why this is happening and they are scared of speculative
bubbles."

The center-right government of Prime Minister John Howard has
repeatedly shown its reluctance to intervene in the working of the
markets, and the treasurer approved the Qantas bid. But with elections
this year, supporting the privatization of companies like Qantas and
Coles poses considerable political risks.

Even before the Qantas bid crashed, the government began a Senate
inquiry on private-equity investment and its effects on capital
markets, and particularly whether more regulation is required.

Senator Barnaby Joyce, a populist member of Howard's coalition who
sits on the inquiry committee, said Friday in a telephone interview
from Canberra, "Private equity adds a whole new dynamic we don't have
the legislation on board to manage."

Joyce says that the debt that private-equity companies take on
effectively hands control of important companies to those who hold the
debt rather than the managers installed by the private-equity groups
themselves.

Joyce broke party ranks this year to vote against a bill that would
have granted foreign private-equity investors tax breaks on their
capital gains.

"The Foreign Investment Review Board guidelines have to take on board
the control mechanisms of debt," he said.

Joyce also says he is concerned that companies taken over by
private-equity groups pay little or no tax because most of their
taxable profits service the debt. "It puts a huge hole in the taxation
revenue of a government," he said.

The committee is scheduled to report next month. Withers, the
professor, say he does not believe that there will be any substantial
regulatory change, but he says the continued scrutiny could in itself
prove valuable.

Alongside the political and public concerns about the power of the
private-equity funds, there is also disquiet in the financial markets.
In the short term, some analysts have expressed worries as to whether
Australia's relatively small market can absorb the wave of cash that
private equity is unleashing, a fear played down by Martin Duncan,
chief equity strategist at JPMorgan in Sydney.


(Page 2 of 2)

"This is part of a bigger question about excess liquidity in the
market," Duncan said in a telephone interview from Sydney. "You could
argue that in the short term you are going to get a flood of money
looking for a home, but all the academic research shows that one-off
flows of liquidity are adjusted for quite quickly."

He says there are longer-term risks.

"Potentially there is a problem down the track if there is quite a big
slowdown in growth," Duncan said. "Some of these businesses are going
to be far more highly geared than they used to be and therefore there
is a risk that you get an increased wave of bankruptcies."

Australia's central bank recently reviewed the role of private equity.
While it notes that Australian companies have reasonably low debt
burdens in historical terms, the central bank says this situation is
starting to change: the private-equity groups tend to load up their
acquisitions with debt while other companies realize that a debt-free
balance sheet might make them a target.

John Edwards, chief economist in Sydney with HSBC in Sydney, says
there are concerns about companies' taking on high levels of debt
relative to their market value, known as gearing.

The Reserve Bank of Australia is particularly worried that the pricing
of current deals does not adequately factor in the risk that investors
are taking on, and that people are becoming complacent.

"In this environment of stable economic growth and relatively low
interest rates, investors have been prepared to move further out the
investment risk spectrum," the Reserve Bank said in a recent report on
private equity.

The Australian Private Equity and Venture Capital Association says the
risks are overstated. In its submission to the Senate inquiry, the
group points out that only 3 percent of total loans in the Australian
banking system are to private-equity backed businesses - and that
private-equity activity in Australia in 2006, at about 20 percent of
total merger and acquisition activity, was half that of the United
States or Britain.

The association's chairwoman, Katherine Woodthorpe, says worries over
debt levels are overblown.

"The debt levels we are seeing now are averaging 70 percent debt to 30
percent equity, and the people who are used to working with those
levels of debt are very sanguine about managing them," Woodthorpe
said.