November 27, 2006

Notes from the PLI Securities Law Institute

In our “Conference Notes” Practice Area, we have posted notes from the “Public Company M&A Developments” panel held at the recent PLI Securities Law Institute. Panelists included:

– Brian Breheny, Chief, Office of Mergers and Acquisitions, SEC’s Division of Corporation Finance
– John Finley, Partner, Simpson Thacher & Bartlett LLP
– Gregory Varallo, Partner, Richards Layton & Finger, PA
– Patricia Vlahakis, Partner, Wachtell, Lipton, Rosen & Katz

Inside Private Equity: Why Funds are Doing the Going Private Deals

Over the holidays, I read this interesting Fortune article about the mindset and strategies involved with private equity funds doing deals. Below is an excerpt from the article:

“Yet there is another side to this story. The little-discussed heart of the matter: There are management strategies and techniques that enable PE-owned firms to produce stunning results that others can’t match. These successful practices have long seemed shrouded by the “private” in private equity. But they needn’t be.

Look inside the companies owned by major private-equity firms, talk to the executives who run them, and you’ll find a distinctive way of managing that’s sharply different from what goes on in most publicly traded companies or most private companies under conventional ownership. Investigation shows why privately held firms – at least if they’re owned by one of the major buyout shops – have important advantages over competitors, and why they’re regrading the playing field in several industries. Many of the lessons apply to virtually any organization.

The differences begin at the most fundamental level, with new objectives. Private-equity firms want to buy companies for their portfolio, fix them, grow them and sell them in three to five years. The eventual buyer could be another company in the portfolio company’s industry, another private-equity firm or the public, through an IPO. The holding period is occasionally less than a year or as long as ten years. But always the goal from day one is to sell the company at a profit.

Facing a goal like that changes a manager’s mindset – usually in positive ways. No longer seeing a corporate future that stretches indefinitely into the distance, executives realize that they gain nothing by resisting change: With the exit looming, driving change is their only hope.

‘Everybody in the company knows you’re on a sprint to do well,’ says von Krannichfeldt. ‘It’s not this mindset of working for a company that’s been there for 100 years and will continue for another 100 years. I find this much more intense than a public company.’

Pay is a whole different concept in PE-owned companies. Don’t come to play unless you’re prepared to put significant skin in the game. While public companies talk a lot about aligning executive pay with performance, they typically award stock options and restricted stock on top of already substantial pay packages, giving executives lots to gain but little to lose.

And in big companies those options reflect the fortunes of the overall corporation, not the specific business a manager is running. By contrast, private-equity firms make the game much more serious. Not only is a far larger share of executive pay tied to the performance of an executive’s business, but top managers may also be required to put a major chunk of their own money into the deal.”

After then talking about all the freedoms of the privately-held company, the article goes on to note: “If it all sounds too good to last, some people worry that it may be. Private equity has become so large, powerful and successful that some firms may be doing too much, too fast.”