Managers of companies bought out by private equity funds are seen resorting to savage cuts to pay the interest on huge debts taken on to finance the deals and give pay-back to the private equity owners, meanwhile allegations of collusion to force down buy-out prices are being made against private equity companies KKR and Blackstone.
2007 is a year when private equity chickens may come home to roost.
Regulators on both sides of the Atlantic are investigating the sector, class action law-suits against private equity firms for collusion in the US are being initiated, and some deals are beginning to unravel messily.
Weetabix is a case in point. After being bought by a private equity company called Lion Capital, it sacked 7 per cent of its workforce and cut an employee bus service in an attempt to reduce costs. Weetabix was then loaded up with $249m worth of debt on which it is now paying, according to a report from Bloomberg, interest at 13 per cent. The debt was taken on to pay a dividend to Lion Capital.
The semiconductor industry, hit by private equity takeovers at NXP and Freescale last year, may take note that the subjects of the latest class-action law-suits in the US are KKR, the lead investor in the consortium taking over NXP, and Blackstone, the leader of the consortium which took over Freescale.
The allegations are that they colluded on deals so as not to push up the prices, so depriving small shareholders of their rightful returns.
KKR and Blackstone did buyouts worth $269bn last year and borrowed $166bn to finance them, according to Bloomberg.
The worry for employees is that managers become so heavily incentivised, under deals which are kept top secret, that they are prepared to manage with savage heavy-handedness to achieve the financial goals of their private equity masters.
This is particularly damaging to a company when the private equity firms are going for what they call a ‘quick flip’ i.e. selling on the company within two years of the purchase. Recently NXP’s CEO said that the new owners were looking for an IPO two years down the road.
The semiconductor industry, which requires patient investment, seems particularly ill-suited to this kind of investor if the company is to floourish long-term.
Recently one of Silicon Valley's most respected CEOs, Wim Roelandts of Xilinx, warned that private equity funds are damgaing to IC companies. "Private equity buy-outs are a scheme for a few people to get rich quickly", said Roelandts, "they're not looking at the strategic direction of a company. They buy a company, leverage the hell out of it, sell bits and pieces, cut the R&D spending and go public to get their money back."
In many ways the private equity people are behaving like the notorious 'asset-strippers' of the 1970s. Public opinion eventually forced them to scale down their activities.
So, if your employee bus service gets cut, you can bet on there being trouble ahead.
Leave a comment