Mannerisms

Well, it does raise an interesting point about private equity - or capitalism in general.

The fact a CEO cannot see why an acquirer is willing to pay so much money has two explanations:

The fund can see some hidden value that others have missed. No doubt that is what they will argue, and there is logic to it. Be definition, the CEO won't see the mistakes they are making that lead to their companies being down-rated.

or

They are wrong. At the extreme this is basically 'The greater fool', and they'll lose out.

However, if somebody is happy to pay me more money for something than I think it is worth, then I am happy to take their money.

If I own shares I cannot see why they have the price on them that they do - that is when I decide to sell them: that is called "taking the profit".

In either case, where is the problem?

In capitalism, the job of a CEO is to make money for their shareholders; it is not to psych-analyse the abilities or motives of people who want to buy your shares.

If you can see a way to make those returns to the owners, then it is your duty to do so. Failing to take those offers is swindling the owners of those profits.

That is a bit harsh, but both legally ("fidiciary responsibility") and economically there is a logic.

And if you don't like it, then, well - do not be a CEO of a public company. Go and join a co-operative where owners and employees are on the same side.

... I can see Karl Marx coming back into fashion. For a few years we kidded ourselves that owners, bosses and employees were on the same side. But private equity makes it clear that owners want profit & employees want job protection - and those are not the same thing. And in Anglo-Saxon capitalism CEOs are paid to serve the owners, not the employees.

Well, Yes, up to a point.

But a CEO really intent on giving money to the shareholders would cut back on the R&D, sell off the less profitable parts of the company (even if they had long-term potential, and cut headcout to the bone.

That would boost immediate profits and returns to shareholders, but might imperil the long-term future of the company.

Unfortunately these are the strategies often followed by private equity companies after a takeover.

CEOs of public companies have to be accountable to their shareholders + employees + long-term interests of the company, and have precise legal responsibilities.

Private equity funds often only want to make a quick return (they call it a 'quick flip')and are under few legal obligations to explain, reveal and justify.

Moreover the private equity people get tax relief on the debt they incur to buy companies.

You have to ask if it is socially justifiable to give such a concession to private equity funds when, for instance, there is no tax concession on the dividends of income earned by pension funds.

I am sorry, but I think it is more subtle than that.

I don't work for a PE fund - although I do work for a VC-backed company, so I suppose I have to have some empathy. After all, if I didn't believe private firms had advantages over public ones, who would work for a start-up?

"But a CEO really intent on giving money to the shareholders..."

Well, yes. And there are CEOs who just that. Many people would say Arnold Weinstock ruined the UK electronics industry through decades of such behavior....

But the difficulty is when you say "would boost returns to shareholders". Not so. Analysts and investors are no fools - R&D spend is something that is reported, and any tech company slashing its spend will get reported on as a result.

Who wants to own shares in a company that has no future? "Sell now while the going is good, get out before everyone else notices", etc -- not a good way to boost share price.

PE firms have the same motivation as shareholders: maximise the value of the firm.

If they rape it & ruin the future, who will want to buy it off them? A flip relies on someone buying from you. Slashing R&D too far will remove any prospect of a future or sales. And if you cannot sell for a profit, then why buy it?

You repeat the point "tax relief on debt". True. *All* business gets tax relief on business expenses, and interest is an expense. So what? Thats not a loophole - it is deliberate.

Now, we could make acquisitions taxable I suppose. That would close the "loophole". But does it treally help the world if Cisco & Broadcom have to pay 30% for acquisitions? It certainly won't help the VC industry if no-one will acquire.

I guess the funds hardly need me to defend them.

But I do worry that a lot of the criticism will cause unintended consequences: remember, VC funded start-ups are private equity too.

I agree. It should be like that. If the PE people had understanding of the IC busness, they wouldn't cut R&D.
But look what happened within a few months of NXP and Freescale being taken over by PE funds - both were pulled out of Crolles2 which was a very fine, heavily subsidised (so particularly cheap to them) R&D source.
And look at poor old Zilog after being taken over by Texas Pacific, now a shadow of its former self.
I have never heard anyone say of VCs that they don't understand the chip industry, in my experience they understand it better than almost anyone, but it was interesting to hear these guys in Athens say that they were in regular contact with the PE people, because they were getting several calls a week from them, and were unimpressed by their understanding of the chip business.

True, they did withdraw from Crolles 2.

But compare the limitted membership with IMEC's consortium, for example. Maybe it wasn't actually that fine an effort - I don't know? But both of them are continuing other efforts.

Or, more likely, they just decided that they no longer want to invest so heavily in process technology and move towards "fab lite".

Nothing wrong with that: TI made the same decision about the same time. And ADI, IDT, Cypress and others are all doing the same.

It is hard to blame PE firms when the industry leaders (all publicly traded) are leading the way.

Poor old Zilog? To be honest, I thought they had been a shadow since about 1981 when the lost out in jump to 16-bit (although as an ex-Sinclair ZX80 owner I'm still nostalgic);)

The key point: PE firms are not buying for the sake of ownership (well, they sometimes do - Nomura buying all those pubs for example!!). They are buying as they intend to sell (probably an IPO). If they slash too heavily and gut the company, who would buy it? And if no-one buys it, then where is their profit?

VC and PE are veryclose... The two biggest VC investors in Europe are 3i and Apax: "world leader in private equity" and "global private equity fund". Thet do both. It is different in US, and Sand Hill Road is special - but even there a lot of the people do both.

As I say, I don't think they need me to defend them, and I don't think they are a panacea, or that thery are nice guys (they are not; they are ruthless, hard-nosed capitalists).

But I do think much of the criticisim is naive or misinformed. Or rather, that misses the point about the genuine concerns - but (as TGWU point out) those apply to global business in general.

well i agree i work for one of the above and that article is exactly right thats what they are (private equity firms)doing already selling it off piece by piece if you dont already know freescale semiconductors uk. is up for sale!!! any takers..!