John Daane, CEO of Altera, reckons that you can't blame the private equity funds for bad decisions, but you can blame the managements which sell out to them.
"It's not the investment people that make the bad decisions, it's the boards of the companies which make the bad decisions by deciding to sell", said Daane, "managements should be doing something which will benefit the company in five years time, not what will increase cash flow next quarter. The management in these deals always say they're looking at the long-term, but when the financial people make their presentations to the banks, they tell them they expect to get the money out in three years or less."
"They (PE funds) acquire, take on debt, dividend themselves and sell the shares", said Daane, "in the tech world you need a high R&D spend. I could double the cash flow of Altera by laying off half the staff. If the management think they're better off selling, then they could do the necessary work themselves." The reason they don't is simple. "In many of these cases the management make a lot of money," said Daane.
Daane's views are similar to those of Wim Roelandts, CEO of Altera's arch-rival Xilinx. "They (PE funds) 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," said Roelandts.
Daane condemns the private equity practice of loading their acquisitions with convertible debt by which they borrow money to be repaid in shares. The PE funds will be out of the stock long before the convertible becomes repayable. The practice magnifies short-termism, and promotes the maximisation of cash-flow to the detriment of the acquisition's long-term future.
That's probably why, in well-run, successful, semiconductor companies, there seems to be a general disdain for private equity.
TOMORROW: TEN SILLIEST APPLICATIONS
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