New York Times columnist Ben Stein and the legions of other critics of management-led buyouts have it all wrong, according to TheEconomist.com. Calling the reaction “a tad hysterical,” it argues that M.B.O.’s are not, as Mr. Stein has repeatedly argued, an inherent conflict of interest, and shareholders are often enriched by them.
The purported conflict in management-led buyouts arises from managers, in their role as part of the buying group, trying to get the lowest price for their companies, which on the face of it means that, in dealing with private equity suitors, they are acting against the interests of their shareholders, who want the highest price.
Are shareholders getting shortchanged? TheEconomist.com suggests they are not, writing that “so much money has been raised in the past couple of years by private equity firms, and banks are so keen to lend them billions more, that this has become a sellers’ market.” (Of course, this argument assumes that buyout firms will actively bid against eachother, which is something that the Justice of Department is looking into.)
Further, it is not as if managers are free of personal risk in such deals. Private equity firms “are much less tolerant of failure than public companies are,” TheEconomist.com writes. “They fire fast.”
The critics are also wrong, TheEconomist.com says, to assume that “the mere existence of a potential conflict of interest will lead directly to wrongdoing.” One of the “great strengths of capitalism,” the magazine concludes, “is its ability to develop efficient mechanisms to manage conflicts of interest. When a boss considers selling his firm to private equity, the check on him is particularly simple: the shareholders of his firm must approve any sale.”
As noted previously on DealBook, data suggest that the premiums paid for companies in M.B.O.’s is often smaller than in the average deal. TheEconomist.com shrugs this off: “So what?” it writes. “The selling shareholders were presumably happy with that premium. The time to cry scandal will be when private-equity firms pay less than the public-market price.”
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