Making buyouts work: public policy and private management.

• Author: Barbatelli, Ettore, Sr.
• Position: Takeover Management

Making buyouts work: public policy and private management

Whether you are for or against leveraged buyouts and foreign investment in U.S. business depends largely on your vantage point.

If you are a member of management, sometimes referred to by advocates of buyouts as "entrenched" management, and you have no opportunity to participate in the takeover transaction, not only is the takeover of your company deleterious but all takeovers are. Similarly, if competition, particularly foreign competition, is troublesome, then all forms of foreign investment in U.S. industry become undesirable.

In any event, the recent surge in leveraged buyouts is a significant and, in many ways, a positive trend. Following a buyout, refinanced companies become focused, bold, and impatient creatures - needing cash flow to live and steady growth to flourish. To meet their revolver or term loan payments, they must meet cash flow goals. To do this, they cut unnecessary frills and excessive expenses, emphasize marketing and sales, and reduce hierarchy costs and decision-making time in the day-to-day running of the business.

Also, marginal operations are sold and the core business becomes the main focus. LBOs and MBOs have been made famous because of the wealth they create for investors and managers who assemble them. What is often forgotten is that such gains are not based on illusory stock market conditions. Success stories, by and large, have been the result of exemplary management.

Critics who oppose the concept remind us that LBOs often involve high levels of risk and other potential drawbacks. Is the trend toward buyouts leading to overleveraged, vulnerable companies? Do they cause excessive relocations? Do they threaten federal revenues? These are among the questions Congress is now asking as it considers further regulation of corporate acquisitions. Many legislators have indicated the simplest way to curtail the acquisitions is to limit or eliminate the deduction of interest expense.

But as we look to the next decade of American business and the certainty of much change, we need to take a step back and consider the buyout phenomenon. Buyouts have had a profound effect on the way many companies do business. The issue has left the confines of corporate boardrooms and, quite properly, entered the realm of public policy. But, as new laws are proposed, it is essential that we understand what is accomplished by leveraged buyouts. We must do this if only to encourage its benefits and discourage its abuses.

The tax question

Perhaps the first notion to address is the idea that LBOs and MBOs are tax ploys, that they relieve companies of income tax burdens and deprive the Federal Treasury of much-needed revenues. A recent survey by...