What can we learn from private equity?

AuthorRock, Robert H.
PositionLETTER FROM THE CHAIRMAN

The value of mergers and acquisitions has soared, up almost 50 percent from last year's record amount. An increasing number of these deals involve private equity (PE) firms.

Over the past five years I have voted three times as a director to sell the company to a PE firm. At the time, the price paid for these companies seemed very full. But within a few years, the new owners had extracted a tidy profit, and in one case an outright killing.

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How did they accomplish this? They upgraded management, raised performance expectations, tied rewards to performance, instilled a sense of urgency, cut costs, pared unprofitable operations, grew those parts where returns were highest, capitalized on low interest rates and relatively loose covenants, and imposed the discipline of leverage. In addition, these PE firms revamped the board of directors, often inserting a strong outside chairman, and instituted rigorous oversight processes that helped bring about these superior results.

In an article in the November 27, 2006, Wall Street Journal, Don Gogel, CEO of the highly successful PE firm Clayton, Dubilier & Rice, spotlights the structural advantages of private equity, including "a better governance model than public companies." He asserts: "It is extremely difficult for public company CEOs and their management teams to focus and execute long-term strategies that require fundamental changes in business practices at the same time as they are responding to the cacophony of their many, multiple constituencies." PE owners are usually tough taskmasters, but as the one and only...

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