"How Formica got burned out by buyouts" (Finance, Mar. 22) incorrectly characterizes sequential leveraged buyouts as damaging to Formica Corp. and, by implication, any other company subjected to the same process. The damage done to the Formica business was done during the two periods when the business was owned by conglomerates. The business improved during its two periods of LBO ownership.
The fundamentals of well-executed LBO management and ownership are:
-- The use of substantial debt in the capital structure because it is the least costly form of capital.
-- The discipline that debt obligations impose on management decisions.
-- The motivational impact of stock ownership on management.
-- A tax-efficient way of rewarding investors through sale of the business.
It is this last point that can lead to sequential LBOs. Every business needs to be revitalized periodically, and selling a company to another LBO organization can be a good way of doing this, while simultaneously rewarding investors.
The major caveat in LBOs is not to overdo the leverage. Some research that was done by Professor Michael Jensen of Harvard business school makes it pretty clear that the majority of LBOs have been well-executed. I was an investor in Formica's first LBO, and I am a modest investor in its third LBO experience. I am betting that the company will prosper under the leadership of Vince Langone.
T.J. Dermot Dunphy, CEO
Sealed Air Corp.
Saddle Brook, N.J.