Failed Bain, Jacobs Bid Shows Why There’s an ‘Out’ in ‘Buyout’

Chief executive officers are discovering the unintended consequences of management-led buyouts as private-equity firms return to acquiring public companies after almost three years of restraint.

Joey Jacobs, of Psychiatric Solutions Inc., the Franklin, Tennessee-based operator of mental-health clinics, is one.

Jacobs, 56, was working on a deal earlier this year to take his company private with Bain Capital LLC, said people with knowledge of the matter. After news of the talks leaked in March, Universal Health Services Inc. Chairman Alan Miller put in a bid as well.

There had been friction between the two partly because of Jacobs’s past efforts to buy part or all of Miller’s company, said people close to the executives who declined to comment because the talks were private. Given their duties under Delaware law to get the best price for shareholders, Psychiatric Solutions directors were forced to consider the competing bid.

That led to last weekend when, in the span of a few days of negotiating, Jacobs and Bain were unable to beat Universal Health’s final $2 billion offer and Jacobs’s board sold the company out from under him, said people with knowledge of the events. Universal Health doesn’t foresee a role for Jacobs in the combined company, the people said.

Spokespeople for Jacobs, Universal Health, Bain, and Psychiatric Solutions declined to comment.

Inherent Conflict

Ross Johnson, whose effort to take RJR Nabisco private during the buyout boom of the 1980’s was chronicled in the book “Barbarians at the Gate,” has been there. His buyout deal with Shearson Lehman Hutton was derailed when private-equity firm Kohlberg Kravis Roberts & Co. topped his offer and sparked more bidding. Johnson ended up losing his job.

“The most awkward thing in a management-led buyout is the conflicted role of the CEO,” said Colin Blaydon, director of the Center for Private Equity & Entrepreneurship at Dartmouth College’s Tuck School of Business. “They owe duties to their company to get the best price they can. It’s a pretty fine line.”

Among the other CEOs who saw their would-be private-equity partners trumped by interlopers this year are Andrew Puzder of CKE Restaurants Inc., owner of the Carl’s Jr. hamburger chain, and Stephen Kahane of Amicas Inc.

Puzder’s $619 million deal with Thomas H. Lee Partners LP got jumped by Apollo Global Management LLC. Apollo aims to keep the management team in place and is in talks with Puzder about a new employment contract, CKE said in a May 4 filing.

Kahane’s $217 million sale to Thoma Bravo LLC was trumped by Merge Healthcare Inc., an industry competitor. He was replaced as CEO when the merger was completed last month.

Buyouts Return

These executives may get more company as so-called “take private” leveraged buyouts rebound. There have been 65 acquisitions of public companies by private-equity firms announced worldwide this year, valued at $20.36 billion, compared with 46 deals valued at $3.19 billion during the same period in 2009, according to data compiled by Bloomberg.

And while Jacobs may find himself poorer of title, he won’t find himself poorer. The company’s most recent estimate for his payout upon a change in control, based on a Dec. 31, 2009, termination date, is about $12.5 million.

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