Glad To Be Out Of The Quarterly Grind
When Lou Gerstner left IBM (IBM ) in 2002, working for a private-equity firm was not even remotely on his mind. Now he is chairman of the Carlyle Group. Gerstner recently explained his decision to Associate Editor Emily Thornton.
You worked for Kohlberg, Kravis & Roberts in the '80s. From your point of view, how has the private-equity industry changed?
In the '80s it was a smaller business. A few firms. A few deals. And the fees charged in the '80s almost precluded the necessity of major returns to investors. Today the requirement that you produce operational improvements in companies is a lot [tougher]. It has evolved to the point where your ability to raise new money and your ability to generate a substantial fee come from producing positive operating benefits from the companies you run. [Operational improvements have] become more important than [they were] before.
What's driving private equity today?
The predominant and most important economic activity today is restructuring. Excess capacity has been growing in almost every industry. It's why we don't see any pricing power [anywhere] in the world. Companies are having to restructure, and they're having to get more competitive. They can't just do what they did before. The second most important factor is the impact of information and networking technology. Networking technology is fundamentally altering almost every industry. So the combination of excess capacity and new technology enables people to create a competitive advantage where they couldn't before. That's driving the restructuring of enterprises around the world.
In your view, is it easier to fix a private company than a public one?
In theory, no. If you've got a really good CEO with strong backing from his or her board, you should be able to go to your shareholders and say: "Look, we're going to go through some tough years. The industry has changed. The competitive environment has changed. We're going to go and fundamentally change this company." That's what I had to do in 1993. I had no choice. We went through a substantial transformation at IBM in a public environment.
In a private setting, you eliminate the dysfunctional short-term focus on quarterly results that dominates the market today. I think there are a lot of executives who are frustrated by the extraordinarily short-term nature of measuring the performance of public companies. I'm amazed to see that some company made 65 cents a share over a 90-day period, and some collection of people thought it should have made 66 cents. And it loses $1 billion in market cap. There's something wrong. And I'm sure that's frustrating. The benefit of being a private company is that you have a longer time frame, and you have a direct alignment of the shareholders with the management to fix the company, to build value over time, and be patient with the changes. There's a big difference between being tolerant of poor performance and being intolerant of 90-day numbers without an awareness that maybe [the executives] were investing over that period and doing the right thing.
Is there anything to be done?
We have a great deal of attention by regulators to protect small investors. But I don't see a lot of attention being paid to finding a way to have large investors benefit from [focusing on the] long term. I propose that we should tax gains differently for long-term investors than for short-term investors. Until we figure out a way to get [large investors in public companies] to deal with long-term performance, then all of the other things we're doing will not change the preoccupation with short-term results.
When we [at Carlyle] decide to buy a company, we lay out a five-year plan. We sit down quarterly and review all of the companies in the portfolio. But we're not reviewing that quarter's results. We're looking at it against the long-term plan. We don't have to deal with a change in the valuation of our investment because in one 90-day period something happened.
Is there a big difference between the culture of a private-equity firm like Carlyle and a public company?
When I was running a company and one of my divisions was looking to invest hundreds of millions or billions of dollars, we had a very tough-minded approach to when documentation had to be provided. We don't work that way at Carlyle. Sometimes I get an investment document four days in advance. Sometimes someone sends me a heads-up memo two weeks in advance. And sometimes I get [an investment] document the day before.
Do you miss running a public company?
Not at all.