Levine on Wall Street: Unloading 2007
The beginning of a global financial crisis is not traditionally a great time to do a leveraged buyout, but 2007 saw the private-equity buyouts of food services company Aramark and hotel company Hilton Worldwide, and both lived to tell the tale. In fact both lived to priced initial public offerings yesterday, coincidentally each at $20 a share. After some twists and turns Hilton's total enterprise value went from $26 billion at the buyout to $32 billion at the IPO; Hilton's private equity investors, led by the Blackstone Group, are up about $8.5 billion on their investment. Aramark is smaller and somewhat less lucrative, but I see a $10.3 billion enterprise value at the IPO price versus about $8 billion at the time of the buyout. In the interest of full disclosure and also complaining about how old I feel, I should say that I worked a little on the Aramark deal as a junior lawyer in 2007. So it's nice to see that it worked out well for everyone.
Maybe private equity owners made money by making Aramark and Hilton cleaner
Do private equity funds make money by improving the operations of the companies they buy, or by financial engineering and asset stripping? People disagree! Here is one interesting study that looks at private equity buyouts of restaurant chains in Florida and finds that restaurants acquired by private equity have fewer health code violations than those that are not, which I guess is a reasonable proxy for being well-run. Also their financial performance seems to be a bit better. So score a (possibly unrepresentative) point for operational improvements.
Maybe good governance is bad
Does shareholder-friendly corporate governance improve corporate performance by aligning managers with shareholders, or does it force managers to focus on short-term quarterly results and neglect long-term investment? People disagree! Here is a (summary of a) study that finds that companies with staggered boards -- boards where only one-third of directors are elected each year, making it harder for an activist or hostile bidder to vote out incumbents -- have better performance, on some measures, than companies without. The researchers say that "a staggered board may helpfully insulate the board from opportunistic shareholder pressure," which is exactly what the board wants you to think. So score a (possibly unrepresentative) point for the good effects of "bad" governance.
Facebook is hitting the big time
"Facebook stock jumped close to 4 percent in after-hours trading on Wednesday on news that the social media giant would join the Standard & Poor's 500-stock index at the end of next week," which is a good reminder that passive index investing isn't always all that passive. The stock jumped because of all the anticipated buying pressure from index funds who'll need to add Facebook (and sell poor Teradyne, which is being knocked down to the minors in the S&P MidCap 400). The the move "ends months of speculation" about when Facebook would join the S&P 500. If you were running an index fund wouldn't you have been tempted to get in earlier?
Man likes chickens, dislikes soccer team
Here is a story about a hedge fund manager, Crispin Odey, who has taken a $22 million short position in Manchester United stock. A hedge fund taking a short position in a stock is usually not all that newsworthy; Odey isn't even trying to get the FTC to shut down Manchester United. But Crispin Odey is enough of a legend that anything he does is worth writing about. So this article includes the near-perfect sentence "Mr. Odey is well known in London for his brief marriage to Rupert Murdoch's eldest daughter Prudence and for having a sausage named after him in Ross-on-Wye." Near-perfect but not perfect, because it omits the fact that Mr. Odey is also quite well known in some circles for his plans to build a 775 square foot, £130,000 "Palladian-style chicken house" whose "pediments, cornice, architrave and frieze are in English oak" and whose "columns, pilasters and rusticated stone plinth are being hewn from finest grey Forest of Dean sandstone." Anyway now he's short some Manchester United stock is the story.
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Matthew S Levine at firstname.lastname@example.org