Memo to Steve Schwarzman: Hire a Clown

Tomorrow night, Blackstone Group chief Steve Schwarzman will throw himself an ostentatious 60th birthday party, complete with some crooning from Rod Stewart. The New York society pages estimate that the bash will cost in excess of $4 million, and I’m told that Schwarzman is a bit uncomfortable that the details are being scrutinized as if it were a taxpayer-funded event. But this party presents Schwarzman with a much bigger problem than personal pique – it will be just another reason for public company shareholders to reject leveraged buyout offers (or at least to drive them up). In other words, this party is bad for business.

Let me explain: So far in 2007, three different take-private offers have been rejected by shareholders as being too low. The most recent came last week, when Eddie Bauer shareholders nixed a $614 million offer from Golden Gate Capital and Sun Capital Partners. In addition, a number of other deals have only received approval after the initial offer had been significantly raised. Think Equity Office, Harrah’s or – coming soon – Clear Channel.

The common denominator is that public shareholders thought the buyout firms were low-balling them. This is probably true in some cases, but the perception has been far worse than the reality. In general, mega-LBO firms are warning their limited partners to expect stable or lower returns than in recent years. Public shareholders, however, seem to believe that Blackstone, et all are telling investors that salad days are coming and the past was just a breadstick.

What’s driving this perception? Increased visibility. Every time a private equity firm buys a brand-name company – think Dunkin’ Donuts, Neiman Marcus, etc. – the mainstream press covers it ad nausea. Think it’s a coincidence I didn’t appear on CNBC for three years, but have been on more than a dozen times in the past few months? And, since most journalists have little insight into LP return expectations, each story is portrayed like this: “Firm X bought Company Y for $40 per share. It’s a 20% premium to the closing stock price, but it will probably be a huge bargain for Firm Y because they’re smart guys. Why else would they have offered $40 per share?”

All of this brings me back to Schwarzman’s party – and event that will add to this perception that LBO firms are making a killing at the public shareholders’ (consenting) expense. Even if that perception is true, why rub their face in it? All it will do is cause them to drive up the price of the next go-private acquisition. After all, if you can afford Rod Stewart, you can certainly afford another few dollars per share.

So cancel the party Steve, for the private equity market’s sake. Just invite over a few close friends, and maybe hire a clown (or perhaps just the other Faces members). It will save you money in the long run…


  • To a certain extent, that logic of public shareholders you present is flawed, hopefully you can represent this in your next article on the subject. The flaw is this, new shareholders (the PE universe) have a much more risky piece of equity due to the leverage they put on the company. Public shareholders need to realize that a fair negotiation should exist in determining price. Just because a share might be worth $X to PE firm Y, that is a pro forma valuation for all of the value that those “smart guys” bring, plus the new capital structure.

    We’ll not debate the former assumption for now and focus instead on the latter. The real alternative that provides a more comparable than “this is worth $X per share because there is a bid for $X-1″ basis for comparison would be: are the public shareholders willing to simply put the same level of debt on the business to pay themselves a dividend? If that is the case they can actually do something about it rather than waiting for their theoretical prince to swoop in and make them rich.

    It is this level of understanding of where returns come from in so many deals (engineering and leverage) that allow for equally smart guys like “JPMorgan Partners, J.W. Childs Associates, CDM Group and former bondholders of Aurora Foods Inc. for $2.16 billion, including around $900 million of assumed debt.” to be willing to sell a company to said Blackstone Group in the first of the top 3 deals you list following your editorial. Are the expected returns any different for the average sponsor to sponsor deal than they are for a going private deal? That would be a much more interesting editorial.

  • I enjoy your newsletter but really don’t like your shot at Steve Schwarzman’s party. Don’t carp about the party! Steve is entitled to enjoy himself however he wants – even (God help him) with Rod Stewart.

    There seems to be an inexhaustible supply of underperforming public companies and our capitalist system dictates that they move into stronger (or at least more active) hands. This has been going on for decades, with the only change being the way the financing is set up. This decade it’s been LP money channeled through the PEs. In the ‘90s it was thin-float “New Economy” stock and in the ‘80s it was junk bonds.

    Sometime later this decade the good times will end for LPs, and the PEs will move on to whatever. In the meantime the current winners should party hard and enjoy themselves to the max – after all, Milken and Quattrone never missed a chance.

  • Dave,
    I think you’re missing Dan’s point. He’s not saying that Schwarzman doesn’t have THE RIGHT to have the party. He’s saying that it feeds a perception that will make his business harder. Just because you CAN do something doesn’t necessarily mean you SHOULD.

  • Not sure if you were there for the morning of the Wharton conference. But Schwarzman was really peeved that Tim Draper ate into his speaking time, because Tim insisted on doing what I thought was a great rendition of RiskMaster. Schwarzman said it wasn’t the appropriate time and place to sing a song! Maybe he can save himself a few bucks if he called Tim instead to sing at his party (replete with air guitar that he played with his teeth)

  • I’m generally fully in agreement with your insights and advice, but this time you’ve made an egregious error. Cancel the party and invite the Faces over? Ron Wood of the Faces, now a Rolling Stone? No doubt his fee would be equal to or greater than Stewart’s. And if Keith Richards tags along, just think of the liquor bill. Talk about bad for business! Please, retract before Schwarzman follows your advice and the bottom falls out of an already-shaky LBO market.

  • I believe your analysis of this situation is based on the wrong premise. Do you know with confidence that in this environment PE firms are getting more push back (in the form of increased purchase price) from public equity investors regarding a buyout offer? As an equity holder, public or private, my first response to any offer at all is that it is too low. Better to stress test the buyer than accept the first offer. Any buyout firm worth its salt understands that the first offer, particularly for a public asset, is a starting point only. Maybe you should analysis all public to private transactions going back 5 years or more to gain better perspective on how it relates to the current environment.

  • Rightly or wrongly, the party will be viewed as waving a red cape in front of a bull (several bulls?) who are already feeling tetchy. And no-one–repeat no-one–is untouchable.

    But Steve is no dummy: he knows this. Why is he proceeding anyway? To make the rich and powerful of New York grovel and kowtow. Why is he doing that? To show that he can.

  • there is also another dimension to ‘events’ like Schwarzman’s party: relationships. i am sure a large number of CEOs come and like the idea of getting close to celebrities, politicians, the tabloids and knowing Schwarzman.

    secondly, the buyout kings have always been in the news, especially regarding their consumption (contemporary art, park avenue apartments, houses in the hamptons…dont seem to be too creative) – so it is not really a secret that they are making a considerable amount of money. this sort of news attracts many people to the industry, creates awareness and the ‘midas image’, also towards LPs. so I really struggle to see the problem with this party…

  • Bag The Faces (or anything to do with Rod Stewart); getting the Small Faces together would be much better gig.

  • Overall,i digest with relish your news and comments, and think debate is healthy – particularly when markets look toppy.
    However, criticising Mr. Schwarzman’s party has the ring of sour grapes. He may be showing Nero-esque signs of excess, but he is a free man in a (still) free country.
    In point of fact, throwing such a party is not so much symptomatic of the greed of private equity. Au contraire. i think it neatly illustrates the fact that so much excess rent can be generated (in a supposedly efficient market), merely by taking control of and improving poorly run companies – public or otherwise.

  • What is amazing is the statement that the perception is worse than the reality on these mega buyouts being too low. Let’s take an example. Say you were invested in an apartment building with 10 friends. Suppose one of them came along and said he had a great buyer for the building (and as an aside, he was also going to be part of the buying group). Would you think your friend had gotten the best price? Would you sell it to him? of course not! Now imagine that the rest of the people are managing other people’s investments in the building and they decide to let the guy buy it anyway because he is their friend. That is what is going on with public boards. Buyout firms have realized that it is cheaper to bribe a CEO than to compete in an auction. So they go to the CEO, offer him $50-100 million of future value (and a whole lot of immediate cash) to participate in the deal and make him convince his board and shareholders it is the best deal. Witness HCA. The CEO went behind his Board’s back, got himself a great deal and then told a lousy story to other buyers to avoid another bid (because he was a buyer too after all). Ah yes, shareholders took the deal too because he was very convincing that it was the best they could get. But many of these investors are mutual fund managers and pension fund managers that are also friends with the CEO and potentially even LPs in the buyer group. oh but it is a higher price than the current market price you say? By that logic, every board should just give a CEO a raise of 10% over the prior year’s pay. After all, if you were happy last year with that amount, you must be happy with more.

    There is a very simple solution to this incredible fact that most CEOs will always screw shareholders for personal gain. Don’t let a CEO be part of a buying group in any way. Make it like the government with defense contractors. If you run a public company, you can’t buy the company for a year after you leave. So if you think the value is too low, quit and find another company or buy the whole company in a year. But then you will be competing in a real auction. Otherwise, fix it for the public shareholders you work for.

  • I have no problem with the PE’s buying what people are willing to sell at a price set by the market. I DO have a problem with the management owning a significant amount of the stock and then making themselves a part of the deal. In these situations, I am not convinced that the market IS setting the price and why should the schmucks who are producing poor returns benefit, along with the sponsors, but not the shareholders? With respect to the party – I always feel that people can spend their (and I assume that it is his) money on what they want to spend it on. Perhaps “throw away” is a more accurate term than spend in the previous sentence. Schwarzman can transfer as much of his wealth to the party planners of New York as well as Rod Stewart as he wishes. Besides, anyone who watched the Super Bowl will realize that Prince would have made a much better choice than a decrepit Rod Stewart.

  • Hey, wait a minute! Didn’t David Bonderman throw an even better birthday party in Vegas a few years ago, far way from the hoi polloi? Mick Jagger crooned and Robin Williams chuckled. The numbers were bigger and the markets were humble. Clearly, there is even more to wonder about.

  • Private Equity Buyer’s are not doing anything post-LBO that couldn’t be done pre LBO by the exisiting management. Part of the value of a company’s equity is the potential to increase that value by an optimal capital structure.

    Public shareholder’s have everyright to insist that PE-buyer’s overpay for that potential.

  • I wonder how many LPs were at Schwarzman’s party, not including those in the friends & family pool? Given his generally low regard for LPs, I’d bet none.

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