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…