I was on CNBC earlier this morning (watch video) to discuss the ethics and consequences of buyout firms pulling out of agreed-upon transactions (Sallie Mae, United Rentals, etc.). The segment was promoted by an Andrew Ross Sorkin piece in yesterday’s NY Times, which asked if the smartest guys in the room had actually been posers.
I’ve gone back and forth on this question a lot, particularly given my constant comments in 2006 and early 2007 that deal multiples were being irrationally inflated. Moreover, I agree with Sorkin’s argument that bailing buyout firms – particularly ones doing so without a MAC assertion – are violating their oath to be long-term partners.
But here’s the thing, and it’s really a trump card: Buyout firms didn’t do anything but exploit the greed of corporate boards, their bankers and their lawyers. I’m not saying LBO pros are angels, but what’s wrong with them taking the best terms available? And if those terms include extraordinarily-low breakup fees ($100m in the case of United Rentals), then whose fault is that?
It kind of reminds me of the Les Miles situation. Miles is the head football coach at LSU, but he played ball, met his wife and became an assistant coach at the University of Michigan. When he originally signed with LSU in early 2005, Miles got a “termination by coach” clause that allows him to
leave only if his destination is for Michigan, so long as he pays a $1.25 million buyout fee. Yesterday, the Michigan head coach has stepped down, and everyone assumes Miles is moving north. Don’t blame Miles if he leaves, because he’s living up to the terms of his contract. Instead, blame LSU for agreeing to the provision in the first place.
There is of course a counter-argument, which says that burned banks will retaliate against firms like Cerberus and J.C. Flowers once the credit markets come back around. It’s a point-of-view expressed recently by Paul Finnegan of Madison Dearborn Partners, who said buyout firms should sate bankers by offering up at least “cosmetic” covenants on troubled deals.
I put this forward at one of my panels at Buyouts West, and the consensus was that bankers (A) Have short-term memories; (B) May not be the same people in the next cycle (due to layoffs); and (C) Will take fees over vengeance. As one panelist noted: “Bankers are coin-operated.”
So are LBO pros. The only difference is that they seem to be a bit smarter…