The Clear Channel Lesson

Bain Capital and Thomas H. Lee Partners blinked yesterday, when they agreed to up their per share bid for Clear Channel Communications from $37.60 to $39. Early indications are that the increase still might not sway opposition shareholders like Fidelity Investments, but the move lends credence to an argument far larger than any one deal: When push comes to shove, buyout firms will usually put more money on the table.

Whether it be Clear Channel, Harrah’s or Equity Office, LBO firms have demonstrated that their first bid is not necessarily their best bid. More specifically, their first bid accepted by a company’s board is not necessarily their best bid. They might bluff for weeks or months – and Bain/TH Lee displayed a pretty good poker face – but there is almost always some upward wiggle room. After all, you don’t spend all those resources on a multi-billion dollar transaction, just to callously walk away over a few hundred million dollars.

The trouble, however, is that it is nearly impossible to salvage such situations without encouraging the next one. If you owned shares in a company targeted by Bain or TH Lee, would you automatically jump at the first accepted bid? Unlikely.

Kevin Conway of CD&R yesterday noted that LBO critics keep floating a contradictory argument: On the one hand, buyout firms are “stealing” public companies. On the other, they are overpaying for them. And he’s right, so long as the criticism remains binary.

But let me suggest a third road: LBO firms try to steal public companies but, if forced, will be willing to overpay for them.