June 24, 2007
Bausch & Lomb: A Sorry Tale
Bausch & Lomb, a 154 year old company, is selling to a private equity firm, Warburg Pincus for $65 a share. The company is struggling and its stock price is well down from highs of $80 a share two years ago. The CEO responsible for the company's recent setbacks is Ronald L. Zarella. Zarella will receive a golden parachute payout of $40 million and have an equity stake in the privatized company. If the company turns around, he will rake it more millions. There are three things seriously wrong with this story: First, Zarella is profiting from his own weak managing record (there were accounting problems while he led the company). Second, Zarella is conflicted in the buyout both by the overly generous golden parachute and by his participation in the purchaser. And third, the purchaser will undoubtedly do the cookie cutter "Peltz thing" to print money -- sell under-producing assets, sell undervalued assets, leverage and distribute money to shareholders (an extraordinary dividend or buyback). This is not rocket science; it is pathetically simple. If this is a viable strategy for the private company it is surely a viable strategy for a public company; Zarella should have done the Peltz thing as CEO of the public company. The entire deal smells. At some point, we are going to have to come to grip with the fact them many of the private buyouts are a huge reward for those who should not be rewarded and this reward may itself be a primary reason for the buyout. Buyout groups look for companies with poor managers and fat golden parachute agreements; convince the manager to sell, cash the agreement, and come abroad the buyout team which can use his knowledge and contacts (and inside information) and tell him how to behave. We need a decent judicial opinion on one of these deals that lays out more protections for shareholders.