July 8, 2009
Data on Private Equity Management Skills
I noted some time ago that private equity firms, once they buy a public company, set up a management structure that is very different from the one advocated by corporate governance "experts." Data is coming in on how private equity does. It is mixed. Josh Lerner at Harvard says the PE firms fail more than public companies but are more innovative. Nick Wilson at the University of Leeds says in the UK there is no difference once one neutralizes the effect of leverage. Nicholas Bloom of Stanford finds that PE companies are less well managed than public companies but better managed than family run privately held companies. All the studies suffer from two flaws. First, at issue is how the PE purchased companies do in relationship to those same companies had they not been purchased. PE firms tend to buy companies that show substantial room for improvement and attempt to profit from making those improvements. Thus the comparison is between those companie unpurchased and those companies as purchases, not between all public companies and all PE purhcased companies. Second, the data shows that things revert to the mean. Of interest is the finding that some PE firms consistently outperform others, that the best indication of future performance is past performance. What management proctices do these successful firms use in comparsion to public companies (and other PE buyouts)? The data is enlightening and helpful but not conclusive.
The CFTC Wants Limits on Oil Price "Speculators"
This is huge news. The Commodities Futures Trading Commission, our main futures market regulator, has given notice that it is considering "position limits" on oil futures to stop the effect of "speculators" in the oil futures markets. This signal that the CFTC agrees in principle with the notion that recent price volatility in the oil futures market is due to speculation untied to fundamental values. There are two questions: First the value of speculative traders to a market and, second, assuming the first answer to be negative, whether regulation will work. How does one regulate traders that set up overseas on overseas markets that do not have trading limits? Only an international authority will do, Pope Benedict's solution.
July 7, 2009
GM is Sold for Too Much??
The bankruptcy judge, Judge Robert E. Gerber, approved the sale of GM on Sunday. Under Section 363, GM sold its "healthy" assets to a new company owned 60 percent by the federal government and 17 percent owned by a health care trust for the benefit of UAW workers. Our government has put $50 billion into the company and billions more into suppliers, lenders and GM's former credit company GMAC. It took the Judge 95 pages to justify short-circuiting a Chapter 11 process that usually involves the votes of creditor and claimaint committees on a specific plan. Section 363, usually reserved for selling unwanted assets or closed plants, has become a loophole for reorganizaing an entire company outside the full Chapter 11 process. The dangers of a 363 sale are obvious. The company can be sold for too little (benefitting the new owners and hurting the residual creditors) or, in a bizarre twist, for too much (hurting the new owners and benefiting the residual creditors). The The former situation is more likely: The company could have been sold for a higher price (to other purchases or the same pruchaser) given an open bidding process and more time or the company was worth more sold in smaller pieces, liquidated, over time. The Judge is the gatekeeper. In the later situation in which the company is sold for too much is rare and bizarre: Why would new owners agree to pay to much??? Yet we may have such a case bizarre case in both the Chrysler and GM bankruptcies. The company is sold for too much because the government is the buyer and it is spending taxpayer dollars, not based on finanical returns but based on political returns. In other words, Section 363 is particularly useful if the government wants to buy a company fast in bankrutpcy to satisfy political constituencies. Here is Judge is not a gatekeeper; he could care less. A good deal is a good deal for the creditors. The only complaint that some creditors can have is that they were not included in that part of the purchasing group that received a bargain equity price thus recieving a larger piece of the largess of the government payout than the creditors in the residual shell corporation did (ie the UAW gets more of a windfall than they do). The Judge's answer was, "Shut up and be happy, you are still better off than you would have been had the government not stepped in with cash." Coupled with the price is the government's power to force the quick sale; the government threatened to pull the plug on any additional funds necessary to keep the company operating if the Judge did not act within 40 days of the bankruptcy filing. "Sell to us for a premium price within 40 days or we walk." The Judge had no rational choice but to approve. His decision should have taken a paragraph to write, not 95 pages.
The policy question is whether we want the federal government to do this, use Section 363 to nationalize private companies in bankrutpcy.