Daniel Primack has an interesting piece on Ben Stein and his critical comments about MBO’s. Ben is our era’s Leonardo di Vinci in that he has been in various White Administrations, writes and is on TV often regarding investments and, most importantly, is an actor best known for his teacher role in Feris Bueller’s Day Off (Voodoo, anyone anyone…Economics). Ben questions how ethical (or legal) MBO’s are when the buyout guys have priveleged information (as does, obviously, management).
Last month, Ben Stein wrote in The New York Times that management buyouts of public companies should be outlawed. Pretty surprising for a free-market Republican who made his bones in the Nixon White House, before becoming an economic pundit, actor, gameshow host and economic pundit (again). So surprising, in fact, that some financial bloggers wondered if it was a fit of pique that has since abated.
It hasn’t. I spoke with Stein yesterday about the article, and have posted the entire audio interview at peHUB.com.
My goal was to let Stein expound on the points he made in print, but also to play a bit of Devil’s Advocate. For example, if management buyouts are such good deals for company management, how come they don’t get outbid? Aren’t there certain operational efficiencies a company can recognize as a private entity that it can’t as a public entity? Isn’t there a possibility that company management will overvalue its corporate assets (the “falling in love with your own players” problem)? Don’t shareholders have the ultimate responsibility here, since they have the final vote?
So you know, I’m partially convinced by what Stein says (which also means I’m partially unconvinced). I share his major concern that company management has an unavoidable conflict of interest when it comes to a management buyout – and that management’s first fiduciary responsibility is to its shareholders. I even wonder a bit if this is where the amorphous DoJ investigation could be heading. I also share his concern that PE firms backing a management buyout are privy to more information than is a common shareholder, which means that the final shareholder vote is not being done with full transparency on both sides.
On the flip side, I’m not quite sure why Stein doesn’t have the same objection to strategic M&A deals in which the acquired company management gets options/jobs/golden parachutes with the new company. Moreover, most MBOs are done at a significant premium to current market price, and rarely get outbid by another offer.
So take a listen to the Q&A, and let me know what you think about his argument – either on the merits or in your own self-interest. What he says is obviously unsettling for the private equity market (not to mention I-banks), but that is no reason to dismiss it out of hand…