epeon

Private Equity, Business Flipping and Asymmetrical Outcomes

Let me make another devil's advocate. Years ago I worked for a company called Central Soya. Central Soya was a processor of soybeans. It was very good at this business. It knew how to build, modify, and run these plants very efficiently. It had an excellent engineering department. Central Soya had good cashflow. However, the management of the company insisted in investing in businessess it really knew nothing about (frozen, packaged foods). Management also had a fleet of airplanes and awesome offices.

Well, the company was bought out and the PE company that came in divested them of their frozen food operations and sold of the airfleet. It basically stripped them down to what they were good at. This, of course, enhanced cash flow. They then sold the company at a tidy profit.

Now, did this PE company add much? Well, in a way, they did. They focused the company on what it was good at and it stripped it of non-performing assets. Could the company's management have done this? Sure, but the never did.

Private Equity, Business Flipping and Asymmetrical Outcomes

Let me play the devil's advocate here. Many of the companies that were bought out by PE were bought out on the cheap because their stock price was low. It was low because the management of said companies never properly rewarded their stockholders. These companies were run as private little fiefdoms by the management and the stockholders were, at best, an afterthought. Consequently, the stock's value languished. This made them cheap and an easy buyout target. PE then raped them.

Was PE wrong? Sure. But,these companies made themselves such easy targets by allowing their stock price to be very low in relation to their value. I guess what I am saying is that there is wrong on both sides of that buyout.