We have opined…with no real evidence…that private equity is a fraud. That is, that private equity firms do not really “add value”. They buy, they sell…they take out huge fees.
The flattering theory animating the private equity capitalists is that they are smarter than other people. They outsmart the public markets by buying under-appreciated assets from right under the public’s nose. And they pretend that they take the companies and reshape them – according to an inspired vision that completely escaped the firms’ own managers.
Correcting the mistakes of Ms Market and Mr Management is, according to the theory, worth a lot of money – which is the money private equity firms earn for their labours.
When we first heard about it, we guessed that the two premises of private equity were more vanity than reality. What they really did was to put one over on the investing public (which doesn’t seem all that difficult, in light of the evidence). In short, the private equity managers bought from morons…and then resold to the same group (after stripping assets and running up huge debts).
But what did we know?
Well now comes the evidence.
The International Herald Tribune reported the results of a group of the biggest M&A deals over the last few years. Only three out of seven of them had a positive effect on the companies involved. Unicredit bought Capitalia for US$30 billion this year. So far the shares are down 10%. AstraZeneca bought Medimmune for US$15 billion, another deal done this year. So far, the result is a 9% loss.
Looking further back, it was a very big deal when Daimler bought Chrysler in ’98 for US$36 billion. That has cost the combined firm US$12.6 billion of market cap since then. And after Glaxo Wellcome bought SmithKline Beecham in 2000, shareholders lost 25%. Or, how about this…thanks to the dealmakers in 2001, Allianz bought Dresdner Bank. You’d have to be pretty thick to miss making money in the financial industry over the last six years, during the biggest financial bubble in the history of the world, but when the magicians worked their wonders on the combined firm, it lost 40% of its value.
In the first five months of 2007, the hustlers earned US$25 billion doing deals of this sort. But when Boston Consulting Group looked at the results of similar transactions – 3,200 of them – it found that nearly 60% of them actually reduced shareholder returns.
Takeover activity rose 38% in the first half of this year, compared to the same period a year ago. A breathtaking US$2.5 trillion is changing hands as a result. How much of it will really “add value”? Not much.
Markets and Money