Buyout plans face hurdles

Shareholders wary of bids to go private

March 18, 2007|By Hanah Cho | Hanah Cho,Sun reporter

Shareholder concerns about securing the best value for their company and worries that higher bidders might be scared away by those in charge are some of the hurdles facing a series of recent management-led buyout proposals - including one for Baltimore-based Laureate Education Inc.

Management-led buyouts have been surging during the past few years along with a wave of private equity spending. Such proposals typically include a series of top company officials who pool their money with other investors and offer stockholders a premium for each share they own to approve the deal. The public company then becomes private under the same management team.

But some shareholders have balked at the moves, noting conflict-of-interest concerns and worries that these deals are undervalued, allowing private equity firms and management to gain lucrative payoffs at the expense of stockholders.

Others question whether rival suitors are dissuaded from making higher bids than those put forth by management. That can happen, critics argue, when a successful company's future hinges on a leadership team that might leave if its buyout proposal is rejected.

"A management-led buyout is going to inherently raise questions about whether the management is acting in the best interest of shareholders or whether they're acting in their own personal interest," said James Post, professor of management at Boston University School of Management, who teaches courses in corporate governance and ethics.

Institutional investors such as T. Rowe Price of Baltimore and Fidelity Investments of Boston recently have publicly opposed management-backed deals, noting these concerns. Both investment firms represent millions of shareholders who own stock in various companies facing management-led buyouts.

In the case of Laureate Education, the $3.8 billion buyout led by Chairman and Chief Executive Officer Douglas L. Becker has drawn opposition from two large institutional shareholders - Select Equity Group and T. Rowe Price. Both companies argue that the $60.50-a-share offer undervalues the long-term potential of the company. Price also worried that a bidding war was unlikely given that few companies would want to buy Laureate without Becker on board. Laureate shares closed Friday at $59.

Laureate executives, who are trying to sell other shareholders on the proposal, argue that the offer provides an 11 percent premium over what the company was worth before the deal was announced this year.

In documents filed Friday with the Securities and Exchange Commission, Laureate indicated that no other competitive bids were received in response to Becker's offer.

Laureate is not alone in defending its buyout proposal.

San Antonio-based Clear Channel Communications, the largest U.S. radio broadcaster, delayed a shareholders vote on a buyout backed by its founders and executives so it could garner support after opposition surfaced, including from Fidelity. The vote was moved to April. The deal is valued at $26.7 billion, which includes assumption of $8 billion in debt.

And some boards of directors tasked with evaluating management-buyout deals have rejected them, saying the prices offered were inadequate. That was the case for New York-based Cablevision and Universal American Financial Corp., a health insurance and managed care company also based in New York.

Instead of seeking competitive bids, in some cases, rivals have been discouraged outright from making an offer after a management-led deal was announced.

When the chief executive and controlling shareholder of Four Seasons Hotels, Isadore Sharp, proposed a $3.8 billion buyout bid last year, he made it clear that the company would not entertain rival offers by saying his transaction "is the only one I am prepared to pursue." The company announced last month that the board of directors unanimously approved the deal.

As a result, Chris Young, director of mergers and acquisitions research at Institutional Shareholders Services, a Rockville firm that advises clients on proxy issues, said the board and shareholders can be put in a tough spot.

"If there's good management, there's an issue of `If we rebuff the proposal, will the management team walk away?'" he said.

Last year, $375 billion in buyouts were undertaken in the United States, shattering a record of $116 billion in 2005, according to data by Thomson Financial.

Almost $6.2 billion worth of buyout transactions this year involve management teams. Last year, nearly $110 billion involved management teams, Thomson data shows. Companies that were recently bought out by management and private investors include Aramark Corp., the largest U.S.-based food-service company, and HCA Inc., the nation's biggest hospital chain.

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