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Thread: Private Equity Groups

  1. #1
    Cyburbian Emeritus Bear Up North's avatar
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    Private Equity Groups

    You don't hear much in the news about private equity groups. But, the decisions that they make have HUGE effects on business and commerce in this here US of A.

    Today it was announced that the deal has been completed for a private equity buyout of the big money-making arm of General Motors.....GMAC. The equity group(s) purchased a 51% stake in GMAC.

    The usual questions followed. Did GM sell this successful wing just for the cash it needed to fund their operations? Why would GM shed a "star" performer?

    Experts are indicating that because of the General Motors situation, perhaps a situation that could include the word "bankruptcy" in a sentence, the big money guys have down-rated the value of GMAC, because it was "connected" to GM. This equity purchase will kick GMAC back up in the financial ratings.
    _____

    There are private equity groups of all sizes and flavors. Do a GOOGLE for "private equity" and you will see what I mean. The private equity companies with web sites will give you a litany of reasons why you should choose them. And a lot of those reasons make sense.

    Put yourself in the position of a small manufacturer. Call yourself Cyburbia Window Box Company, located in a small town, maybe about 100 employees, doing very well, thank you. At some point you reach a position where you cannot substantially grow your business unless you get some heavy-duty financial help. Your plans include organic growth (growing your window box biz) and growth by aquisition (you want to buy a competitor who has those cool stainless window boxes that urban dwellers just go wild for). You make enough to support your family, your retirement, and your employees make a nice living. You do not have enough to acquire that competitor.

    Enter the private equity firm.

    In many situations they will KEEP the present owners and the top management staff. Their goal.....known from the get-go.....is to get you funding help (and some management tweaking) to grow your business. The usual investment period for a private equity group is 4 to 7 years. They usually plan on a very large increase in the VALUE of the company, from the time they partner with the management teams until they sell to another PE group.....or the company gets big enough to do an initial public stock offering.

    Go ahead, do that GOOGLE, and check out the names of the companies that private equity groups are holding. Good example: Gibson guitars.
    _____

    Anybody else have thoughts.....positive or negative.....about this way of doing business?

    What say you?

    Bear
    Occupy Cyburbia!

  2. #2
    Cyburbian michiganplanner's avatar
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    Good timing on this one Bear. Part of my daily routine as an economic developer has me meeting with all sizes of businesses at every point of their economic life/cycle.

    I just met with a company that went through a similar situation. Old leadership was retained new cash was and ideas were infused. The company is experiencing some good growth now.
    I'd be more apathetic if I weren't so lethargic.

  3. #3
    Cyburbian DetroitPlanner's avatar
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    I'd assume GM will want to buy back 2 percent stake to give it control should it pull out.
    We hope for better things; it will arise from the ashes - Fr Gabriel Richard 1805

  4. #4
    Cyburbian Emeritus Bear Up North's avatar
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    Prying Open An Old Thread

    You may have heard the news this morning.....a private equity group has purchased the Chrysler arm of Daimler-Chrysler. That purchase will certainly affect thousands of Daimler-Chrysler workers in NW Ohio. Toledo has a huge (and only a few years old) new automobile plant that houses Jeep manufacturing and a large machining plant in suburban Perrysburg Township.

    As noted in the opening post for this thread (in April, 2006) private equity groups will give a significant "cash explosion" to a company they purchase, enabling that company to invest in the future. I would bet dollars-to-donuts that the investment bucks for Chrysler will be for development of new products, new technologies (especially geared toward high horsepower with low operating costs, such as hydrogen technology), and facility automation. The new owners will not want to bring in busloads of new employees.....they will push for more and more automating of the business process.

    The business process can be automated in many ways.....on the plant floor, with more and more computer-driven technologies.....and in the offices, especially by pushing for simple things, such as electronic data interchange and other proven 21st Century practices.

    What does this mean to the average union worker? Too soon to tell, of course, but you can again bet those same dollars-to-donuts that the new owners will strike hard bargains with those bargaining groups. The new owners will want to position themselves to be very profitable and worth something like 6-multiples over today's purchase price.....when they sell it in 5 to 7 years.

    Side note: The private equity group's CEO is a former Treasury Secretary who hails from.....Toledo.

    Bear
    Occupy Cyburbia!

  5. #5
    Cyburbian safege's avatar
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    Robert Reich had a radio commentary on this last week. It is in his website, and on his blog.

    http://www.robertreich.org/reich/commentaries.asp

    Caution to Bear. If you check out the blog, you will see that I went off on a tangent, but also that I did some major bashing of Libertarian thinking. I couldn't seem to help myself. Bad boy, bad bad boy.
    Last edited by safege; 14 May 2007 at 8:31 PM. Reason: Added web address
    Psychotics are consistently inconsistent. The essence of sanity is to be inconsistently inconsistent.
    -Larry Wall

  6. #6
    Cyburbian Luca's avatar
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    In case anyone is interested in facts, as opposed to "Fortune"-style fawning or, at the opposite en d of the spectrum, hand-wringing...two major factors have spurred private equity groups to new heights in terms of A.U.M. and influence:

    > The growing presence of leveraged players and relatively low global cost of money.

    > Diversification of pension fund assets away from old-fashioned money managers.

    At a deeper level, the regulatory environment for public companies, plus the age-old "agency conflict", have made them less competitive. What I mean is that while regulations (some good, some kinda stupid) mean that a public company spends a lot of time filling forms, defending itself in the press, spinning quarterly results, etc. at the same time, despite all the "safeguards", many public companies are still seemingly run for the benefit of the top tier of employees rather than the shareholders. Private equity sort of eliminates both issues or at least reduces them; hence the attraction.
    Life and death of great pattern languages

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