Equity Firms: Taking the Country Private


Although that dread word “anti-trust” has not yet been spoken aloud, in public, the feeding frenzy of mergers and acquisitions since 2001 that has resulted in fewer and fewer corporations owning more and more of the economy, along with the recent return to power of Democrats and the rage building up around CEO salaries, has made it all but inevitable that at some point it will raise its insidious little head. This will not, of course, come from the Bush Administration, where their attitude is and has been right along: “Go to it, boys. Our heads are turned.” (Will Rogers on the Hoover Administration)

Just to take a single example, our entire media apparatus, which was in the hands of fewer than 20 giant corporations when Bush came to office – bad enough, you’d think – is now in the hands of a mere half-dozen thanks to Michael Powell’s obedient, not to say obsequious, FCC.

But uttered or not, the specter of potential regulation and/or legal proceedings designed to weaken or even break up these near-monopolies a la AT&T or Microsoft in Europe sends shivers of fear down the spines of corporate owners everywhere. Even worse, Barney Frank is – or soon will be – holding hearings to look at whether investors should have more say over the pay packages Boards offer their major executives. Maybe even give them veto power.

Yes, things could get ugly on The Street in a few years, and even uglier in the executive suites next door.

Suddenly, riding to their rescue like the Lone Ranger with a calculator and a heavy list of Washington friends in his pocket, come the equity firms.

Since three private-equity firms bought out the Dunkin’ Donuts parent for $2.4 billion in 2005, Luther has doubled store growth, retooled his executives’ pay and opened his first branches in Asia. And he did it behind a veil of privacy, away from the glare of analysts and federal regulators.

All of this was made possible by the deep pockets of private-equity firms. “These are not barbarians at the gate,” Luther said. “They are more partners than owners.”

Not since junk bonds has an alternative form of investment risen to prominence as quickly as private equity, an obscure world where fund managers risk billions to buy and try to turn around slumping companies, and then sell them for a profit. (emphasis added)

Only, like Dunkin’, the companies they’re buying now aren’t exactly “slumping” and the equity houses aren’t really risking all that much.

With unprecedented sums in their coffers, private-equity firms have the ability to buy all but the biggest companies. Among their prize catches are Toys R Us, Neiman Marcus, Hertz, Burger King, Harrah’s Entertainment, Clear Channel Communications and HCA, the nation’s largest hospital company.

The key to their success and the main advantage they have to offer when they buy these companies is in the bolded sentence in the first quote: an equity is a private entity, weakly regulated when it’s regulated at all, and often exempt from rules and laws that apply to public corporations. (That would include CEO salaries, of course.) It is a near perfect tool for the corporatocracy to maintain its control over the economy and – most important – its control over the economy’s wealth.

Last year, private-equity firms spent a record $540 billion to acquire companies in virtually every sector, up from $59 billion three years ago, and in the process have been dramatically changing the cast of powerbrokers on Wall Street. Although average investors can benefit from the run-up in stock prices during one of these buyouts, the trend has concentrated control of major swaths of U.S. industry in the hands of a few wealthy groups that do not have to reveal much about their operations.

Or anything at all if the Bush Gang has anything to say about it. But as I said above, this trend has not gone unnoticed.

The surge in private deals is raising concerns in Washington. The Justice Department is looking into whether some of these buyouts are anti-competitive.

Yah think?

Last week, the Federal Trade Commission ordered District-based Carlyle Group, the nation’s largest private-equity firm, to give up management control and its board seats at Magellan Midstream because Carlyle is part of the group buying oil pipeline operator Kinder Morgan for $22 billion. The two energy-distribution companies dominate the same 11 markets across the Southeast United States.

It isn’t Alberto’s JD that’s worrying them – they have nothing to fear from that quarter. The Justice investigation is most likely an attempt to derail potential Congressional investigations which might have more teeth and result in actual laws. No, what’s got their silk-lined shorts in a lather is the possibility that they might lose the Cash Cow that’s been stuffing their Christmas stockings all year ’round. Worse, they might actually have to face some regulation that would somewhat slow their on-going project to own everything in the US that makes money.

Because that’s what we’re on the edge of here: the entire GNP in private pockets, free from public interference – and taxes, mostly.

(Paranthetically, I still have to laugh whenever I hear Wall Street types and conservative punditz defending tax cuts to corporations and the rich on the grounds that “they should get the most back because they pay the most.” In $$$, yes, but in percentage of income? Not even close. There are hundreds of $$$BILLION$$$ corporations who pay NO taxes at all – Raytheon right here in Mass is one of them, or was a couple of years ago when I last checked – because the tax codes were written by their lobbyists so as to contain accounting loopholes the size of Siberia.)

But the plunder of the US economy by a few very rich, very powerful people is not the end of the story. At the same time they’re stealing the money, they’re trying to set up a system where they don’t have to steal it because we’ll be forced to give it to them. They’re doing this by tying the US economy into their market performance.

Private-equity firms usually accept money from only super-wealthy investors and huge institutions like pension funds. As massive private funds formed over the past few years and returned about 25 percent annually — with top performers getting 40 percent or higher — nearly all major pensions reallocated their holdings, pouring billions into the sector despite the higher risks. These pensions now are tied to how private equity navigates the economy, said Colin Blaydon, director of the Center for Private Equity and Entrepreneurship.

Private equity “is seen by pension funds as their best hope,” Blaydon said. It will have a huge impact on “the average worker — teachers, firemen, the guys on the assembly line. . . . It is a big part of their retirement benefit.”

As the equity houses go, so goes our future. Unfortunately, although equity houses like Carlyle minimize the risk factor by taking on successful, very successful, companies, they don’t – can’t – eliminate risk entirely.

Some analysts are concerned that this trend — like the dot-com era of the late 1990s — is a bubble that will burst during a downturn when the money for acquisitions becomes harder to borrow. They add that it is hard to track what many of these firms are doing.”

When a credit downturn occurs, there’s the potential here for quite high default rates and large losses for debt holders,” said Ken Emery of Moody’s Investor Service.

Read: CRASH! Zing go our pensions, our savings, our homes. And the economy. Zap! $$$HUNDREDS OF TRILLIONS of $$$ as if they’d never existed.

The Bush Administration has been playing Russian roulette with our economy ever since it stole in through the back door in the dead of night, and like the burglar it is, it won’t quit until every last spoon has been looted. We’ll be left with nothing, but Poppy and Carlyle will have a brand new toy to play with:

The United States of America.

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One response to “Equity Firms: Taking the Country Private

  1. Pingback: Equity Firms’ Lobbyists Buy Senate » Comments from Left Field

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