Going private gives CEOs new bosses
A private-equity buyout leaves a company beholden not to stocks but to directors, often with a more long-term - and more demanding - focus.
By Wall Street Journal
Published November 7, 2006
Cristobal Conde was an eager participant in last year's $11-billion purchase of SunGard Data Systems Inc. by seven private-equity firms, one of the largest leveraged buyouts ever. Conde, a 19-year SunGard veteran and its chief executive, quickly learned how much his life had changed.
At Conde's first meeting with his new bosses, SunGard director David Roux, co-founder of one of the firms that bought the company, offered advice on how to train new clients. In three years running SunGard as a publicly traded company, Conde says he rarely heard such specific suggestions from directors. He recalls politely rejecting the idea.
As Conde and others are learning, running a company controlled by private equity is a different job from running a publicly traded company. As buyouts proliferate, more executives are making the adjustment. Through Oct. 31, there were 2,163 private-equity buyouts globally valued at $538.67-billion, up from 2,024 deals and $291.63-billion for the same period last year, according to capital-markets data provider Dealogic.
More deals are coming: Private-equity firms have raised more than $199-billion since the start of 2005 but have spent only $56-billion, according to another data tracker, Thomson Financial.
Executives at these companies are freed from the requirements of the Sarbanes-Oxley corporate-reform law, the tyranny of quarterly earnings expectations and questions from investors and analysts about hourly stock moves.
Instead, they must respond to directors immersed in operational minutiae and intensely focused on costs, operate with a leaner staff and without many big-company perks and generate outsize returns to pay back the big loans typically used to take companies private. There is self-interest at work, too - CEOs of private-equity-controlled companies can own as much as 10 percent of the concern themselves.
Shift in expectations
With private-equity owners, "their expectations tend to be even higher than Wall Street's," said David A. Brandon, CEO of Domino's Pizza Inc. Brandon ran Valassis Communications Inc., a public marketing firm, before joining Domino's in 1999, when private equity firm Bain Capital held a majority stake. He stayed when Domino's went public two years ago.
Some CEOs find the changes liberating. Buyout firms tend to take a longer-term focus and worry less about quarterly profit swings.
When Domino's was majority-owned by Bain, Brandon expanded a profit-sharing plan to include all salaried employees. "That would have been very difficult to implement" if Domino's had been publicly traded, because the extra expense would have hurt short-term quarterly results, he said.
Conde said SunGard has 53 research and development projects under way, many of them long term, compared with about 10 before the takeover. Total spending on development hasn't changed, reflecting efforts to shift some work to cheaper locations overseas, Conde said.
Managers at private equity companies say they can - and often must - be more decisive. From 1999 to 2005, Bob Caulk ran United Industries Corp., a garden-products maker backed by Thomas H. Lee Partners LP. United's strategy was to grow through acquisitions.
In 2001, Caulk was approached about doing a deal with a struggling fertilizer maker seeking to sell itself. "Thinking about buying a company that's nearly in bankruptcy - you have to swallow hard," he said. But he got a green light from directors in less than a month.
"I don't think in a public situation you would have ever brought your board of directors up to speed" that fast, he said. United was acquired for $1.2-billion by publicly held Rayovac Corp. in 2005.