Following the buyouts of household names like Albertson's, Toys "R" Us and
others, private equity has slowly gained national attention. However, despite
the notoriety from earlier deals, it seems Cerberus Capital Management LP's
purchase of Chrysler hasn't dispelled some misconceptions of the private
equity business. It doesn't help that only two weeks before heralding
Cerberus' acquisition United Auto Workers president Ron Gettelfinger
referred
to private equity shops as "strip and flip" firms. Gettelfinger's comments
were echoed in an
editorial
in Tuesday's Cincinnati Post:
The buyer is Cerberus Capital Management, a private equity company, meaning
that it can operate pretty much without regard as to what Wall Street thinks.
Typically, private firms ruthlessly slash costs and operations of an acquired
company so that the stripped-down entity can be sold at a profit, as a whole
or in pieces.
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For starters, PE firms can't operate with complete immunity from Wall Street
because most of their investments issue debt, which often is rated by Moody's
Investors Service and other agencies. In addition, the portfolio company may
have to continue filing Securities and Exchange Commission documents in
conjunction with debt offerings. However, PE firms do free companies from
worrying about quarter-to-quarter earnings, allowing them to focus on the long
run — a plus that the aforementioned Cincinnati Post editorial overlooked, but
that was not lost on the
editorial
writers at the Detroit Free Press (nor the wife of
PE Hub's Dan
Primack).
The basis for the "strip and flip" perception stems from some recent examples
of PE firms taking companies public about a year after purchasing them.
Examples include more household names: car rental firm
Hertz
and mattress maker
Sealy.
However, while these IPOs are notable, they are actually rare when compared to
the volume of buyouts.
Maybe Cerberus' involvement with an American icon will help dispel some of the
myths surrounding big, bad buyout firms. —Matthew Wurtzel
See
editorial from today's Cincinnati Post
See
editorial from today's Detroit Free Press
See today's
post from PEhub
See
Chrysler Dealwatch
