CEO cash and control

14Nov06

Do you ever wonder what is really driving the wave of management-led buyouts?

The ready availability of private equity cash and affordable debt financing now makes management-led buyouts (MBOs) increasingly financially feasible. The potential compensation available to CEOs, who prior to a deal may only own a fraction of the company, must also play a significant role. However, it now seems obvious (to us) that there is more going on that meets the eye.

Our guess is that the control aspect plays an increasingly large role in the decision making nexus for managers. In a world of Sarbox, options-backdating investigations, activist hedge funds and nervous boards of directors the CEO position in a publicly traded company has become increasingly less attractive. The Economist notes how the tenure of a CEO, despite higher pay, has become ever shorter:

The key point is that these departures reflect a dramatic trend in the executive suite. Nowadays the average boss can expect to be in his job for far less time than in the past―some executive recruiters estimate four years, down from eight in the 1980s―and to keep it only if he gets results.

It is any wonder that CEOs and CEO-caliber candidates might gravitate to the warm embrace of private equity financed transactions? In that configuration, presumably management need only deal with the demands of profit-focused investors. The challenge for CEOs now seems to be getting a deal done without getting tangled in a web of potential (and real) conflicts.

Sarah McBride and Dennis K. Berman in the Wall Street Journal report on the growing scrutiny facing managers trying to close MBO-type transactions. They look in-depth at the many issues facing the management of Clear Channel Communications (CCU) in their attempt to try and engineer a MBO transaction.

The situation at Clear Channel and at other companies that have pursued such deals has fed a growing concern: that corporate executives may be pushing for transactions that are ideal for themselves but might not be optimum for other shareholders.

We all want to control our own work life, to one degree or another. CEOs are no different. However, CEOs should remember that it is the existing shareholders that have already compensated them handsomely. Even when management follows the letter of the law in terms of board approval of a MBO deal, they should also pay attention to appearances. Because appearances matter in a world where income inequality and fears of private equity-led buyouts are becoming all the more prevalent.

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