Abnormal Returns (yummy!) had a nice piece at the beginning of the month on "megacap catalysts." There were some good tidbits and a pointer to a June 1st Wall Street Journal article (subscription required) on the bullish prospects for management buyouts. Though I am depressed that Abnormal Returns gave up on their lovely New York evening skyline banner, the stuff that appears on those pages often comes back to snuggle up and remind you how good that last weekend in Napa was.
Sure enough, we are in the midst of talking to management of a mid-sized (hardly a megacap) to support their unsolicited bid for the company. A dicey thing, this. Lots of secret meetings on the estate, which someone had the turpitude to call "neutral ground," and nearly a dozen bottles of wine, though this barely makes a dent in Armin's cellar.
A small side of me hopes that the sudden surge in domestic MBO activity might delay my purchase of expensive 220/240v converters for all my consumer electronics. I can't yet tell how large the side that thinks time in Europe would be interesting is. In response to reader questions: Yes, I will still blog if I move to Europe. No, it will not be called "Going Private," it will be called "Europe on $2,500 per day."
At first I was under the impression that working directly with management where the incentives to write a good deal were aligned with management's cooperation should make diligence easier. In fact, it is harder.
While management may well know dirt that you would never uncover in traditional diligence without their help, replacing fact-diligence with people-diligence is not an ideal trade. The incentives are for them to get a deal done, not necessarily a good deal and ego, fear and denial are powerful weapons against full disclosure to outsides.
Often management will believe that they can overlook (or even conceal) this or that underperforming group because once the deal is inked they can resolve it before anyone is the wiser. The peril of the MBO is the "M." It is much more treacherous than the "L" and "M"'s are much better at looking like something they are not than are financials, leases, or "property plant and equipment." Beware, young private equity professional.
