The growing trend: Private equity firms buying publicly traded businesses

Published 15 Feb 2017

Purchases of publicly traded businesses by private equity firms:

Private equity markets are witnessing a flurry of activity and growing at a phenomenal rate because of large deals. On the whole, private-equity firms made a spending close to $50 billion during 2006, which is five times what they spend for instance in the U.S. healthcare company purchase deals in 2005, in the opinion of Dealogic- a company that follows global M&A activities. To continue with the example, the U.S. healthcare industry that is worth $1.8 trillion or more than $1 of every $7 spent in the nation’s economy is gearing towards for investment from Private equity firms, in the opinion of industry analysts and firms involved. For instance the $32.7 billion deal of hospital operator HCA Inc. led by private-equity firms Bain Capital LLC, Kohlberg Kravis Roberts & Co and Merrill Lynch Global Private Equity which was agreed to by the shareholders during November 2006. (Japsen, 4)

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The main drivers of these activities are due to the inherent size of the healthcare industry and its fragmented nature of functioning throughout the nation due to which it appears natural that investments by publicly traded companies are unable to tackle the growing U.S. medical-care system on its own. In the opinion of private-equity firms, publicly traded companies such as HCA are drawn towards private ownership in part since it eases them of the pressure of reporting regarding their earnings on a regular basis to the Wall Street and the public. (Japsen, 4)

Who is going to be impacted and how:

Private-equity firms are possibly the newest phenomena on the Wall Street at the moment, equipped with the financial muscle to buy the publicly traded companies. The impact of this has been in more ways than one. The reach of the private equity companies into the financial markets is poised to change the structure of the stock market by way of placing a rising number of big-ticket companies beyond the reach of small and average investors besides placing several retirees pension and retirement funds into increased speculative investments compared to earlier. Basically this a refurbished form of the leveraged buyout — LBOs firms of the 1980s under which these firms enter into deals with companies that are undervalued, put them into shape and dispose them following earning of a quick profits in a very short time. Their secret has all along been the efficient use of debt that is normally close to 70 cents of every dollar invested. As they stack debt on the companies which they enter into deals, private equity firms free up their own money, thereby permitting them to make more investments and maximize their potential returns. (Krantz, 10)

The amount invested in private equity touched $139.6 billion during 2005 which was double the amount compared to 2003, according to Citigroup authorities. This figure is more than $135.8 billion which were invested in stock mutual funds in 2005. And because private equity firms are sitting on huge stockpile of cash, they are assuming a more crucial and developing financial strength currently. For instance, Jack Welch, former CEO, GE, Robert Johnson, founder of Black Entertainment Television and U2’s Bono, have taken the private equity route. During 2006, some of the large U.S. players gobbled by private equity firms included Neiman Marcus which was bought for $4.9 billion, Toys R Us for $$6.6 billion and Computer Services firm SunGuard Systems for $11.3 billion. However the much talked about deal that was the biggest private equity deal in recent years was the acquisition of Hertz Car Rental Company for $15 billion by a group of firms. In a sharp departure from what was happening during the 1980s in which the companies were bought and rebuild, the current trend has been that the private equity firms is putting qualified management groups who are capable of raking in more profits from less performing companies. (Krantz, 10)

Will some benefit while others lose?

It is observed that only big names have been benefited by the Private Equity deals. A slew of giant companies like Clear Channel Communication, Cable Vision, Readers Digest, SunGuard Data Systems, MGM and the hospital major HCA have been bought out through private equity deals. There has been no respite from this with the Blackstone Group disclosing about its intention to buy Equity Office Properties Trust-the nation’s largest owner of office buildings, in a deal that was unprecedented. However as the number and size of the private equity deals have risen, eyebrows have been raised regarding whether the leveraged buyout market which they are fueling might eventually leave some companies and shareholders shattered. The Securities and Exchange Commission is also probing into accusations of insider trading and multi-million dollar fraud. (The New Face of Capitalism)

There have been instances where shareholders have filed lawsuits to put an end to some of the deals, like the buyout of hospital chain HCA. Astoundingly huge payouts in the form of dividend payouts to private equity buyers from companies such as Hertz have often made the firms appear to be hungry. In the past, private equity firms remained in a secluded corner of the financial world, satisfied with buying, building and running strong companies. A lot continue to do just that. However the fact that made them popular during the 1980s was that there were more and more of leveraged buyouts wherein the groups added huge borrowings to their own cash primarily due to the liberal debt laws which safeguarded profits from the tax authorities. (The New Face of Capitalism)

Happenings of recent years have made apparent that satisfaction for both countries as well as individual companies can be risky in the current global economy. The present encouraging outlook for US can be upturned rapidly. Given the increased competition within the companies and industries, winners and losers are not decided once. Recent researches have depicted that 50% of America’s economic growth comes from firms which were non-existent about 10 years ago. Not do these high-growth firms create jobs, they also are less comparatively likely to fail, build substantially more wealth in the form of profits, sales and value, pay higher wages, give higher employee benefits and make more investment in research and development. Besides, high growth firms inspire growth and the development of other non-high-growth firms. (Buss, 53)

What is prompting this activity?

The pace of activity in private equity deals has been so hectic that even the corporate giants Texas Instruments, Dell Computers and Home Depot could be the next targets of private equity firms. The main drivers of this activity is the manner in which the management strategies and methodologies equip private equity firms to show impressive results which is beyond the reach of others. By observing the companies owned by major private-equity firms and discussing with the executives who manage them, it is found that there is a unique procedure of management which is strikingly distinct from what happens in majority of the publicly traded companies or majority of the private companies that are traditionally managed. The differences start at the most basic level with new objectives. (Colvin; Charan, 18)

Private equity firms desire to enter into deals with companies for their portfolio, rebuild them and dispose them off within a timeframe of 3 to 5 years. The ultimate buyer might be another company in the portfolio company’s industry, a new private-equity firm or the public, through an Initial Public Offering — IPO. The period of holding is sometimes less than a year to as long as ten years. Nevertheless, the ultimate objective from the day the deal is inked is to sell the company at a profit. The definition and the underlying meaning of ‘Pay’ is altogether different concept in private equity owned companies. It is observed that whereas a lot of public companies express regarding matching the pay of executives with performance, they normally award stock options and limited stock over and above greater pay packages, thereby giving the executives a great deal to gain, and little to lose. (Colvin; Charan, 20)

Moreover, in case of big companies, these options show the wealth of the entire company and not the particular business a manager who is in charge of. This is in sharp contrast in case of private equity firms where the mode of functioning is much more serious. It is not just that a greater proportion of the executive’s pay is linked to his business performance, but top managers might also be needed to contribute a sizeable chunk of their own money into the business deal. This is because putting own money builds an ownership frame of mind instead of a corporate mentality. The resulting difference shapes the manner in which one spends the money. Besides, one more thing that is prompting this activity is that people just attempt to put in more effort when their money is at stake. For instance, in the opinion of Pramod Bhasin of Genpact, an outsourcing company owned by GE, becoming owners makes one strive and put all-out effort to attain targets and look for newer areas where the business could be reached. (Colvin; Charan, 20)


  • Buss, Terry. F. Capital, Emerging High-Growth Firms and Public Policy: The Case Against Federal Intervention. Praeger. 2001.
  • Colvin, Geoffrey; Charan, Ram. Private Equity, Private Lives. Fortune Magazine. 27 November, 2006. pp: 18-20
  • Japsen, Bruce. Private equity is shot in the arm for industry. Chicago Tribune. 30 December, 2006. pp: 4-5
  • Krantz, Matt. Private Equity Firms Spin Off Cash. USA Today.16 March, 2006. p. 10-11.
  • Roane, Kit R. The New Face of Capitalism. US News and World Report. 26 November, 2006.
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