Ben Stein on management buyouts

Ben Stein is a multi-untalented writer-comedian-actor-financial pundit.  This week he's filling in for Gretchen Morgenson, and almost makes me long for another Morgenscreed, no mean trick. Here's what Stein says about management buyouts:

To my mind, these deals should be illegal on their face. That is, they should simply not be allowed at all as a matter of law. Here’s why: The managers do these deals only to make money. It’s business, after all. They do them to make money off the assets of the stockholders. They could, if they wished, sell off the assets or otherwise manage them for the good of the stockholders. (Again, the assets of public companies do belong to the stockholders as basic law.) Instead, they buy the assets on the cheap and sell them off for their own management benefit, or they manage the company differently for the benefit of themselves and their buyout partners. * * *

I want to make sure you know that I am somewhat ahead of the curve. No court has yet put all of this together and banned management buyouts. But it took a long time for courts to bar segregation or for Congress to bar residential housing discrimination. Management buyouts are great for management. But by every standard I can see, they are yet another sad sign of how our corporate trustees have lost their moral compass. The time for them to stop is long overdue. If the stockholders have hired you and pay your wage to manage their assets, your job is to do that for them — not to buy them out at fire-sale prices and turn around and make billions that rightfully belong to them. The management buyout is a sad and infuriating avatar of a decadent age.

I won't even comment on the comparison with segregation or housing discrimination.

It isn't that there are no problems with management buyouts.  But, Ben, take off your clown suit for a minute and listen to some questions.  How can you write about this transaction without even commenting on the potential benefits -- i.e., as an important way to restructure the company to impose more discipline on managers? How can you not consider what would happen if managers couldn't do these transactions?  Would they suddenly get more honest? Would others step in, or would deals that would make the shareholders better off just not get done? How can you not ask why, if these are such good deals, nobody outbid the managers?  Or do they, Ben?  Have you wondered why the shareholders approve these transactions? Did you know that state law usually requires managers to run an auction, and that federal and state law impose disclosure requirements?  Have you considered whether these rules could be improved as an alternative to banning the transactions?

There are answers to these questions, nuances that regulators should consider.  Maybe we need more regulation (I doubt it).  But one thing we don't need is another idiot on the financial pages of the Sunday NYT.  Bring back Gretchen.

Comments

[Robert Schwartz]

Way Harsh, Dude. Not wrong, just tough.

P.S. Insider deals cannot be outlawed without interfering with the free transferability of property. Never a wise idea.

Although I would have pointed out that a a lot of deals have gone south, perhaps as many, as have made their principals rich. Stein just remembers the winners.

[Larry E. Ribstein]

Yes it was harsh. But Stein, with his over-the-top proposal, and really objectionable analogy to segregation and discrimination, lost the right to be treated as a credible analyst.

Good point about the losers. There is a lot of risk in these deals -- one reason why nobody outbids the managers on the deals that go through.

[Roger Ehrenberg]

Guys, your objections have merit but at the same time there are a few problems with the MBO process that warrant discussion.

Firstly, there is substantial information asymmetry that exists between management and public shareholders. This is a fact and, to my mind, a problem. Neither you nor Equity Private in his scathing analysis mentioned this point. It stands to reason that the party with more and better information has an advantage over other parties, particularly in situations which are extremely complicated and/or where there are a large number of degrees of freedom in the financial and business analysis. This opportunity for information arbitrage on the part of insiders does not seem right to me. In a multi-bidder situation I can see how there are natural checks-and-balances, unless the information possessed by management is so valuable that they can not only emerge as the highest bidder but still have a massive upside embedded in their winning bid. But in a situation where there is a single bidder and a "fairness opinion" and a board vote is all that's needed to get a deal done, this does not give me great comfort.

Which leads me to my next point - fairness opinions. Boards hide behind these - you know they do. And anyone with any time on the Street also knows what a bunch of garbage they frequently are. They can be cranked out in an afternoon. And there are inherent conflicts between the Board receiving the opinion and the Street firm, as either a historical relationship exists or a budding relationship is desired. In either case, this is not a recipe for objectivity.

And this gets me to the issue of the Board. Yes, boards should be objective, rational, ethical and functional. But come on, guys, how many examples do you need to see that Boards are frequently asleep at the wheel, not focused on the tasks at hand and do not provide adequate checks-and-balances to management? If I am solely reliant on a Board to act in an appropriate manner for public shareholder interests to be protected then I'm feeling like crap.

Neither my note (nor my blog post at Information Arbitrage) are meant to suggest that legislation is the way to go. I think Ben did go too far (and I say as much in my view of his piece). But language and unfortunate metaphors aside, I think his piece is directionally correct and warrants deeper analysis and, perhaps, a stronger grasp of the statistics of different MBO scenarios. I certainly don't have them but would be very interested in seeing them.

[Stan Walsh]

"There is a lot of risk in these deals -- one reason why nobody outbids the managers on the deals that go through."

Yeah, that and $300 million breakup fees like Univision's. I disagree with a lot (most) of what Stein says, but methinks you doth protest too much.