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Stealing Corporations
When Management Steals the Comapny From Their Their Shahreholders

Introduction

Management of corporations often introduces measures such as poison pills and staggred Boards of Directors to stop outsiders from buying the company. Yet at times, management seems almost giddy to sell the company. This seems to occur when the people managing the company are buyng it themselves. The typical approach is to enlist an investment firm to raise the capital. Usually, the investors make use of a Leveraged Buy Out (LBO) to fund the purchase. In an LBO, the buyer borrows the money needed to buy the company by using the company's own assets as collateral. The purchase leaves the same management team in place, except they own the company. The typical price is only a small premium over the then-current share price. The managers, once they own the now private company, impose tough cost controls, show increasing profits for a few years, and then turn around and take the company public again -- for huge profits.

The poblem with these LBOs is that management is cheating their own shareholders. While this site strongly encourages takeovers of public corporations and opposes poison pills and the like, these buyouts are thefts. These purchases are not arms-length transactions negotiated to bring the best possible price for the owners. Instead, management sees the conmapny is under-valued, buys it for a slightly higer price than the market is quoting, and turn a gigantic profit in a few years. You do not see competing bids when management proposes an LBO. Management does not solicit other offers or show the books to other potential purchasers. These LBOs are a clear violation of fiduciary duty by management and the Board.

Here are some examples.

Safeway

In 1986, Safeway, the large California supermarket chain was a mediocre company whose CEO, Peter Magowan, did not seem much interested in improving it. An outside investor, the Hafts, began buying shares. Instead of selling to them, Magowan arranged to partner with KKR, a well-known LBO firm in a $4.2 billion buyout that left him still in charge. Shareholders, though, did seem to get a good deal, as the purchase price of $62.50 per share was an 80% increase over the price three months previously. After running Safeway as a private company for just a few years (and laying off thousands of employees), Magowan and his manegement team took it public again in 1990 and made millions. Magowan used his profits to buy the San Francisco Giants baseball team. The question is why couldm't Magowan have found a way to generate these profits for his shareholders, not just for himself?

Duane Reade

Duane Reade has been a drug store chain in New York City since 1960. Long privately run, it went public in the early 1998 at $16.50 in part to obtain sufficient capital to compete against better-funded competitors, such as CVS. Though the stock did well initially -- opening at $22 and trading for a while in the $30 range, the company has not done particularly well. Then in late 2003, management announced plans to take the company private, in parthership with Oak Hill Capital Partners. The offer is to buy the shares at a mere $17, only a couple dollars above the share price at the time of the announcement. Soundslike the insiders aer trying to get the company cheaply. Funny how no competing bids are around to drive up the price. If you are a Business Week subscriber, see See Robert Barker's column titled What's That Smell At Duane Reade?. For a different (and na´ve) opinion, see Motley Fool.

Gristede's Foods

Gristede's Foods operates gorcery stores in New York. On April 13, 2004, Gristede's announced that it had received a letter from John Catsimatidis, CEO and effective owner of 90% of the company, stating his intention to cbuy out the public stockholders at 87 cents per share. Shares had been trading in the 80 - 90 cents range recently. Gristede's traded at over $1 for half of 2002 and half of 2003, and over $3 for much of the 1990's. The company's market cap is around $20 million. On the books, it has net assets (assets less liabilities) of around $3 million. However, $65 million of the assets are "Property Plant and Equipment". Want to bet a bunch of that is actually worth a lot more than book value? (Note -- the company leases its supermarkets, so some digging will be required to locate this hidden value.) Looks like Catsimatidis is trying to grab the rest of his company on the cheap. The excuse is that it costs too much to operate a small public company. See Why Small Companies Want A Little Privacy in Business Week. We think it is legalized theft. We think Catsimatidis should put the company up for bid. Or, better yet, replace himself and see if anyone else can do a better job running it.

Last Update:16 June 2004

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