At most any company, few things are more unsettling than a new set of suits showing up at the office. And yet that's just what's happening at an ever-increasing clip, as private equity firms gobble up more and more companies, creating prolonged periods of suspense and uncertainty for existing managers and other employees.
This week's announcement of a $33 billion private buyout of hospital chain HCA by Bain Capital, Merrill Lynch and Kohlberg, Kravis, Roberts is the biggest deal yet in a year that's already seen a record $158 billion worth of corporate takeovers by private equity groups, according to data from Thomson Financial. Private deals now account for about a quarter of all M&A activity.
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Like so many others before them, workers at HCA may have to get used to the sight of black Lincoln Town Cars pulling up to the front of the company's Nashville, Tenn., headquarters, dropping off new bosses whose immediate task will be to evaluate the managerial talent at the firm's various business units. That is, unless the new partners decide to hold their management meetings somewhere off-site, which some do to alleviate the tension around the office.
Some culture shock is normal after a buyout, since more rigorous financial reporting and the feeling of reduced control usually accompany the arrival of a new boss.
"Our employees were suddenly part of something bigger, which can make them less motivated," says Dan Bruns, former CEO of early Internet provider Delphi, whose company was sold to News Corp in 1993. Bruns ultimately bought the company back from News Corp, reigniting it as Prospero three years later.
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For a manager whose unit has performed at or below par lately, an aggressive and informed presentation to the new owners is likely to be the only shot at keeping the job. While today's private equity deals are generally more conservative than the leveraged buyouts of the 1980s--less debt often means less pressure to cut heads--cost-cutting is still an integral part of the new management's plan to spruce up the balance sheet and ready the firm for a spin-off back into the public markets.
"A manager should immediately try to get some face time with the new owners, especially if you think your unit is on the cusp," says Rick Rickerstein, managing partner at private equity group Pine Creek Partners, who estimates he's been involved in 50 corporate buyouts during his career.
But securing face time is only half the battle. Managers who don't want their next call to be to a head hunter need to do their homework. At the very least, that typically means Googling the partners to learn about them as individuals, to learn about their past deals and what they usually expect from their investments. Also, decide beforehand on a handful of important points to hammer home, and present them crisply and aggressively. "It's amazing how many managers waffle and don't know their numbers," Rickerstein says.
For those who do survive the cut, the benefits can be extraordinary. In the end, leanly staffed private equity firms tend to concentrate on the balance sheet and the big picture; they need to rely on management to carry out the details of any cost-cutting or revenue-boosting plan.
The senior managers who stay on usually come away with a combined 6 per cent to 18 per cent stake in the company, providing motivation to get things done. And they get to implement a turnaround plan for the new partners free of quarterly earnings pressure from Wall Street, worries of shareholder lawsuits or costly and time-consuming Sarbanes-Oxley rules.
Robert Kidder, who served as CEO of battery maker Duracell, a unit of Kraft Foods when it was bought out by KKR in 1987, believes he benefited from the direct access to the new management shareholders, rather than having to guess at what the broad array of public shareholders were interested in.
"It really simplified matters. I was dealing with owners who were very bright and very rich, and I learned very quickly they were comfortable investing for the long term," he says.
The relationship Kidder formed with the new owners paid even more dividends down the road. KKR tabbed him to turn Borden around in 1995 after the group bought out the troubled dairy company.