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Investors say buyouts shortchange shareholders

A wave of private buyouts of big companies includes some that seem to put the interests of managers and outside investors ahead of shareholders. And that's a cause for concern, according to some corporate governance experts.
/ Source: The Associated Press

As Four Seasons Hotels Inc. shareholders contemplate a $3.7 billion offer to take the company private, one in particular is in line for the equivalent of a stack of suitcases stuffed with money: Isadore Sharp. The chairman and CEO of the luxury hotel chain will get a special payment of $288 million if the deal goes through.

While outsized, Sharp's bounty isn't unusual for executives at companies being taken private. Even some buyout firms say the deals, by their nature, put them and the managers who join them ahead of shareholders. And that's a cause for concern, according to some corporate governance experts.

In the proxy for a planned $6.3 billion buyout of Aramark Corp., the nation's largest foodservice company, the buyout team -- which includes private equity units of Goldman Sachs and JPMorgan plus the private investment firm Thomas H. Lee Partners -- said it "attempted to negotiate the terms of a transaction that would be most favorable to themselves, and not to stockholders of the company and, accordingly, did not negotiate the merger agreement with the goal of obtaining terms that were fair to such shareholders."

Fair enough -- except for the fact that the buyout team includes Joseph Neubauer, Aramark's chairman and CEO.

That's part of a troubling trend, according to James Owers, a professor of finance at Robinson College of Business at Georgia State University. When a company's managers team with buyout groups, "there's an inherent conflict of interest," he said.

"Management is supposed to serve shareholders and get the best price possible," added Robert Dammon, a professor of finance at Carnegie Mellon's Tepper School of Business. "On the other side, the same management is serving as the buyer and wants to sell the company as cheaply as possible."

The 529 management-led buyouts announced globally so far in 2006 are worth a combined $133.1 billion, according to deal tracker Dealogic. Under the deals, management and a group of outside investors pool their money and usually take on debt to buy the shares of a public company, taking it private.

Private equity funds have become increasingly popular as a way for wealthy investors to get higher returns than the stock market offers. Leon Cooperman, who runs the $4 billion-plus Omega Fund has estimated that private equity funds have about $300 billion under management.

As a testament to its rising stature, "Venture Capital and Private Equity" has become one of the largest elective courses at Harvard Business School.

Just last week, businesses as diverse as magazine company Readers Digest Association Inc. and radio and outdoor advertising company Clear Channel Communications Inc. and have said they are going private. On Thursday, Readers Digest said it agreed to a $1.6 billion cash buyout deal, and Clear Channel shareholders agreed to an $18.7 billion buyout.

Also HCA Inc. shareholders approved the company's $21.3 billion leveraged buyout after a judge last month refused to delay the shareholder vote on the deal.

HCA, the nation's No. 1 for-profit hospital chain, this month settled a lawsuit by shareholders in part by decreasing to $220 million from $500 million the fee it would have had to pay the LBO bidders if the deal fell through.

Speaking generally about such fees, Dammon said, "The fee is just a way of raising the price and the cost for any other bidder. It's just intended to discourage other bidders. I would argue it's not in the best interest of shareholders."

Shareholder suits have become a common part of buyouts. Shareholders at casino company Harrah's Entertainment Inc., hot tub company Jacuzzi Brands Inc. and Aramark have sued over the proposed deals, protesting that the company's boards didn't work to get the best price.

Eminence Capital LLC, which in May owned 7.8 percent of Aramark's common stock, calculated that an original $32 a share offer by a buyout team led by CEO Neubauer would yield the buyers an "egregious" rate of return of 35.7 percent on their investment if the company's revenues and margins improved.

"This staggering return would accrue to the buyout group and not your public shareholders," according to a letter filed with the Securities and Exchange Commission by Ricky Sandler and Seth Rosen, executives at Eminence, a New York investment manager.

Eminence proposed a $40 a share price, which it said would lower the return to the "mid-to-high teens" for the buyout group, "something that is more appropriate for the risk being assumed by a buyout group which includes the company's longtime CEO." A message left at Eminence was not returned.

In May, the Aramark buyout team raised its offer to $33.80 a share, a 20 percent premium over its closing price on April 28, 2006, the day before the original offer was announced.

Neubauer did not participate in the board's deliberations about the deal, according to company filings. A vote on the buyout is scheduled at a Dec. 20 meeting in Philadelphia. An Aramark spokeswoman did not return a message requesting comment.

If the buyout goes through it will be the second time the company has been taken private. Aramark first went private in 1984; Neubauer was the company's president and CEO at the time. He was chairman and CEO when the company again went public in December 2001, and that year the company lent him $8.49 million to buy Aramark stock, according to its 2001 proxy. Such loans are no longer legal.

Under the terms of the current deal, Neubauer would convert his 8.5 million Aramark shares, valued at $250 million, into an ownership stake in the company once it goes private.

"By virtue of this investment, unlike our other stockholders, Mr. Neubauer will have an opportunity to share in any growth of Aramark following the merger," the company said in its proxy.

Neubauer will also have a $1 million salary, which the board would be able to increase, but not decrease, under the terms of the deal.

At least five shareholder suits have been filed against Aramark, alleging its directors breached their fiduciary duty to stockholders.

Neubauer could have cast 10 votes for each of his shares, but has said he will cast just one per share, reducing his voting power from 23 percent to less than 5 percent. The other members of the management committee are doing the same.

The investors at Eminence already voted with their feet, selling 10.4 million shares in the company during the most recent quarter, which was most of its position in Aramark, according to, a data provider.

At Four Seasons, the offer price of $82 a share represents a 28.4 percent premium over the closing price the day before the deal was announced.

Under an agreement Sharp made with the company in 1989, if the company were to be sold, he would receive a payment based on the sale price, plus another payment if the price per share was 25 percent higher than the weighted average trading price for the preceding six months. The announced deal is a 33.1 percent premium over the past six months' trading.

That's how his $288 million, one-time payment was calculated. Under the deal, Sharp and his family would also retain a 10 percent ownership stake after the company goes private, with remaining shares split between private equity companies owned by Microsoft founder Bill Gates and Prince Alwaleed Bin Talal Alsaud of Saudi Arabia.

On a conference call the day the deal was announced, Sharp took no questions. A spokeswoman for Four Seasons declined to comment.

"This transaction is intended to ensure the legacy of the Four Seasons," Sharp said on the call. "This proposal achieves all my objectives for Four Seasons and my family, and is the only one that I am prepared to pursue."