Take That, Berle and Means

23 August 2006 at 8:55 am Peter G. Klein Leave a comment

| Peter Klein |

When the Board and senior management of media company VNU agreed to a buyout by a private-equity group headed by Kohlberg Kravis Roberts, shareholders did something usual: they rebelled.

The rebels — including some of the world’s largest mutual funds — proposed their own business plan and new executives, and tried to force the chairman to quit. “We took the initiative to defend long-term shareholders’ interests,” says the group’s leader, Eric Knight, head of New York-based Knight Vinke Asset Management.

After a months-long battle, shareholders eventually won a modest increase of nearly $250 million from the private-equity firms — or 2.5% more than the original deal. But that improvement was less significant than the fact that shareholders had rebelled, proposing a do-it-yourself restructuring plan that competed with a big private-equity offer accepted by management and the board.

So reports the W$J in its last Friday’s issue. The story is pitched as indicating a more-general backlash against LBOs. Warren Buffett is quoted as warning his shareholders against “deal flippers.” However, there is plenty of evidence that LBOs, on average, generate long-term gains, not only for shareholders but also for the economy as a whole. (Look for a major contribution to this literature from my PhD student John Chapman.) And isn’t it ironic to find stockholders taking an active stand against private-equity investors, given Michael Jensen’s warning of the “Eclipse of the Public Corporation”? Maybe the public corporation has life in it still.