Reprint: R0711D
As the dust settles on the recent frenzy of private equity deals (including transactions topping $20 billion), what lessons can companies glean? Directors and executives of public companies may now be slightly less fearful of imminent takeover, yet the pressure remains: They face shareholders who wonder why they aren’t getting private-equity-level returns. Rather than dismiss the value private equity has created as manipulated or aberrant, public company leaders should recognize the disciplined management that often underlies it.
Pozen, a longtime leader in the financial services industry, finds that in the aftermath of buyouts, companies undergo five major thrusts of reform. These translate into five key questions that directors should pose to senior management: Have we left too much cash on our balance sheet instead of raising our cash dividends or buying back shares? Do we have the optimal capital structure, with the lowest weighted after-tax cost of total capital, including debt and equity? Do we have an operating plan that will significantly increase shareholder value, with specific metrics to monitor performance? Are the compensation rewards for our top executives tied closely enough to increases in shareholder value, with real penalties for nonperformance? Finally, does our board have enough industry experts who have made the time commitments and been given the financial incentives necessary to maximize shareholder value?
The era of private equity is far from over—the top funds have become very large and are likely to play an influential role in future market cycles. Boards that ask these questions, and act on them, won’t just beat the takeover artists to the punch. They will build stronger businesses.
