Buyout plans face hurdles

The Baltimore Sun

Shareholder concerns about securing the best value for their company and worries that higher bidders might be scared away by those in charge are some of the hurdles facing a series of recent management-led buyout proposals - including one for Baltimore-based Laureate Education Inc.

Management-led buyouts have been surging during the past few years along with a wave of private equity spending. Such proposals typically include a series of top company officials who pool their money with other investors and offer stockholders a premium for each share they own to approve the deal. The public company then becomes private under the same management team.

But some shareholders have balked at the moves, noting conflict-of-interest concerns and worries that these deals are undervalued, allowing private equity firms and management to gain lucrative payoffs at the expense of stockholders.

Others question whether rival suitors are dissuaded from making higher bids than those put forth by management. That can happen, critics argue, when a successful company's future hinges on a leadership team that might leave if its buyout proposal is rejected.

"A management-led buyout is going to inherently raise questions about whether the management is acting in the best interest of shareholders or whether they're acting in their own personal interest," said James Post, professor of management at Boston University School of Management, who teaches courses in corporate governance and ethics.

Institutional investors such as T. Rowe Price of Baltimore and Fidelity Investments of Boston recently have publicly opposed management-backed deals, noting these concerns. Both investment firms represent millions of shareholders who own stock in various companies facing management-led buyouts.

In the case of Laureate Education, the $3.8 billion buyout led by Chairman and Chief Executive Officer Douglas L. Becker has drawn opposition from two large institutional shareholders - Select Equity Group and T. Rowe Price. Both companies argue that the $60.50-a-share offer undervalues the long-term potential of the company. Price also worried that a bidding war was unlikely given that few companies would want to buy Laureate without Becker on board. Laureate shares closed Friday at $59.

Laureate executives, who are trying to sell other shareholders on the proposal, argue that the offer provides an 11 percent premium over what the company was worth before the deal was announced this year.

In documents filed Friday with the Securities and Exchange Commission, Laureate indicated that no other competitive bids were received in response to Becker's offer.

Laureate is not alone in defending its buyout proposal.

San Antonio-based Clear Channel Communications, the largest U.S. radio broadcaster, delayed a shareholders vote on a buyout backed by its founders and executives so it could garner support after opposition surfaced, including from Fidelity. The vote was moved to April. The deal is valued at $26.7 billion, which includes assumption of $8 billion in debt.

And some boards of directors tasked with evaluating management-buyout deals have rejected them, saying the prices offered were inadequate. That was the case for New York-based Cablevision and Universal American Financial Corp., a health insurance and managed care company also based in New York.

Instead of seeking competitive bids, in some cases, rivals have been discouraged outright from making an offer after a management-led deal was announced.

When the chief executive and controlling shareholder of Four Seasons Hotels, Isadore Sharp, proposed a $3.8 billion buyout bid last year, he made it clear that the company would not entertain rival offers by saying his transaction "is the only one I am prepared to pursue." The company announced last month that the board of directors unanimously approved the deal.

As a result, Chris Young, director of mergers and acquisitions research at Institutional Shareholders Services, a Rockville firm that advises clients on proxy issues, said the board and shareholders can be put in a tough spot.

"If there's good management, there's an issue of 'If we rebuff the proposal, will the management team walk away?'" he said.

Last year, $375 billion in buyouts were undertaken in the United States, shattering a record of $116 billion in 2005, according to data by Thomson Financial.

Almost $6.2 billion worth of buyout transactions this year involve management teams. Last year, nearly $110 billion involved management teams, Thomson data shows. Companies that were recently bought out by management and private investors include Aramark Corp., the largest U.S.-based food-service company, and HCA Inc., the nation's biggest hospital chain.

"In many such situations, the company will be more valuable in the hands of current management because they know the company - it gives them an advantage in determining the value to offer for it," said Ross Albert, a partner at Morris, Manning & Martin in Atlanta, and a former senior special counsel for the SEC.

But management's influence on company performance may be more illusion than reality, said Young, of Institutional Shareholders.

"Some of the companies are targets because they're underperforming," he said. "Although private equity [groups] would like to keep management teams on in general, I would argue whether the management team has been that great. If they have been, it'll be running the business more efficiently anyway."

The risk of losing executives should not be of overriding concern to the board, but rather it should be soliciting the best offer for shareholders, said Jonathan Bergman, chief investment officer at New York-based Palisades Hudson Asset Management LP, whose clients are investors in private equity funds. "The board of directors work for shareholders," Bergman said. "Management, as empowered as they are, they're the hired help."

Laureate, the Baltimore-based operator of online and foreign universities, agreed in January to the Becker-led proposal. The deal is believed to be the largest buyout in the for-profit education sector.

It surpasses the $3.4 billion transaction involving for-profit education company Education Management Corp., the Pittsburgh-based operator of culinary, fashion and health management schools. Providence Equity Partners and Goldman Sachs Capital Partners acquired the company last year.

But T. Rowe Price, Laureate's second-largest shareholder, believes the company should remain public because of its prospects for growth.

Becker has headed Laureate's growth overseas with executives eyeing India and China for expansion. Many analysts and shareholders tie the company's long-term potential to management.

The longtime Baltimore executive has led the company since it was born through a complicated breakup of Sylvan Learning Systems Inc. In 2003, Sylvan sold its prekindergarten-through-12th- grade tutoring businesses to focus on higher education and became Laureate under Becker. The tutoring business became Educate Inc., also based in Baltimore. (Educate, which has not enjoyed the financial success of Laureate, also recently approved a management-led buyout deal, which requires shareholder approval. Educate's largest investor, with more than half the outstanding shares, said it would approve the deal.)

Laureate executives say shareholders should reserve judgment on the deal until they read the proxy, which was filed late Friday. The company said a special committee of independent directors thoroughly evaluated the transaction, which was unanimously approved by the board. Becker abstained from the vote.

Under the deal, Laureate's special committee had authority to solicit competing proposals until Wednesday. According to Laureate's proxy, 67 potential buyers were contacted to solicit bids but just two equity firms showed interest. Each unnamed firm declined to bid on the company, citing the asking price, according to the proxy.

In such situations, rival parties will have every incentive to propose alternative bids if they see value in the company, regardless of whether management is on board, said Michael J. Rubach, associate professor of management and chairman of the marketing and management department at the University of Central Arkansas.

"They see value in the company," said Rubach, "and they'll increase that value with or without current management."

hanah.cho@baltsun.com

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