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Squeeze Play

This Wall Street Journal article gives a nice insiderish view of private equity.

Last week in Boston, a group of local businessmen led by Jack Welch let it be known that they were interested in acquiring the Boston Globe from the New York Times Company for $500-$600 million. The offer served to put the Globe “in play” (as the talking heads say) and to galvanize Class B (non-family) shareholders of Times stock, already up in arms about mismanagement and financial performance.

The public side of this saga began on Oct. 19, when Times Chairman and CEO Arthur Sulzberger received a letter from Sen. Edward Kennedy and a motley crew of local pols and labor skates demanding that the Times stop “disinvesting” in the Globe and sign a pending labor agreement with Globe employees. Picking a fight with the Times has long been the express lane to oblivion in Democratic Party politics. The fact that a gaggle of Democratic pols was picking a fight with it over one of its owned properties meant that private equity could not be far behind. And indeed it was. Whenever a company is “in play,” the prospect of auction looms. Buyers hate auctions. They serve only to drive up price. Private-equity firms spend countless hours scheming to derail auctions, often enlisting competing private-equity firms into their consortium to short-circuit the process. Sellers, of course, love auctions and generally insist that they occur to “maximize shareholder value.”

What made the Team Welch bid remarkable was its keen understanding of the auction process and its skillful leveraging of local assets toward shutting down any possibility of same by the Times. The Kennedy letter wasn’t meant for Mr. Sulzberger; it was a message to other private equity firms: We have the local pols and labor leaders on our side. The presence of Jack Connors, Boston’s leading ad-man, as a partner in the deal was another message to private-equity firms: We have the best-connected guy in the city and he employs a lot of people who decide where to place advertising in local media. The inclusion of Joe O’Donnell, concessionaire and one of Boston’s favorite sons, sent another message: We have friends on both sides of the aisle. And, oh, by the way, “Jimmy” Lee of J.P. Morgan Chase is crunching the numbers and will provide Team Welch with all the financing it could ever need. Usually, the more public the process is, the more likely an auction results. But by tilting the mirrors of perception in public, Mr. Welch left other private-equity players with the following choice: Sign on with Team Welch or risk a nasty, local bidding war that will doom the upside in the deal for everyone.

That would be James Lee ’75, leading Eph banker of his generation.

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#1 Comment By frank uible On November 12, 2006 @ 10:53 am

Another way of putting it is that the M&A (jargon for “mergers and acquisitions”) game is more about perceptions than about hard core financial analysis.