Leveraged buy-outs In finance, as in Greek tragedy, one of the commonest pairings is between hubris and sheer, toe-curling folly. In the boom years of 2006-07 nothing, it seemed, could constrain the leveraged buy-out (LBO) industry. In 24 months it pulled off deals with an enterprise value of $1.4 trillion, the equivalent, after adjusting for inflation, of about a third of all the buy-outs ever done. Thanks to the credit crunch, buy-outs have since become scarce: so far this year only $131 billion of deals have been announced. Yet those expecting private-equity executives to be cowering in fear of retribution will be disappointed. The mood remains one of almost hypnotic confidence.
The Economist examined ten of the biggest completed LBOs that were announced in 2006-07, accounting for a fifth of the total by value. Two are already home and dry. Blackstone, a private-equity firm, profitably sold on most of the property assets of Equity Office Properties within months of buying it. On June 5th buy-out funds run by TPG and Goldman Sachs sold Alltel, an American cellular operator to Verizon Wireless at a slight premium. But the condition of the eight others is less reassuring. In the latest quarter three of them suffered year-on-year declines in sales or underlying operating profits or both, mirroring the broader pressures on company profits. Under such conditions, the ability to make money for investors is one question; whether the biggest deals can survive with such huge debts is another.
The eight mega-deals that are still in the hands of their original acquirers have balance-sheets that by any reasonable standard leave no margin for error. On a weighted-average basis, after allowing for capital expenditure, cashflow only just covers interest payments. Listed companies, even after excluding those in the booming energy and mining industries, have interest cover nearer to ten times, according to UBS’s World Inc database. If public firms are equipped to withstand a storm, LBO balance-sheets, it would seem, could barely cope with a summer shower.
Investors in private-equity funds are typically locked in for at least five years and no one plans to sell now. Most of the mega-deals involved companies with high market shares and good brands: exactly the sort of businesses that can prosper in a downturn. What is more, it is argued, if mark-to-market losses do exist, they may not have to be recognized. Indeed, although notionally subject to accounting rules that require investments to be carried at fair value, private-equity firms seem to enjoy a degree of latitude that most bank executives would kill for. The disclosure remains hazy, but it appears that Freescale is the only one of the top-ten deals in which the carrying value has been written down much below cost. Source: The Economist: 07/03/08
| How to address China's growing talent shortage The growing need for talented managers in China represents the biggest management challenge facing multinationals and locally owned businesses alike, surveys show. Demand for skilled managers will grow more quickly than the supply of qualified candidates.
In a recent AmCham Shanghai survey of US-owned enterprises there, for example, 37 percent of the companies responding said that recruiting talent was their biggest operational problem—more than the number who cited regulatory concerns, a lack of transparency, bureaucracy, or the infringement of intellectual-property rights. Separately, 44 percent of the executives at Chinese companies surveyed by consulting firm McKinsey reported that insufficient talent was the biggest barrier to their global ambitions.
Continued strong economic growth in China over the next several years will further fuel demand for good people. On the supply side, the gap is widening at all levels in China. For entry-level corporate positions, there is an ongoing mismatch between the sort of graduates most Chinese universities turn out and the type of candidate who would interest local and regional companies, to say nothing of multinationals. People who prove themselves effective will have increasingly high expectations of their current employers, and if those expectations aren’t met they may easily be tempted by lucrative rival offers. The market for experienced hires is even more challenging, especially when international experience beyond China and Asia is required.
Local companies and multinationals therefore increasingly fish in the same small pond of high-potential graduates and experienced managers with the right functional capabilities, leadership potential, and language skills. Many local companies are willing to match or exceed the multinationals’ compensation packages.
Companies that are successfully addressing the talent challenge in China stand out in a number of ways, including their ability to localize techniques that have worked in other parts of the world. The most effective companies have a clear strategic view of their talent needs four to five years out, identify gaps at all levels of the organization, and segment their executives carefully. They develop and operate both a sophisticated external-recruiting machine and an internal-development and -training program adapted to the local Chinese environment. Companies that get the solution right will create a real source of competitive advantage. Source: The McKinsey Quarterly; July 2008
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