Saturday, May 12, 2007
Sarbanes-Oxley: Follow the money
Regular readers know that I'm a bit of a crank on the subject of Sarbanes-Oxley, the "post Enron" legislation to transform the financial reporting and other obligations of American public companies. My usual disclaimer: Many aspects of the law were good reforms that have added value, but certain of them are so burdensome that they are hurting American business far more than they are helping investors.
The latest bit of evidence for the foregoing comes from Herb Greenberg's interview (sub. req.) of Warren Hellman in today's Wall Street Journal. Hellman's firm, Hellman & Friedman, has been in the private equity game since before people called it private equity. (Back in the early '90s I represented Sears in the sale of a company to Hellman & Friedman, and at the end of the transaction they called me up and asked me to represent them -- I turned them down, because I had made a decision to leave the practice of law.)
Anyway, Greenberg asked Hellman how the private equity business has changed over the years. The answer is instructive:
How did the buyout business change?
There used to be fewer funds. We were one of the first that raised around $1 billion. That was in 1991. At the time, almost all transactions were done with private-sector companies. We didn't do a transaction with a publicly traded company that wanted to go private until 2005. And while public companies theoretically were always part of the mix, for us they seemed to be too expensive. It used to be you looked at a private company and asked what discount we could get it at relative to a public company. One fundamental change now is how much of a premium is paid to the public market price. Now almost everything you look at is public-to-private transactions. Thank you, Mr. Sarbanes and Mr. Oxley for doing us a tremendous favor. (bold emphasis added)
In other words, public companies used to trade at such a premium to private companies that it was rarely economical for private equity firms -- which demand high rates of return -- to buy them (yes, there were a few notorious public leveraged buyouts, but they were actually pretty rare). Since the enactment of Sarbanes-Oxley, public companies which bear the burden of that law now trade at such a small premium to their private market value that "almost everything you look at is public-to-private." Something, probably Sarbanes-Oxley, has destroyed the valuation premium of public companies, and private equity firms are taking advantage.
2 Comments:
By 
, at
Sat May 12, 02:38:00 PM:
I've always thought it was a sad day in America when Congressional control over taxpayer money isn't accounted for as strongly as S-OX requires of our corporations.
Under S-OX, many practices Congress uses would be illegal with punishment including prison time.
By 
CW, at
Sun May 13, 11:37:00 AM:
Another problem with Sarb-Ox is the removal of equity from public markets to private markets concentrates wealth in the hands of those who can command equity in sufficient quantity to participate in such equity deals. It is a barrier to entry into ownership.
CW
