Boards and shareholders growing skeptical of buyouts

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NEW YORK » There's a new twist in the buyout boom roiling corporate America: A growing skepticism among shareholders and the boards that represent them over the value of such deals.

Whether it's the directors at Cablevision Systems Corp. rejecting a sweetened going-private offer or Health Management Associates Inc.'s decision to do its own recapitalization rather than be bought by others, there's a building backlash to the record-setting pace of private-equity and management-led takeovers.

The driving issue is money, fueled by evidence that buyers are reaping much larger rewards than shareholders, thanks to the ability of buyers to quickly flip their acquisitions at higher prices.

There were a record $409 billion worth of buyouts in 2006, nearly four times the total in 2004, according to Dealogic. Among the biggest: a $21 billion deal to take hospital chain HCA Inc. private and a $15 billion buyout of pipeline operator Kinder Morgan Inc.

That dealmaking has gotten much attention on Wall Street, helping to fuel the market's big gains over the last six months by pumping up shares of stocks that could be potential buyout targets.

But such deals might not be as sweet as they look. Last year, management-led buyers paid investors on average only 21.2 percent above the stock price the day before deals were announced, while private-equity firms paid about a 22.5 percent premium.

That was below the nearly 25 percent premium that investors got through a strategic merger or acquisition, according to Dealogic.

Investors are also troubled that some of the newly acquired companies weren't private for long. Instead, they were quickly sold back to the public, without undergoing major restructuring or operational changes. And in the process, the new buyers lavished themselves with tremendous payouts.

The poster-child of such tactics is Hertz, the car rental company that was sold by Ford Motor Co. to Clayton, Dubilier & Rice Inc., Carlyle Group and Merrill Lynch. They paid $2.3 billion in cash, borrowed more than $3 billion and assumed $10 billion in debt to acquire Hertz in the fall of 2005.

Hertz took on more debt to pay its new owners about $1 billion in dividends. Then, the proceeds from its November IPO were used to pay that debt off and to give the private-equity owners another special dividend worth about $400 million.

They also own 216 million shares, which are worth about $3.8 billion today.

There is a growing resistance to such deals.

"In light of several high-profile 'quick flips,' public shareholders can't help but wonder whether they are leaving money on the table," said Chris Young, who heads merger and acquisition research at the proxy advisory firm Institutional Shareholder Services.

An independent committee of directors at Cablevision rejected a $30 a share offer from the controlling Dolan family to take the New York cable TV operator private.

The family -- which owns about 20 percent of the company but controls 70 percent of the shareholder voting power -- had made a previous bid of $27 a share in October, and then raised its offer on Jan. 12.

In a letter to the Dolans, the directors said the new stock offer valued at $8.9 billion wouldn't be in the best interest of shareholders and didn't reflect the fair value of the company.

That decision was lauded by analysts and investors who felt the company's assets, which include about three million cable customers in the New York area, the New York Knicks basketball team and Madison Square Garden, is worth more.

Other companies, like Phoenix-based Swift Transportation Co. Inc., are willing to give up offers they deem too low, despite a tough business climate in their industries.

The trucking company's board rejected a $29-a-share bid in November from founder and former top executive Jerry Moyes, but agreed to a buyout Monday for $31.55 per share, valued at about $2.74 billion.

Health Management Associates is going a different route by doing what many on Wall Street are calling a "self" leveraged buyout.

The Naples, Fla.-based hospital operator will take on $2.4 billion in new debt to fund a one-time $10 dividend for every share.

While that effectively gives HMA's executives and directors a big payout because they own large stock positions in the company, it also lets its shareholders -- instead of private-equity firms who could have bought out the company -- claim the one-time cash dividend.

The buyout business isn't ending, but the rules of the game are certainly changing.