Those “barbarians at the gate” of the 1980s now have the federal government opening doors for them. Kohlberg, Kravis, Roberts, & Co. (KKR) — the private equity firm that pioneered the “leveraged buyout” two decades ago — can thank federal regulations and laws for creating many of its recent buyout opportunities, including the high-profile pending buyout of Texas energy company TXU.
KKR is certainly not the only firm in its industry benefiting from government regulation. In fact, much the business in the private equity industry is spawned by government action pressuring family-owned or publicly traded companies to sell.
As this booming industry begins to wade into the game of Washington lobbying, the benefit they reap from government’s heavy hand will not likely be lost on these big-dollar investors.
Stephen Schwarzman, chairman of the private equity firm Blackstone Group, was very open about this, declaring to a conference of buyout firms: “Sometimes governmental reforms really work well for you, because they mess things up,” The New York Times reported. “We’re the beneficiaries of governmental reforms.”
KKR, specifically, has benefited from the threat of federal limits on carbon dioxide emissions, the estate tax and Sarbanes-Oxley.
TXU, the largest electricity producer in Texas, announced plans last year to build 11 coal-fired power plants, enraging environmentalists. Early this year, Democratic politicians paid TXU a visit.
Sen. Barbara Boxer, the California Democrat who is chairwoman of the Environment and Public Works Committee, co-authored a Dallas Morning News op-ed with Sen. Jeff Bingaman, the New Mexico Democrat who is chairman of the Energy Committee.
Boxer and Bingaman sent a pretty blunt warning to TXU: “Any company planning to spend billions of dollars on new coal-fired power plants, and any investor in such a company, should think carefully about how to spend their funds so as to be part of the solution to climate change, not a part of the problem.”
More to the point, the senators made it clear that they planned to unleash the federal government on anyone who was “part of the problem.”
With these powerful chairmen and influential green groups breathing down their necks, TXU was in trouble. In fact, on Election Day 2006, TXU’s stock took a big dive and stayed down, even while big profits continued to roll in that quarter.
As long as the party running Capitol Hill intended to make things hard for the company, TXU had to sweat. With its stock value depressed, in swooped KKR and other buyout firms to purchase a suddenly undervalued company and make peace with the environmentalists who helped make the company such a bargain.
For Systems & Software Inc., the motivating factor to sell was the federal estate tax. S&S was a family-owned software company launched in 1970. Burt Willey and his sister inherited the company from their father in 1990. In 2005, an arm of KKR bought a majority stake in S&S. This gave Burt and his sister a nice payday, but it gave S&S the gift of immortality.
Willey told me that the looming estate tax helped convince him to sell. Willey had done some estate planning, but it became clear that the company was more stable if it was in the hands of a firm rather than a flesh-and-blood family. KKR might not have found a willing seller in the Willeys if not for Teddy Roosevelt’s “death tax.”
Uncle Sam also helped KKR take over Toys “R” Us. The post-Enron Sarbanes-Oxley bill helped convince the toy company that being publicly traded was too much hassle. Recently, the Securities and Exchange Commission (SEC) concluded that Toys “R” Us, like many other retailers, was accounting improperly for leases.
Sarbanes-Oxley made such accounting missteps by public companies a possible felony. Faced with the continued headache of these high-stakes and shifting federal guidelines on public companies, Toys “R” Us decided it was time to go private, and they sold out to KKR.
Shareholders sued, saying the board had not gotten the best price possible, but they should have directed their anger about low stock prices at Messrs. Sarbanes and Oxley.
KKR executives were not bashful about the boon to them that is Sarbanes-Oxley. Managing Director Tom Barnds explained to the San Jose Business Journal: “It’s a tough time to be a small public company. You have $2 to $5 million in incremental costs related to Sarbanes-Oxley. So there are some costs you can eliminate by going private.”
KKR didn’t write these regulations, but looming carbon dioxide limits, the estate tax, and especially Sarbanes-Oxley are sure opening a lot of doors for the “barbarians.”
Examiner columnist Timothy P. Carney is author of “The Big Ripoff: How Big Business and Big Government steal your money.”
