3/1/2007 | 3 MINUTE READ

Insider: Give Private Equity a Chance

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Wall Street has had more than enough time to help influence the supplier turnaround. Now it’s time to give someone else a chance.


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It was as if the auto supply world had collapsed. The date: Friday, February 9, 2007. The event: American Real Estate Partners LLP—chaired by billionaire corporate raider Carl Icahn—had reached an agreement with Lear Corp. (www.lear.com) to buy the supplier for $5.3 billion—or $36 per share. What was most surprising is the relative state of Lear, which has not filed for bankruptcy nor shown any signs of impending doom. Icahn and his team seemed to be indicating that Lear may actually be a value play. While the big players on Wall Street have been heaping negativity on the manufacturing sector—automotive in particular—for more than a decade, Icahn and his ilk have been placing their bets on the supply sector of late.

What could be their motivation? It would be naïve to say that Icahn and investor Wilbur Ross—who purchased the European seating operations of both Lear and Collins & Aikman in 2006—are shopping for auto suppliers because they want to save our auto industry. No, these guys are in business to make money, plain and simple. Is there anything really wrong with that? There’s little doubt that both gentlemen have done their homework and have a keen sense of what the future holds for the global automotive industry. Icahn already owned 16% of Lear, while Ross has his visions set on forming a global supplier powerhouse with operations throughout the world. Still, the acquisitions and moves to take suppliers private are causing some consternation among the investor community.

Some of Lear’s top investors have said they will oppose the move to sell out to Icahn and go private. They say Lear’s board has a fiduciary responsibility to do what’s right for all of the company’s shareholders, not just Icahn. That may be true, but they also have a responsibility to guarantee the future survival of the company in an environment where OEMs are demanding more cost reductions, even as raw material prices increase. Lear’s board has extended an olive branch of sorts, allowing other bidders to enter the fray before the end of March.

A move toward private equity could be a boon for Lear and other suppliers who may or may not be on the brink of financial crises. After having been beaten up by public traders and analysts ad nauseum, this may be the only avenue left to show the “investment experts” there is a future as an automotive supplier. Going private would also relieve Lear of having to comply with thousands of pages of securities regulations—most notably the Sarbanes-Oxley Act of 2002—that add unnecessary reporting and associated costs, which become an ever-increasing burden on enterprises living off profits in the pennies for many of the parts they supply.

Leaving the public equity markets also provides a more free-wheeling environment without the constant badgering from investment analysts trying to predict your next quarterly profit or whether your return-on-net-sales level is within the industry norm. All of that becomes a thing of the past. Making investments in “moon shot” ideas are also less likely written off as “flights of fancy” that degrade shareholder value. By no means is there an implication that private companies don’t have to make a profit. But they may have some leeway in terms of the exact level of profitability desired by their investors. The goal may be a 2.5% return one year and maybe 5% the next, depending on market conditions. The exact level, however, is not predicted by five or six analysts who sit in their offices on the Upper West Side of Manhattan.

There are a few drawbacks to taking an enterprise private: First, there is a lack of transparency in that the company no longer has to provide any financial data whatsoever to employees or other outsiders. Investors could also be looking to gain a quick buck and could gut the operations through cost reductions and just sell off the enterprise to yet another private equity firm who will keep the vicious cycle going until there is nothing left to salvage.

Still, everyone needs to take a deep breath and give the private equity investors a chance to see if they can make a go at the auto supply sector before declaring the arrival of D-Day. After all, listening to Wall Street hasn’t proven to be the best course of action.