Wednesday, March 28, 2007

Private equity conglomerates and the focus problem

How did this one get so big?

I'm not trying to debate this point. It seems pretty clear that conglomerate is the most accurate description for the top tier PE firms. So where do they go from here?

I've argued for some time that the PE model won't translate well into the technology world, as most of my readers know. The biggest reason for this failure, in my opinion, is precisely the type of generalized corporate management that conglom...I mean private equity firms...are best at.

Small and focused is the order of the day. Now, small may be a relative term. It may 500, 5000 or 50000 employees depending on the business in which the enterprise operates. What is most important is that enterprise is well adapted to its particular purpose, without the distractions of other disparate, or even tangential, business activities. Generalized management techniques are not designed to address these problems. Are Steve Schwarzman, Henry Kravis or Leon Black really going to roll up their sleeves and get into the nuts and bolts of why one of the tech firms in their portfolio isn't performing to plan? Are David Bonderman and Steve S. really going to delve into the operational benefits and pitfalls of upgrading process technology at a Freescale fab, or whether the fab should be shutdown? Do they have the background to provide leadership in this area? I doubt they do.

(Don't misunderstand. No disrespect is intended. But let's be friggin' real here! You know I'm right.)

Let's not even get into the leverage issues and LIPOs and the potentially (ultimately?) crippling effect they will have on many of the acquired firms. (The WSJ appears to think Leon Black is the king of the LIPO. Subscription req'd.)

From a pure management standpoint, enterprises need to be slimming down and focusing their operations squarely on performance in their core businesses. This is not the game of a conglomerate; by definition, conglomerates are about scale and the (perceived?) efficiencies it grants. (An oversimplification, I know, but humor me.) This slimming is exactly the reason that Motorola shed the Freescale business - because it sucked up resources from MOT's chosen core businesses.

Weren't the original conglomerates discredited, GE notwithstanding? How many non-PE conglomerates are there anymore? Not as many as there used to be - GE, Textron, Berkshire Hathaway and Tyco? (The latter being gripped in death throes as it tears itself into its 3 constituent parts.)

So anyway, from my (admittedly limited) vantage point, it seems that the trend is toward smaller, more efficient and less diversified enterprises. I'm all for this. More employers serving more people - consumers, other businesses, government, whomever requires those specialized services. Financial engineering, in and of itself, is not a strategy for growth. Yes, there will always be mergers, divestitures, spin-offs, leveraged recaps, and all manner of other operations. However, they should serve the interests of the enterprise and its stakeholders - the customers, the employees, the shareholders and even the creditors.

Then again, I guess, in a PE transaction, a LIPO does *exactly* that, doesn't it? At least for the shareholders.


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