Monday 2010-11-08

Merchants of Debt by George Anders

Anders doesn't have an econ/banking background, so the reader has to fill out some of his descriptions with their own understanding, or outright reformulate misunderstandings. Still, it makes for a passable anti-leveraged-buyout history of KKR.

Anders at his most even-handed:

The best part of (Kohlberg, Kravis, and Roberts) KKR's legacy was its ability to put big ownership stakes into the hands of top managers at companies. With those holdings came the daredeveil excitement of trying to get rich by running a company more profitably. Wrapped up with those riches, though, were the hardships of the "discipline of debt." And even when managers' pressure on their workers abated a bit, a general weariness set in at more than a few KKR-controlled companies. there was a limit to how long anyone -- CEO or shop-floor worker -- was willing to wrok at a breakneck pace.
-- Epilogue

Anders has never been a banker in times of easy credit with money coming in that he needs to lend...:

Most people feel intimidated when seeking a loan ...
But (George) Roberts never asked to borrow money. He always asked if his bankers could raise a loan for him. The slight difference in wording proved crucial. Suddenly Roberts controlled the situation. The bankers, even if they represented a giant institution a thousand ties KKR's size, were the ones put to the test.
-- Chapter 4, How to talk to Banks
The New York office, run by Kravis, never housed more than fourteen partners and associates. The San Francisco office, run by Roberts, was even smaller; it employed just six...
The coffee shop around the corner from KKR's midtown Manhattan offices employed more people than the buyout firm ever did.
-- Introduction
The US economy was growing, but anxiety about inflation kept stock prices bogged down at levels barely higher than those of the mid-1960's. Companies could be taken private cheaply in buyouts. Small-size loans were readily available...
-- Chapter 1, Courting CEOs
In the 1962 edition of his classic finance textbook, Securities Analysis, Columbia University professor Benjamin Graham warned against the "hazards" of a high-debt, "speculative capital structure, with consequent instability and even possible insolvency."...
(Michael, University of Rochester economist) Jensen asked in a a research paper: "Why don't we observe large corporations individually owned, with a tiny fraction of the capital supplied by the entrepreneur in return for 100 percent of the equity, and the rest simply borrowed?"
-- Chapter 2, The Growing Allure of Debt
There were two reasons why a firm so tiny could wield such clout. One involved human networks; the other, computer technology.
The leanness of KKR's own staff belied the huge amount of work that KKR contracted out to various allies (accountants and lawyers, upon seeing the generated fees rushed to court possible LBO targets for KKR)...
Quickly the saleman demonstrated a VisiCalc financial-analysis package...
KKR got its first Apple II.
-- Chapter 2, The Growing Allure of Debt
For pension funds, the (KKR's) new buyout fund looked lusciously appealing. Changes in many states' laws in 1980 and 1981 had allowed public-employee pension funds to broaden greatly their investment mix beyond bonds and safe dividend-paying stocks.
-- Chapter 3, In Pursuit of Profits
First the KKR executives charged their passive investors an annual management fee of 1.5 percent of funds committed...
In a still larger source of wealth, the KKR executives laid claim to 20 percent of any investment gains ultimately achieved from buyouts by their passive investors.
-- Chapter 3, In Pursuit of Profits
Top RJR (Reynolds) executives embraced austerity in large part because of the big stock packages that KKR liked to press on managers...
As executives at dozens of buyout companies raced to wring efficiencies from their businesses, the KKR partners hardly needed to lift a finger...
Most of the time, top executives loved the autonomy...
-- Chapter 8, Ruling an Industrial Empire

Management-friendly Delaware ruins the party:

In a landmark ruling, Delaware judge William Allen said that the "business judgment" rule allowed directors to turn down takeover offers well above the current stock price if they felt that the takeover wasn't in the long-term interests of a company's shareholders.
-- Chapter 11, "We Don't Have Any Friends"
Just as damaging to KKR's prospects were several little-noticed changes in the tax laws. Several times in the late 1980's, Congress curbed an acquirer's ability to boost a company's depreciation charges after a buyout...
Congress also whittled away the ability of buyout firms to avoid paying big taxes when breaking up a conglomerate.
-- Chapter 11, "We Don't Have Any Friends"