How do Private Equity firms do it?
Chrysler is up for sale. I am sure many private equity funds and individual investors are lining up to bid for it.
The ideology of these private equity funds is to buy a company which is weak currently, somehow improve it and then sell it to somebody else/make it public again and make money out of it. But the question I really have in my mind is, if a private equity firm has the confidence to turn around a company, why can’t the current company management do that? This always baffles me. I am sure there is a very good explanation for it. Please share if you know the reason. I am curious.
3 comments:
because the private equity firm will be in a position to take new decisions that the current management will be unable to. because, often these have to be opposite of the decisions that the current management may have implemented just in the recent past. doing so will open up the current management to charges such as "you said this just 6 months ago, now you are saying the opposite". in other words, it is a question of credibility which a new management will not need to answer because it has a clean slate to start with..
another factor is private firms do not need to answer to shareholders and do not need to focus solely on short term stock prices as public companies have to. private firms have a lot more options to shield their short term finances from the public, which could be negative, even as they implement longer term turn around strategies. in turn around situations, this is a positive. this is also one reason a number of businesses went back to being private after passage of SARB-OX some years ago.
SK,
Thanks for enlightening me.
I heard Union Labor was one of the main reasons for Chrysler not being able to break the shackles. Goes in line with with your comment.
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