Will private equity funds gobble up tech and then the rest of corporate America?

Will private equity funds gobble up tech and then the rest of corporate America?

Summary: This is a question that I think is one of the most important ones around, because of the massive amount of global capital and the stunning investment returns from taking public companies private. Is it a good trend?

SHARE:
TOPICS: Tech Industry
3

This is a question that I think is one of the most important ones around, because of the massive amount of global capital and the stunning investment returns from taking public companies private. Is it a good trend?

Here are some issues:

- Will companies emerge leaner and meaner from private equity acquisitions? Or will they be weakened from higher debt loads? Their temporary owners know much about financial engineering but what about strategic positioning?

. . .

- Small investors are cut out of the lucrative deals pursued by private equity funds because only the very rich are allowed to invest. Yet many small investors will end up on the wrong end of those deals.

They face a likely scenario that their employer will be acquired by private equity funds and that their new owners will ask for salary and other restructuring concessions. It builds on stress points in society between the super rich and those that aren't.

. . .

- Will we witness the failure of Sarbanes-Oxley (SOX) regulations and the populist movement for greater corporate transparency?

The expense, and the management distraction of SOX compliance is a prime reason for taking public companies private. Plus, private companies suffer less from public scrutiny, a distinct competitive advantage. 

. . .

- What is the future for NYSE, NASDAQ and other stock markets?

With the prospect of fewer public companies as private equity firms snap them up and take them private, the stock markets will have to do something. They will have to merge to maintain liquidity, which is exactly what they have been trying to do.

More on this subject later this week...

Topic: Tech Industry

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

3 comments
Log in or register to join the discussion
  • Now that you mention it...

    Isn't SOX just a tool for the elite to take back "ownership" privileges from middle America...which had perhaps encroached a bit too much into the "ownership" space? Need to keep the serfs dependent - and ya can't do that if ya let them own stuff.
    Techboy_z
    • Quick followup...

      ...while I'm on the tangent of taking away ownership from the common American...it's the same deal with the "eminent domain" cases that have recently sprung up across the country. Used to be a municipality could use eminent domain for a publicly-needed project. Now, private developers are allowed to be the receivers. What in h#ll has happened to property rights in this country??
      Techboy_z
  • Private Equity (PE)

    You raise some interesting questions that are simultaneously, simplistic, superficitial, illuminating, penetrating and disconcerning. As a body of humble knowledge I practice executive search services for the PE/VC arena and perceive the changes that the items you raise will be profound. PE as it continues in its expansion and emergence as a bigger component into the investment capital arena is not being caused simply by SOX, (although there is an element of feeding its growth), but, more in line because there is such a supply of firms that are better suited going private instead of remaining public. The exponential growth of IPO's in the '90's and early '00's fed that supply. Within that realm capital valuation of firms straddled with quarterly reports has a greater smothering effect than almost anything. Private firms have different scorecards based on their strategic plan, be it an exit strategy or market position. Debt can also be considered public stock as when companies either are engaged in buy back efforts or spending cash inappropriately to continue dividends when strategically the cash might be better suited for organic growth. The fact is that the rise of the PE world is both in response to the opportunities available in the marketplace and the ever changing dynamics of the marketplace. Predicting the social or economic ramifications would be like predicting the social and economic ramifications of the VC explosion of the late '80's and early '90's in the Hi-Tech marketplace eventually culminating in the dot.com bomb of 2000. Yet in '06 the VC market is now returning to its previous investment levels with greater growth expected in '07 although seeding and feeding other sectors other than Hi-Tech and dot.com ventures.

    Surely there will be abuses, mistakes, extraordinary successes and marginal gains with adverse effects on individuals. The question regarding class cannot be answered in this realm, money follows and seeks out return. Regulation (a bad world in some classes) is the only way to level some playing fields if there is a social/political/economic inbalance.

    The thing is the PE world is flush with money from both institutional and private asset management accounts, because the historical numbers suggest a better return than some public equity positions, but it is in reality simply part of a diversified approach. The thing is now there is more money chasing less available deals so the price is going up, causing the brakes to be put on for now on some deals. What is more interesting is to watch bigger strategies emerge as in roll ups and other strategies emerge as in breaking apart old conglomerates allowing pieces of the former to fully flourish.
    RWNemanich