This earlier post noted that the NY Times financial columnist Ben Stein has some rather odd notions about private equity buyouts. Amidst criticizing rich folks for spending their money in a different way than Stein would if he had their money, Stein in this column continues to strap his blinders on closely regarding private equity-backed, management-led buyouts of publicly-owned companies:

“I saw an article about the chairman of Herbalife leading a private equity firmís offer to take the company private. He must be trying to underpay his shareholders for it ó otherwise thereís no built-in profit for him. Of course, heís a fiduciary for those same shareholders, obliged to put their interests ahead of his in every situation. Never mind. This is about money.”

Well, yes, it is about money and the private equity buyers could be wrong in their bet. Stein ignores that Herbalife’s stock price could go down below the price that the chairman and his private equity partners are willing to pay for it, which means that they would absorb the loss rather than the Herbalife public shareholders. Isn’t the more mature analysis here the assessment of the relative risk that Herbalife’s stock price will rise above or below the price that the private equity buyers are willing to pay for it?
But Stein isn’t finished with his blather:

Then I read an article about the head of Four Seasons Hotels and Resorts, Isadore Sharp, taking that company private. His family owns the supervoting shares that control the Four Seasons, and Mr. Sharp says he wants to simplify succession issues with his children. (Donít we all?) Several people have been quoted as saying heís underpaying for the company. Why does he have to do the deal at all? The potential for conflicts of interest is simply overwhelming.
Four Seasons declined to comment when I called to ask, but I assume Mr. Sharp wants to buy the company on the cheap. Every buyer does. The shareholders for whom Mr. Sharp is a fiduciary want ó and by all legal history, deserve ó the highest possible price. Again, why do the deal at all? If he controls the votes of the company, canít he work out succession issues by parceling out those super shares in his will or a living will? Something does not smell quite right here. At least, not to me.
And, hey, lookie here whoís investing along with Mr. Sharp. Why, itís the richest man in the world, Bill Gates. See, heís not rich enough now. He has to get into this ethically dodgy deal to get even richer. Very nice. I guess heíll use that money to do ethical things.

Let’s assume for a moment that the risk is greater that the Four Seasons stock price will fall below the price that Mr. Sharp is willing to pay for it than it is that stock price will rise above it. However, Mr. Sharp disagrees with that risk assessment and is willing to put his money up to back up his belief. Hasn’t Mr. Sharp done precisely the ethical thing for Four Seasons shareholders? I don’t know if the foregoing risk analysis is right or wrong, but it occurs to me that it is at least as likely a scenario as the “ethically dodgy” deal that Stein suggests.
If not for Gretchen Morgenson, I would be amazed that the Times editors would allow Stein’s shallow analysis to pass as a business column in the paper.

O.K., so the offer of private-equity firms Texas Pacific Group and Kohlberg Kravis Roberts & Co. to acquire Dallas-based utility TXU Corp for about $45 billion was the big deal that was buzzing around financial circles over the weekend. As the NY Times’ Landon Thomas reports, it’s always fun when one of the original barbarians arrives at the gate.
But also catching my eye was that Houston-based Marble Slab Creamery — a longtime success story in the premium ice-cream parlor wars — announced on Friday that it was selling out New York-based NexCen Brands Inc. for $16 million. As noted earlier here, Marble Slab is well-positioned to make a run at becoming the Starbucks of premium ice-cream and NexCen — a brand acquisition and management company that is focused on assembling a portfolio of companies in the consumer branded products and franchise industries — has the capital to pull it off. Bully for the Hankamer family, the owners of Marble Slab.

The NY Times’ Gretchen Morgenson’s column ($) this past Sunday is entitled “Will Other Mortgage Dominoes Fall?”, in which Morgenson explores the current downturn in the subprime mortgage market.
As a result of the increasing default rate in subprime mortgages, Morgenson observes that the mortgage-backed securities that many institutional investors purchased may be riskier than they seemed at the time that the investors bought them. Consequently, she notes that those securities may not be worth as much as the investors want them to be worth and that they may sell them. If that happens, Morgenson rightly points out that the market for new mortgage-backed securities may get tougher and there may not be as much cheap mortgage money around for homebuyers, particularly low-income ones.
What I’m trying to figure out is what’s wrong with any of that? Isn’t that precisely the way markets work? Isn’t it good that many low-income or high-credit risk folks have been able to enjoy the benefits of home ownership? Yes, it’s too bad for those low-income folks who weren’t able to take advantage of the cheap subprime mortagages, but isn’t it good that investment vehicles that securitized subprime mortgages with pools of higher grade mortgages shifted part of the risk of those low-grade mortgages to investors who can better absorb the risk? And isn’t it more likely that the downturn in subprime mortgages will be less severe as a result of the hedging of risk that occurs through such securitization?
In other words, what’s Morgenson’s point in the article? Perhaps Larry Ribstein knows?

Former Houstonian M. Lamar Muse, one of the founders of Southwest Airlines and a pioneer of airline deregulation, died earlier this week in Dallas. He was 86 at the time of death.
Muse was legendary in the airline industry for taking over Southwest when the airline had no planes, piles of startup debt, and nominal liquidity. He parleyed that into three 737s from Boeing so that Southwest could begin flying the planes between Dallas, Houston and San Antonio, taking advantage of close-in and underused Hobby Airport in Houston and Love Field in Dallas. Inasmuch as Southwest was flying entirely intrastate, the airline was lightly regulated in comparison to the legacy airlines of the time and, thus, slashed fares to capture the Texas market. When I moved to Texas in the early 1970’s, I could buy a ticket to Dallas or San Antonio for about $30, $50 round trip. And, yes, those orange hot pants on the flight attendants were not bad, either.
Muse left Southwest in the late 1970’s over a dispute about the rate of expansion and he was never able to regain the mojo that he displayed at Southwest. In 1982, he started Muse Air, which was sort of a luxury version of Southwest, but the timing was bad as the oil and gas business in Texas was just beginning to enter a long and deep tailspin at the time. After never generating a profit, Muse sold out to Southwest in 1985, which renamed the airline TranStar. By 1987, Southwest had had enough of the airline’s losses and shut it down.
Muse was a true character to the end, reportedly participating in internet chat rooms regarding airlines up until recently. Probably his most endearing business legacy is his championing of a company stock-based, profit-sharing plan for Southwest employees, who didn’t have pensions at the time. That plan eventually turned many longtime Southwest employees into millionaires as Southwest’s value grew over the years. A fine legacy for any businessperson, indeed.

Looks as if Jim Crane’s proposed private equity-backed buyout of EGL is on the rocks already. That news probably makes Ben Stein happy, but what about EGL shareholders?
Crane commented that he will resubmit another bid, but the market certainly didn’t receive his first with gusto. After an initial run-up in price upon the announcement of the proposed buyout, the stock is now trading at close to its 52-week low. Interestingly, Crane’s failed offer — something that folks such as Stein would make illegal — may end up inducing more bidders to get into play for EGL than otherwise would be the case, thus increasing EGL’s value for shareholders. Stay tuned.