Sunday, July 17, 2005

Role of equity firms One curve ball of holding companies, the private investment bank or private equity company. These companies include such famous names as the Carlyle Group, Bain Capital, Kohlberg Kravis Roberts (KKR), and so on. These companies, with ever-growing coffers from pension funds and private investors, specialize in acquiring a variety of companies, taking them private, "reengineering" them, and then, usually, cashing out with a new stock offering or a sale to another company. These investments are quite diverse. The Carlyle Group, for example, currently such business as Texas gas wells, a Korean office building, a US auto parts maker, a Connecticut HMO, and so on. But typically, these are short-term investments. Take for example, Egencia, a French-based online corporate travel agency. The Carlyle Group acquired a major interest in the company in 2000 at its founding. In 2004, it sold the company off to IAC, a company that specializes in online travel services (expedia.com, hotels.com, etc.) A similar scenario is repeated over and over. So while equity firms do seem to be turning into the conglomerates of old, their general purpose is to get in, fix up or split up, then sell off, usually to an established oligopoly in that industry. In that way, equity firm act like a catalyst in the process of oligopolization, a buffer that absorbs the lag between when companies are ready to sell and when others are ready to buy. Increasingly, when a company goes on the block or splits off a division, the bidders include both direct competitors (oligopolies in the same business) and private equity companies. For example, in 2004, German technology giant Siemens AG bought out US Filter, a US maker of water filters, spun off by French Veolia (formerly a part of the abovementioned Vivendi, but that's another story). The $993 million deal was not a slam-dunk, however. Siemens had serious competition, not from other tech firms, but from equity firms including some of the biggest: Blackstone Group, Carlyle Group, KKR, and Warburg Pincus LLC. Like real estate speculators, equity firms are gambling that the firms they take over will appreciate in value while they own them. Then their eagerness and their almost endless supply of capital means that oligopolies are finding they have to bid ever more to grab the pieces that will allow them to expand their market share in a particular business. 6:10:22 PM

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