And the next private equity target is…

Sepia photograph of the "Atlas" stat...

LAST WORD: And the next private equity target is…

Lexpert, June 2007

by Marzena Czarnecka

Psst… you know how everyone’s talking private equity this, private equity that? Well, I just heard a rumour that one of them—can’t remember the name, a whole bunch of initials in it I think—is prowling the streets looking for a new target or two. I know you know they’ve been doing it for years. But this is something new. A new type of target. You want to listen to this.

OK, so these funds have so much cash sloshing about they’re running out of investments, right? They started off with troubled businesses they could buy for cheap, restructure, and flip for a tidy profit. Then they got really good at that restructure-and-flip thing. Tidy profits became obscene profits. Investors being sheep—greedy sheep—the funds got more cash, bought more businesses, got more cash, bought more businesses… Soon, they were buying businesses that were in perfectly decent shape, thank you very much, if in need of a little heartless fat-trimming. But the pickings have been getting slimmer, and that’s been driving up prices. They don’t like that.

But you know all this. Anyway—having done pretty well with a variety of Canadian businesses including telephone directories, the private equity funds started eyeing Canadian telcos. Now, there’d be a challenge, they thought. A still-regulated industry with foreign ownership restrictions. A bored billionaire could really have some fun with that.

No, that’s not the target I’m talking about, although it will be interesting to see if it comes to anything. Canadian pension funds and New York private equity funds slogging it out for the questionable privilege of owning Bell—could be fun to watch (and what an apt illustration of the cultural differences between our two nations: the power of US money represented by private equity, the power of Canadian money symbolized by a pension fund of unionized provincial employees). Of course, I suspect Canadians would rather a European competitor owned BCE than an American private equity fund. But I digress. Back to the point: private equity comin’ sniffing around the telcos illustrates that they are busily exploring non-traditional industries. And this new target industry I’m talking about? Perfect for these guys. Immense earning potential, good demand for the product, really badly run.

You with me?

Hello? Did your overpriced Perrier go down the wrong pipe or are you having an apoplectic fit? Well, why not? Law firms would be perfect. Perfect. Most manage to turn a decent profit every year, despite the fact they remain among the most idiosyncratically and inefficiently run enterprises around. Their earning potential, if harnessed by someone with a private equity mindset, could double. Treble. Heck, quadruple. The new masters would clean house, shake things up, renegotiate the leases, effect a couple more intra-city mergers to eliminate some of the competition, get rid of unprofitable business lines and unprofitable partners…

Ah, you think there’s the rub? One thing to contemplate a run at a regulated, government-protected telco and quite another to put a partnership in your gun’s viewfinder? It may appear a stumbling block, I grant you that. But not an insurmountable one. I don’t know if you’ve ever been in a group of corporate lawyers when New York’s or Boston’s great private equity funds start being discussed, but let me assure you, the mood is… exalted. Lips quiver. Throats construct. Eyes shine with otherworldly light. Those with imperfect impulse control may even drool. Remember how we used to joke these m&a guys were all just wanna-be investment bankers? Well, there’s a new hero in town. They could sell themselves to him. They could. Especially if the price was right.

There’s more to our law firms than corporate lawyers, you say. Yeah, the litigators may be a problem. Always are, aren’t they? But a manageable one. Avarice is a great tool you know, and these folks know how to leverage it. And push come to shove—they might just shove the ‘gators out into spin-off boutiques, a little ahead of time. (Come on—you know every of your top litigators daydreams of a boutique practice at least once a day. The boys and girls who dream of spending their days arguing in court do not dream of having the décor of their offices determined by executive committees.)

The exit, you shout. Makes no sense, where is private equity’s exit here? I asked myself the same question, you know, and when you think about it a little, the answer is beautifully obvious. Follow me. They buy the law from from the partners, shackling the high performing ones they want to keep into highly paid employees and buying off the ones they don’t want. They massage, refine, restructure, until the law firm is indeed the lean, mean legal service providing machine its clients have been demanding. And then…

They sell it back to the partners.

Brilliant, don’t you think?

Marzena Czarnecka is a Calgary-based freelance writer who doesn’t drool much, and never quivers.

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