Back in 2000, the global value of the buyouts on which the private equity sector has flourished was only $28 billion – a healthy sum, it has to be said, but nothing compared to the $502 billion total to which the deals had grown by 2006.
Almost precisely the same splendid figure was achieved in just the first half of 2007. As gold-mines go, this one is yielding quite a bonanza.
These astonishing numbers, compiled by Dealogic, are quoted in the Harvard Business Review for September in a significant article by Felix Barber and Michael Goold.
Assessing the strategy involved, I am reminded of the 1960s and 1970s when I spent quite some time charting the voyage of the 'conglomerates' from heroes to has-beens. In my book 'The Naked Manager', published in 1972, I commented thus on the firms involved:
"The respectable and disreputable alike used financial techniques to pile together unconnected businesses… The purchases were shoved into common accounting and reporting systems, and left to paddle their own canoes, leaky or buoyant, subject to varying degrees and forms of helpful and unhelpful head office intervention."
So the disappearance of the conglomerates was inevitable. But why? And how exactly do the causes relate to the boom of private equity in the present day?
First of all, both sectors of businesses rely on the assumption that there exists a range of transferable management skills which apply in all cases. However, it is simply not the case that all managers can transfer easily between several different businesses.
The privateers put their efforts into priming the asset for resale. For some of the buys, there is time only for a quick wash and brush-up before they are returned to the public sector from whence they came. Claims that fantastic transformations are brought about, and along with them all blessings to the business and the economy, are utter nonsense in such cases.
The long-forgotten conglomerates had no compunction in revamping and repackaging their buys and putting them back onto the stock market. But unfortunately, this was easier said than done. Diversifying has always presented a severe challenge to all managers – and this proved to be the case once again in these 'expert' hands.
Big companies often have difficulty in paying enough attention to lesser units which, says Barber and Goold, has resulted in a continuous supply of businesses for sale that exactly meet the private equity criteria: "stable cash flows, limited capital investment requirements… modest future growth, and above all the opportunity to enhance performance in the short to medium term."
But these bundles of goodies don't sound very attractive. According to Dealogic, until 2004, they offered enough to fuel magnificent growth for private equity leaders; but the supply of unwanted corporate assets big enough to feed the privateers' enormous growth began to diminish, spurring a big switch to buying whole companies.
The change in strategy has brought the financiers closer to the old conglomerates: the need to get involved in business strategies and even to replace entire top managements is quite a leap from merely tightening up financial controls.