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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: TobagoJack who wrote (19780)	6/13/2002 11:20:47 PM
From: Raymond Duray	Read Replies (1) \| Respond to of 74559

Hi Jay, Re: To sum, this time events may turn out different. Both the con men and their marks say the same thing, time after time..... <g> "It's not one damn thing after another. It's the same damn thing over and over." -Edna St. Vincent Millay BTW, wat's WAT? World Actuarial Taxation? West Africa Time? Wet Anode Tantalum? Woordeboek van die Afrikaanse Taal?

To: TobagoJack who wrote (19780)	6/14/2002 1:59:29 PM
From: Raymond Duray	Read Replies (2) \| Respond to of 74559

HOW INSIDERS TAKE ADVANTAGE Hi Jay, Following up on our discussion on LBOs, here's an article that describes the process. The average shareholder here is about to get filleted: thestreet.com Management Buyouts Usually Enrich Execs, Not Investors By Jeff Bagley Special to TheStreet.com 06/14/2002 11:57 AM EDT In looking at potential management buyouts such as the one being proposed at restaurant chain Dave & Buster's (DAB:NYSE - news - commentary - research - analysis), it is essential that investors understand the conflicts of interest inherent in these deals. To sum it up, you don't want to invest in a company that exists merely to enrich the insiders, and you don't want insiders sitting on the opposite side of the negotiating table from you. This happens way too often, in various degrees of sleaziness. That is why one of the first places I look when researching a company is the proxy statement. Here you find all sorts of great information, including executive salaries, stock options and, most importantly, related-party transactions. As much as a company might put a positive spin on related-party transactions, they represent a red flag of the most urgent kind. Usually you should run -- not walk -- away from the stock. A look into the proxy statement of Dave & Buster's provides a little insight into why the "independent committee" of DAB's board would sign off on a transaction that -- in my opinion -- essentially steals the company from the public shareholders. It turns out that independent director Christopher Maguire isn't so independent after all. He is the managing member of Cypress Equities, which entered into an $8 million sale/leaseback transaction with DAB at the end of 2000. Annual rent paid to Cypress Equities is $1.242 million. While nothing may be wrong with this transaction, it certainly calls into question the director's independence and objectivity. Aside from this conflict, other things specific to the proposed DAB buyout bother me. For example, Allen Bernstein (chairman and CEO of Morton's Restaurant Group (MRG:NYSE - news - commentary - research - analysis)), a longtime member of DAB's independent committee, abruptly resigned from the committee on April 25. This was after negotiations started for the buyout but before a deal was finalized, and he had been actively involved in talks when DAB was approached by other parties. The company cited Bernstein's desire to devote more time to his business as the reason for his resignation, but to me it looks like he didn't want to have anything to do with this takeunder. I emphasize, though, that this is just my opinion. The timing just seems to be too much of a coincidence. The Fairness Issue What also bothers me is the fairness opinion. The third party that provided the opinion has a vested interest in the deal getting done -- at least an extra $170,000 in fees if the MBO closes. Also, the exact details of the valuation process appear shrouded in secrecy. Instead of using historical data to value the company, management's unpublished financial forecasts are used. Wait a minute! How can you use management's forecasts when management is sitting on the other side of the negotiating table? And don't you think it is appropriate to disclose the forecasts, which serve as the cornerstone of the appraisal process? This fairness opinion is too much of a "trust us" type thing for my liking. And this gets to the heart of the matter with this and all management buyouts. If business prospects are so bad and if the company is so terrible, why is management willing to take it on? In fact, management has a vested interest not only in posting poor corporate performance prior to an MBO, but in also providing less-than-rosy forecasts. This will depress the stock price and third-party appraisal, enabling the management team to buy the company for a song. Finally -- and this is the best part -- executive compensation agreements typically include change-of-control provisions whereby stock options automatically vest. Such is the case at Dave & Buster's, where the management team will collectively be entitled to millions of dollars after the deal closes. Also, top management will have incentives -- again millions of dollars -- to stay on. So you see, this is a win-win situation for management. They get paid for doing the deal, and they'll get paid later on when they sell the company at a much higher price. For whom is your management team working?