Monday, June 05, 2006

Liposuction is fashionable for debutantes

I guess I should stop pointing at flaws in l’affaire Vonage. But there are so many good lessons in it. Of course the main lesson is not to participate in other people’s exit strategies.If current owners are exiting, why should you enter?

In the case of Vonage, most of the company (80% of it)was owned by several private equity funds. A small IPO of 20% of the company is just a tool for “price discovery” on the remaining 80%. Given the gruesome disclosures in the prospectus (We have lost money, We are losing money, We will lose money). It is pretty obvious that the private equity people are not going to stick around after the lock ups expire.

A similar problem took place in the recent IPO’s of Koppers Holdings Inc (KOP) and Sealy (ZZ) and Burger King (BKC). These companies are part of a recent,dangerous, and related trend of LIPO (Leveraged IPO) transactions.In each case, prior to the IPO the Private Equity sponsors paid themselves massive “special dividends”

and received cancellation fees for management advisory agreements.The result is that most (and sadly in some cases all) of the IPO proceeds go towards extinguishment of debt and recapitalization of a crippled balance sheet. Public investors are merely refilling an empty glass from which the private equity people took a big sip

Tip of the Hat to Equity Private for giving form to the inchoate concept of IPOs of companies that are hobbled with debt

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