Wednesday, July 22, 2009

Conflict of Interest in Company Buyouts

When we hear of one company being bought by another, we tend to think of the case where the acquiring company intends to run the acquired company itself. This can be bad news for existing management of the acquired company. However, sometimes a company is purchased by “private equity,” which usually means that existing management will remain in place.

This will be the case with the company Entrust if the offer from Thoma Bravo to buy Entrust for $2 per share is accepted in a shareholder meeting on July 28. Unfortunately, in this case, the interests of Entrust’s management are in serious conflict with the interests of shareholders.

As Thomas Kirchner explains in an article about the proposed Entrust takeover:

“It is common to give management incentives in the form of equity and options once the company is private. The result is that management can make more money selling a company to a private equity fund and growing it than keeping it public. Moreover, the lower the price at which the company is taken private, the bigger the eventual payoff for management.”

Kirchner goes on to explain that Entrust’s CEO “is scheduled to receive a ‘success fee’ of $2.5 million, plus a 5.7% equity interest in the acquiring corporation, upon closing the merger.”

No wonder Entrust management seem more enthusiastic about the Thoma Bravo offer than they do about the other offers that have come along (as Kirchner explains in a more recent article).

It seems perverse that the recent severe drop in the stock market has created an opportunity for company management to profit at the expense of shareholders. Kirchner believes that if the current offer is rejected, other higher bids will come. I’ll be watching to see how this soap opera plays out.

1 comment:

  1. You know how it will play out.

    No one cares about the shareholders.