Numerous firms including Hertz, Bausch & Lomb, HCA, Clear Channel, and J. Crew have exited the public capital market via going-private transactions.
In these deals a private equity firm such as Kohlberg Kravis Roberts & Co. (KKR) or The Carlyle Group puts up a modest amount of the equity (usually from large private investors and institutions) and borrows the rest from banks. These funds then buy out the public shareholders; the new owner is the private equity firm who either retains the current managers or replaces them. For example, KKR bought VNU, a $4.3 billion media company, and hired David Calhoun, who had been running General Electric’s (GE) $47 billion aircraft unit. Mr. Calhoun’s pay package at VNU was worth more than $100 million, many times more than his GE compensation.
Or, consider the case of Millard Drexler who was hired to turn around J. Crew after a successful 16-year career at running Gap. His annual J. Crew salary was $200,000 and no bonus. He also was granted millions of shares of stock, which at the time were not being traded. After J. Crew again became a public company, Mr. Drexler’s ownership in J. Crew was worth over $300 million. In fact, it is often the case that executives earn more money running privately held firms than public companies, and they do not have to deal with unruly shareholders claiming they are overpaid.
1. Explain why executives might be paid more to run private companies than these same companies would have paid their executives when they were public.
2. What might these employment packages have to say about the argument that public company executives are overpaid?
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