Taking Transformations Private

Tuesday, May 29, 2007

The news that a private equity firm, Cerberus Capital Management LP, is taking Chrysler off of DaimlerChrysler’s hands is intriguing me more and more, particularly after I read Orit Gadiesh and Hugh MacArthur’s article (“Growing the ‘Private’ Club”) in the May 25 issue of the Wall Street Journal. In it they explain why private equity “is becoming a benchmark of performance for CEOs and boards of directors.”

Despite the little I know about the private equity world, I still suspect that we organization development (OD) types could learn a thing or two from their investment and management models as we go about helping our companies and clients reach their potential.

Here’s my limited understanding of the private equity model. They go after public companies that they consider to be under-valued, take them private by buying all the outstanding shares (and taking on a significant amount of debt), clean up the business by focusing on the key business or businesses that will drive value, thereby transforming the company into one with a clear value and growth strategy. Then they take the company public again to reap the financial rewards of a sought-after stock in the public investment market. I would assume one of the reasons why there is so much money in the private equity world is that the model usually generates big returns on investment. As Gadiesh and MacArthur point out, “from 1969 to 2006, the top quartile U.S. private-equity funds had annual rates of return ranging from an average of 39% to well over 200% through good times and bad.” I don’t know about you, but that pretty much beats my CD.

Here’s what I think we can learn (or be reminded of) by the success of most private equity transformations:

1. Focus on value – I can’t imagine how a management team could deliver such legitimate returns without a laser sharp focus on what is the value proposition for this business and proceed to cut, trim, re-deploy and invest resources in such a combination as to maximize value.
2. Discipline – Plenty of public companies have assets on the books that have little to do with its core business. Too many companies fall for business opportunities that have little to do with their espoused value proposition. Others get tangled in the “build it and they will come” mentality. My guess is that these private equity management teams have the discipline to avoid temptation and fantasy.
3. Transform to the market, not utopia – if we’re not careful as OD professionals, we can lose sight of what’s really important and spend too much time and money on employee satisfaction surveys and 360 feedback and other types of “temperature checks”. Our main focus with our clients should be “what changes need to occur to ensure we can execute our business model that is designed to deliver value to our shareholders and customers.”

Keep an eye on these folks. If they pull off a Chrysler miracle, it’s a whole new ballgame.