Why a Blackstone IPO Makes Sense

Sam Zell

Sam Zell, at 64 a spring chicken compared to Buffett and Lauder, recently sold Equity Office Properties (EOP)to Blackstone. Many called this sale a top of the market. If so, then why did Zell keep Equity Residential (EQR)? After all, the housing market has been so lousy that a smart guy like Zell should have been a seller.

My guess is that the EOP sale was just one step in Zell's personal planning for the eventuality of death and taxes. Once again, a "top" call may be misconstrued.

Now let's look at Blackstone. The company is headed by Pete Peterson, 81, and Stephen Schwarzman, 60. Peterson is definitely up there in years.

I believe that death and taxes are playing a big role in the rumored Blackstone IPO, and it has nothing to do with a top in the market. Here is why: When you own a non-public company and die, the IRS will value your estate to include all property in which you had an interest. This includes private and public equity ownership. Individuals with wealth like Peterson are going to get hit with substantial estate taxes by the IRS.

(If you're a business owner and interested in learning more about taxes and dealing with the IRS, check out the the end of this article.)

From Ben Franklin to Blackstone

When I look at Blackstone, I see a case of some highly successful individuals who recognize the words of wisdom that Ben Franklin espoused over two centuries ago about death and taxes.

Why is there this pervasive argument that Blackstone is selling at the top and it should be avoided by investors? It makes no sense. If Blackstone goes public, it will be valued at a premium value to private companies, but at a discount to public companies.

It is in the best interests of its sellers to price it such that the individual and institution buyers in the public market will be able to enjoy long-term growth while perpetuating the life of the company and its credo. Warren Buffett and Estée Lauder did it, so why can't Peterson and Schwarzman?

If you think that an IPO of Blackstone is going to be another Vonage (VG) or Clearwire (CLWRl), then make no mistake about it, stay away. However, that would be a blunder because you might be more likely to miss out on a Google (GOOG)or EL, which were both priced for public consumption and appreciation. If Blackstone goes public you might be invited to one of the best financial opportunities in many years.

Key Points:

• Just because successful companies go public in an IPO does not mean that the sale is being made at the top.
• While going public may have administrative and regulatory drawbacks, it does offer shareholders many benefits that private ownership lacks.
• A Blackstone IPO may be a unique opportunity that only comes knocking every few years.

Some Homework:

• Identify companies which are going public and pinpoint the motivation for the company's action.
• Ascertain if the company's IPO is because of a market top or due to a more personal agenda such as estate or succession planning.
• Don't be afraid to invest in companies with solid management lineage even once the founder(s) have stepped aside or passed on.
• If you're a small or medium sized business owner, consider estate planning and perhaps taking your company public.

You can email me your homework and thoughts on the subjects covered in this article. I will compile the best ideas in a follow-up module of TheStreet University.

Estate Taxes: Business Owners Beware

There are several problems which come into play if you have a substantial amount of your net worth tied up in private companies. Any small business owner should take heed to what I am about to say.

1. The IRS will attempt to put a value on your business. This will be at least the book value of your business, but potentially more based on the market value of net assets and stream of earnings.
2. The IRS will expect the estate to pay its estate taxes before distribution of the estate to its beneficiaries and regardless of the estate's liquidity.
3. The estate will likely have to sell business assets at "fire sale" prices to satisfy the IRS. The business will likely be disposed of in its entirety.
4. Interest and penalties accrue to the IRS at an above market rates.

Asset Protection

One way to prevent the IRS problem is to have sufficient life insurance to cover the estate tax. However, that only really works for the small to medium sized business owner. When you have a company worth billions, the tax issue becomes far more complex and may not be satisfied with life insurance coverage.

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