The clarion call of a "market top" was splashed across the pages and screens of the media landscape when it was disclosed that The Blackstone Group was mulling the possibility of an IPO ( "Investing Basics: IPOs").
However, I believe that Blackstone is yet another chapter in the ongoing story of successful capitalism. It is simply too easy and naïve to categorize a
as a market top or as a vehicle to sucker the unsophisticated investor into the private equity arena. Rather, there is something else going on here.
As I researched my facts and developed my arguments, it became clear that there are some important lessons to be learned in the Blackstone IPO. I will address whether the IPO marks a top of the market, as well as outline the reasons why aging entrepreneurs take their companies public -- and how you can spot those opportunities and actually use them to your advantage in your trading.
Death and Taxes
Benjamin Franklin put it best in a letter to Jean-Baptiste Leroy in 1789, which was re-printed in
The Works of Benjamin Franklin
"In this world nothing can be said to be certain, except death and taxes."
Let's look at what has gone on over the past several years as three dealmakers (Warren Buffett, Estée Lauder, and Sam Zell) faced the certainties of death and taxes, and how they handled their sizeable businesses.
In Warren Buffett's
investors, he summarized 2006 results, and looking to the future he, in a very public way, prepared for his eventual demise. At 76 when he wrote the letter, Buffett believes that his expected lifespan is 12 more years. This may be the only point of exaggeration in Buffett's letter as
at the U.S. Department of Health and Human Services think differently. Perhaps Buffett took an
. Who knows?
Life expectancy aside, Buffett has recognized his mortality. With that fact in mind, he has taken, or is in the process of taking three important steps in estate and corporate succession planning:
1. Develop a Succession Plan:
Buffett is preparing for his succession. As he stated in the letter, "I have told you that Berkshire has three outstanding candidates to replace me as CEO and that the Board knows exactly who should take over if I should die tonight. Each of the three is much younger than I. The directors believe it's important that my successor have the prospect of a long tenure."
2. Estate Tax Planning:
He took the tax issue out of the equation, as did his buddy Bill Gates of Microsoft by bypassing family and leaving their fortunes to charitable causes. Again, according to Buffett, "Last year I arranged for the bulk of my Berkshire holdings to go to five charitable foundations, thus carrying out part of my lifelong plan to eventually use all of my shares for philanthropic purposes. Details of the commitments I made, as well as the rationale for them, are posted on our Web site,
. Taxes, I should note, had nothing to do with my decision or its timing."
3. Ensure Shareholder Value in Perpetuity:
Ensuring that BRK is an ongoing concern after his departure, Buffett continues to work for the benefit of the shareholder in perpetuity.
If you believe that Buffett's actions signal a top in shares of BRK, then go ahead and sell or short them now. However, you will likely be alone in that strategy.
Estée Lauder, the co-founder of the cosmetic company bearing her name,
, was 89 years old when she took her company public. Was that a top for her company or the cosmetics market? Not a chance. The matriarch of this dynasty has two very sharp and highly philanthropic sons, Leonard and Ronald (big givers to religious, social and academic causes).
The Estée Lauder IPO was done with estate planning in mind. Using the highly talented skills of
, the Lauder family was able to use the IPO as a massive method to deploy a "short against the box transaction" (SATB). At that time, the SATB was a viable strategy to defer capital gains in perpetuity.
Unfortunately, the egregious use of an IPO for SATB activity by EL received highly unfavorable media exposure and the tax benefits of the SATB were subsequently eliminated in the tax code. Again, if you thought that the IPO of EL was a top for the industry or market, then you were dead wrong. The stock was issued at $13 on a split adjusted basis and has not looked back. No top there.
Sam Zell, at 64 a spring chicken compared to Buffett and Lauder, recently sold
Equity Office Properties
to Blackstone. Many called this sale a top of the market. If so, then why did Zell keep
? 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
, 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
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.
- 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.
- 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.
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.
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.
At the time of publication, Rothbort was long BRKB, GOOG, and GS, although positions can change at any time. Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities. Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University. For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.