As most of you probably know by now, it was announced last week that Thomas H. Lee Partners and Fidelity National Financial would take Ceridian private for $5.3 billion in cash. Most experts agree that Ceridian chose this option to avoid activist pressures including the hedge fund Pershing Square Capital Management (who had already accumulated an 14.5% stake in Ceridian) intentions to replace the company's board with its own slate of directors.
We have been following this story since Pershing first announced it had bought an 11.3 percent stake (15.7 million shares) in Ceridian back in December of 2006. Our previous blogs on this topic include Changes Coming at Ceridian? and Hedge Fund Perishing Square Capital Discloses Active Stance in Ceridian.
Why all the interest in Ceridian?
Pershing had been pushing Ceridian to spin off its profitable Comdata payment processing to "unlock value" to shareholders. Ceridian was apparently not in favor of this. And the intentions of Thomas H. Lee Partners are not apparent yet. And even this buyout is not a sure thing yet as it may be opposed by Pershing who has until the annual meeting to come up with a strategic alternative.
But one thing is for sure, when hedge funds or private equity get involved you can be certain it is all about money. That is, making money for the private equity firm, major shareholders and selected other Wall Street institutions. The long term interests of the company itself, its employees, customers and to some extent individual shareholders is often of secondary importance. Even Thomas H. Lee Partners About Us statement states that they have "generated superior returns for their investors and partners – it makes no mention of other stakeholders.
So what exactly is private equity? Public equity describes firms whose shares are quoted on stock markets. Private equity is typically investments made by private equity funds. Whereas venture capitalists typically invest in small start-up businesses, private equity typically buys large, publicly traded businesses (often involving a lot of debt) in order to take them private, make major changes (sometimes involving spinning off operating units) and then pushing them back to the public at a higher price.
For a great education on private equity, you can listen to the audio interview or read the transcript of Beyond the dollar sign: a history of private equity.
Famed investor Warren Buffett has been a very vocal critic of these private equity and hedge fund deals saying they sweep down and buy firms, “gussies them up,” (to use his term) by stripping and leveraging their assets and firing employees, and then spit them out to the public at a higher price. However, Buffett wouldn’t say that all buyouts are bad for shareholders. So only time will tell whether or not this will be good for Ceridian and it's customers and shareholders.
I would agree with a recent blog posting from Knowledge Infusion, Ceridian - What to do today that says to Ceridian customers should not panic.
Ceridian's business includes two major business units: Comdata (payment processor) and HR Solutions (a broad range of human resource outsourcing solutions, including payroll processing, tax filing, benefits administration, work-life and employee advisory programs and other HR-related services.). It's clear that the highly profitable Comdata division is being diluted by Ceridian's less performing HR Solutions businesses and no doubt this is the major reason for the interest in Ceridian.
So the big question is what will Thomas H. Lee Partners do about this. As we said in our previous blog postings, we have no idea but one thing is for sure - major changes will be coming.
We just feel bad for Ceridian employees and their customers who will have to sweat this uncertainty out over the next year or so.
Posted by Mark Willaman
Labels: Ceridian, private equity