Managers are supposed to maximize shareholder value. But if they are buying their company, they might be tempted to do the reverse. Witness the proposed LBO at Fairchild.
Jeffrey Steiner is a party animal. One photo of the
Not on his own board, apparently. In August Steiner offered to take the $342 million (fiscal 2005 revenue) distributor of sporting goods and aerospace gear private. He proposed $2.73 a share, which was a 22% premium to the average price Fairchild had traded at over the previous ten days. But a committee of five independent directors found the offer inadequate, so Steiner and a partner withdrew it.
The premium would have been scant consolation to long-suffering shareholders. Steiner, 68, got control of Fairchild Industries, once a maker of military planes, in 1985. What's left of the company now distributes things like avionics and radar. Under Steiner's tenure the stock has gone down 43%, even as the market as a whole climbed sixfold. Earnings per share, 23 cents in 1985, were most recently reported at minus $1.29.
Fairchild is not exactly typical of American corporate performance, but, still, this case makes you wonder about the flood of insider takeover offers coming to the stock exchanges. Dealogic calculates that proposed management-led buyouts so far this year come to $69 billion, up eightfold from the same period last year. In all of them the management gets a piece of the appreciation after the company goes private. The lower the prebuyout price the more the insiders stand to make.
In Fairchild's case outsider investors have taken a bath, while Steiner, who got financing early on through Drexel Burnham Lambert, has taken home millions while putting his children on the payroll. Steiner also split $5 million with his son, Eric, for selling a fastener division to
In a lawsuit filed in 2004 in Delaware shareholders accused him of overpaying himself and his son, leasing planes and helicopters from his family and using company assets to pay for a Paris apartment and children's tuition.
Delaware Vice Chancellor Leo Strine Jr. rejected an initial settlement as a "cosmetic whimper." The judge accused Fairchild of "a grotesque lack of control [in] a company that has no profits" and stated that "you've got a bottom-decimal performer and a company paying top-decimal wages."
Under the judge's urging, Steiner was forced in a settlement to add some independent directors and cut his base pay nearly in half to $1.3 million and his son's by 26% to $535,000. He also agreed to reimburse Fairchild $679,000 for personal expenses paid on his behalf and to pay back $3.8 million in legal fees in a French court case in which he received a suspended sentence and a 500,000 euro fine for misusing funds of the oil firm Elf Aquitaine (Steiner attributed the prosecution to "retaliation" by French authorities).
Steiner blames Fairchild's woes on the damage the Sept. 11 attacks did to aerospace and on a German motorcycle parts acquisition gone awry. "We think we're doing the right thing for shareholders," says Steiner. Since he proposed the buyout, shares have risen 17%--what will keep them up is another matter.
