IPO Spotlight: The Carlyle Group

An IPO that has been generating a lot of buzz, one that has grabbed the attention of investors, is not Facebook, but rather the upcoming IPO of the Carlyle Group. Carlyle is noted for perhaps proposing the most shareholder-unfriendly corporate governance structure in the recent IPO market. A Carlyle IPO would be the fifth among buyout firms to date, following Fortress Investment Group LLC, Blackstone Group LP, KKR & Co, and Apollo Global Management LLC.

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The biggest caveat the Carlyle was proposing in an IPO was to afford its shareholders little power over the company, specifically withholding the ability of Carlyle shareholders to elect the company directors. Instead, the company intends for its current management to remain in control. A group of independent directors will be brought onto the board with the three co-founders of Carlyle, but the elected officials will not be able to supervise executive pay or nominate directors, which is not normal among most public companies.

Other limitations to the proposal include a plan not to include annual meetings for stockholders, essentially eliminating shareholders’ right to vote. Shareholders will also lose out if a conflict of interest arises between such shareholders and the board of Carlyle, since the conflict committee designated to resolve such conflicts will be made up of independent directors appointed by the directors of Carlyle. Another clause states the company will have the right to repurchase shares from shareholders holding less than 10% of the company, and those shares may be “purchased at an undesirable time or price.”

Yet, with all this governance, the biggest drawback to shareholders was the clause requiring public shareholders to arbitrate all claims against Carlyle. Arbitration was to be confidential, meaning public disclosure of such lawsuits would not exist, unless required by the law. Class action lawsuits were also barred, shielding the company from being sued by shareholders. Following the Blackstone IPO, Blackstone was involved in six lawsuits in 2008 that accused the company of misleading investors in its prospectus by overstating the value of its private equity and real estate investments. However, as of February 3, 2012, due to heavy opposition, Carlyle has dropped its arbitration clause.

From Carlyle’s perspective, such restrictions create value, aligning the interests of the company with those of the board of directors, since shareholders often look for short term benefits of an investment. The company also expects gains from a tax benefit that would levy corporate taxes owed by the company to its shareholders.

As Carlyle faces concerns from the SEC and investors alike over its proposed IPO structure, the funds raised, estimated to be in excess of $100 million, would provide additional backing toward future acquisitions. As a recent comparison, Apollo, which had its IPO in 2011, announced 19 transactions for a total of $2.6 billion in value. Perhaps the most publicized IPO of the LBO firms, Blackstone, announced eight transactions following its IPO in 2007, but zero transactions that year prior to its IPO. An area of concern for shareholders of these firms: since their debuts, share prices have yet to exceed their initial pricing.

As for Carlyle, the company made 34 acquisitions in 2011 for a total deal value in excess of $ billion. Its most notable transactions for the year includes its cross border purchase of RAC Plc for $1.6 billion, the purchase of Integrated Dental Holdings for $712.9 million, and its purchase of Telecable de Asturias SAU for $547.4 million. The 27 purchases in 2011 are consistent with the 26 purchases the company made in 2010, although in that year, deal value exceeded $11.7 billion. Carlyle grabbed headlines in that year with notable transactions including the purchase of NBTY Inc for $3.5 billion, Commscope Inc for $2.9 billion, and Syniverse Holdings Inc for $2.2 billion. Both 2011 and 2010 represented significant increases in deal activity from 2009, a year that saw Carlyle make only 15 acquisitions, totaling $1.6 billion in value.

So while the proposed IPO of the Carlyle Group has garnered negative reactions from the Street, ultimately leading to structural changes in its arbitration policy, the IPO could bring benefits in additional M&A activity —a difference from the IPOs of its LBO peers that felt less deal activity as a result of the then struggling economy.

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