Focus Media - Big Rewards Together With Big Risks For Person Equity Firms

I believe y'all jurist the lineament of a somebody equity theater by its mightiness to tell no to a deal.

If y'all induce got a billion dollars (or xx summation billion dollars equally inward the representative of to a greater extent than or less PE firms) so everyone wants to sell y'all something. [When I was a fund managing director at a theater alongside xx billion dollars I used to joke that everyone wanted to live my friend!]

People volition sell y'all anything based on numbers or projections and at minimum what y'all needed to create was follow Ronald Reagan's dictum: trust but verify.

Focus Media (my novel obsession) is a grapple requiring verification. 

Focus Media's buyout is attractive on the stated numbers. As of the last results Focus had 758 1000000 dollars inward cash, restricted cash together with brusque term investments - together with a piffling over 200 1000000 inward borrowings (net cash of inward a higher house 500 million) together with was earning roughly 83 1000000 of operating profits (on their non-GAAP measure) per quarter (call that 330 1000000 per year). Moreover the companionship has history of real fast growth. The incremental working capital missive of the alphabet returned for growth is depression - so incremental ROEs are real high. 

If these numbers are existent together with sustainable the Private Equity bid to accept the companionship somebody is probable to live a lay-down winner. Especially if the growth continues.

However these numbers must live verified. Rat-bag short-sellers induce got argued this companionship has fraudulent numbers. Allegations to that outcome are all over Seeking Apha for instance. Muddy Waters - the theater that bought downwards Sino Forest - induce got published an eighty page study detailing what they believe are frauds at Focus Media.

That said, brusque sellers tin flame live wrong. And the Private Equity firms may live buying a grapple - a grapple driven to grapple levels past times nefarious (or simply apparently erroneous) brusque sellers.

The PE firms induce got an advantage

Private Equity buyers tin flame create something that us piteous equity investors can't. They tin flame do thorough due diligence. They tin flame banking concern check the transactions, they tin flame verbalize to staff at all levels, they tin flame forensically examine the books. They tin flame likely fifty-fifty band Carson Block at Muddy Waters (the most prominent critic) together with inquire him to mail his most damning testify - and they tin flame attempt to confirm or falsify Carson's arguments.

If an ordinary investor tried to create what would live ordinary concern for a PE theater they would live guilty of insider trading.

In other words they tin flame banking concern check whether it is a fraud together with y'all - dearest readers - cannot. They induce got a competitive payoff over y'all together with they induce got a competitive payoff over me.

And beingness competent (at to the lowest degree I presume Carlyle, FountainVest etc are competent) they volition role that advantage.

To that terminate though I wishing to initiatory off them on their way. 

The U.S.A. Securities together with central committee has specific correspondence alongside U.S.A. listed firms when they interrogation something inward the accounts. Sometimes this correspondence is kept private. Sometimes it is included inward filings. Sometimes it leads to formal SEC inquiries which may or may non live made public.

Here is a listing - alongside links - of the released element of the formal world correspondence betwixt the SEC together with Focus Media. 

1. Letter dated Richard Heckman was swindled inward China).  

Further - given that the SEC has paid a fair flake of attending to this companionship - y'all tin flame gauge that at to the lowest degree to a greater extent than or less people at the SEC induce got their doubts most this companionship together with its disclosures. If a PE theater were to purchase this companionship together with after let on it was a fraud they would run a existent together with nasty withdraw chances that the SEC would switch their investigation to them.

The risks to the somebody equity firms are hence uniquely high here. This is a large inexpensive transactions alongside an extensive SEC history of investigation together with alongside untested fraud allegations.

If the PE buyers are correct they brand proficient money. And equally it is the biggest grapple inward PRC that win could live huge.

But if the people alleging fraud are correct non entirely volition the PE firms lose money, but they volition lose a lot of reputation together with they volition likely rank a major SEC investigation into the process.

Big rewards. Big risks. And all soluble alongside thorough due diligence.

John