Private Equity: "I create nothing; I own" ?

I'm an ardent supporter of capitalism, but the way private equity companies structure deals such as the one outlined in the Wall Street Journal article below only benefits the takeover sharks. Obviously there's nothing wrong with restructuring if it helps a company's long-term prospects, but a successful corporation has to share some of its wealth with its workers; if it doesn't the company will usually fail at some point assuming there's free competition. In a case such as this one however, the company that was bought out had no choice but to lay off its workers because the private equity company that bought it saddled it with debt and then immediately took a dividend out for itself.

It's reminiscent of the movie Wall Street and the famous line by Gordon Gekko (played by Michael Douglas): "I create nothing, I own." See my post from last year about private equity--the WSJ article mentioned is eerily similar to this one.


PAGE ONE
DOW JONES REPRINTS
IN THE TRENCHES
How a Blackstone Deal
Shook Up a Work Force
Layoffs at Travelport, Dividend for Investors;
'On Pins and Needles'

By IANTHE JEANNE DUGAN
July 27, 2007; Page A1

CENTENNIAL, Colo. -- Not long after the Blackstone Group bought Travelport Ltd. last August, workers at the company's office campus here began feeling the squeeze.
Two months after the deal closed, scores of employees were lugging boxes of personal belongings to their cars, having lost their jobs. Under Blackstone's ownership, the travel-reservations conglomerate has laid off 841 people, about 10% of its work force. Blackstone, a private-equity firm, has already recouped all of the money it invested in Travelport.

Similar scenes have been unfolding at companies around the nation, a human toll of the corporate-buyout boom. Private-equity firms, which say they bring sorely needed financial discipline to poorly run companies, have been slashing costs and extracting profits at warp speed. As the cycle of buying and selling companies has intensified, life in the trenches can be unstable and traumatic.

By the end of 2007, Travelport expects to slash costs by $150 million. Last week, it brought public its online reservations unit, Orbitz Worldwide Inc., using the proceeds to pay off debt. Its Galileo unit, which feeds airline information to travel agents, is the focus of much of the overhaul. Many of the job cuts have occurred at the company's data-operations center here outside Denver, where some jobs have been outmoded by shifts in technology and in the way people buy airline tickets and rent cars, executives say.

John Kliegel, 41 years old, a computer-systems analyst, and his twin, Russell, a technical writer, were both laid off. They're selling the house they share because they can no longer afford it. Don Kleppinger, a 46-year-old software engineer with five sons, lost his job, leaving him without health insurance for several months. Grace Covyeau, 63, who lost her job as a telecommunications engineer, took a part-time job last month making sandwiches and coffee at King Soopers grocery store.

"It came as a shock," says Michael Berson, 49, who lost his job as a data engineer in October, three years after receiving a "Super Star" award for saving the company $1.2 million on telecommunications costs. Mr. Berson has moved to Tulsa, where he is looking for a new job.

In addition to the 841 layoffs, 1,500 Travelport workers have left voluntarily since the buyout. The company says it has hired 1,582 new workers during that period, and has invested heavily in new technology.

Travelport Chief Executive Jeff Clarke describes the Centennial operation as the "factory" through which thousands of transactions pass every second. "We need to shift into new technologies," he says. "Some require productivity improvements and often will lead to layoffs."

To complete their $4.3 billion Travelport purchase, Blackstone and Technology Crossover Ventures, a Palo Alto, Calif., venture-capital firm that now owns 11%, invested $1 billion and borrowed the rest. That debt landed on Travelport's balance sheet. In March, Travelport borrowed an additional $1.1 billion and paid it out as a dividend to the two firms, returning all their money in just seven months.

"This is likely one of the quickest returns of invested capital for a private-equity deal of its size," Travelport's new chief financial officer, Michael Rescoe, said in a May conference call with analysts.

The buyout boom has been lucrative for Blackstone partners and investors, which include large institutions such as pension funds. Last year, Blackstone managed assets valued at about $88 billion and earned $2.27 billion, according to a prospectus for its own initial public offering in June. Its chief executive, Stephen Schwarzman, who resides in a 35-room Manhattan apartment, made more than $650 million on the offering and retained a 24% stake now worth more than $5 billion.
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