Private Lies (The New Yorker)

This article provides some thought provoking points regarding conflict of interest created by MBOs. While I believe many of these points are valid, I would argue that the article overstates the ability of executive management to make drastic structural changes to their companies while public. One should also consider that MBOs are most attractive when it is believed the public market is undervaluing the company. (Dan Primack also offers an analysis of this article in the 8/23 PE Week Wire.)

"In a study of more than sixty companies that went private, Sharon Katz, of the Harvard Business School, found that, in the two years preceding a management buyout, companies recorded lower than expected accounts receivable, which drove profits down. Similarly, a study by two accounting professors found that executives pursuing M.B.O.s tended to accelerate the recognition of expenses and delay the recognition of revenue, making their companies look less profitable than they were. Management buyouts have a reputation for dramatically improving companies’ performance. But these studies suggest that part of the reason is that executives were making them look bad while they were public."