LBOs Didn't Make Formica Lose Its Gloss
"How Formica got burned out by buyouts" (Finance, Mar. 22) incorrectly characterizes sequential leveraged buyouts as damaging to Formica Corp. and, by implication, any other company subjected to the same process. The damage done to the Formica business was done during the two periods when the business was owned by conglomerates. The business improved during its two periods of LBO ownership.
The fundamentals of well-executed LBO management and ownership are:
-- The use of substantial debt in the capital structure because it is the least costly form of capital.
-- The discipline that debt obligations impose on management decisions.
-- The motivational impact of stock ownership on management.
-- A tax-efficient way of rewarding investors through sale of the business.
It is this last point that can lead to sequential LBOs. Every business needs to be revitalized periodically, and selling a company to another LBO organization can be a good way of doing this, while simultaneously rewarding investors.
The major caveat in LBOs is not to overdo the leverage. Some research that was done by Professor Michael Jensen of Harvard business school makes it pretty clear that the majority of LBOs have been well-executed. I was an investor in Formica's first LBO, and I am a modest investor in its third LBO experience. I am betting that the company will prosper under the leadership of Vince Langone.
T.J. Dermot Dunphy, CEO
Sealed Air Corp.
Saddle Brook, N.J.Return to top
Let's End the E-Commerce Tax Holiday
As exciting as commerce over the Internet may be, check out this scary scenario--and, if it comes to pass, the unwelcome burden it could place on the wrong citizens ("What every CEO should know about electronic business," Cover Story, Mar. 22). Merchandise ordered over the Net (and through mail order, too) does not pay its fair share of state taxes to the recipient's state.
Let's pretend that thousands of people in small towns and cities in Kansas order over the Internet. Those folks do not shop at local book stores, hardware stores, mass merchandisers, etc.--all of which pay taxes in Kansas. If those retailers go out of business when their sales drop, who will replace these funds in local government coffers? Who pays for schools, roads, jails, court systems? Surprise, the people who bought via the Internet--and those who didn't--would see their taxes increase.
There are no free lunches: Someone has to pay. Sooner or later--and it had best be sooner--Internet, mail order, and catalog firms must pay their share of taxes just like conventional retailers.
Glenview, Ill.Return to top
The Gears Are Still Grinding at DaimlerChrysler
I recently visited a friend at the expansive headquarters of DaimlerChrysler near Stuttgart. At lunchtime, however, it became obvious that some Americans, a contingent from Detroit, were confused as they attempted to pay at the cash register of Daimler's cashless cafeteria.
The scene presented another example of the many "transition troubles" pointed out in "DaimlerChrysler: The grace period is over" (European Business, Mar. 29). In a very American voice, one of the Chrysler men at the cash register shrugged and asked rhetorically: "Why are things so complicated?"
Integration is complicated and does seem to be going slowly. One grand reason is that Daimler thinks it bought Chrysler and Chrysler thinks it bought Daimler.
Investors are right to be worried, as so many in top management are absorbed by the complications of integration and the resulting confusion. I would not be at all surprised if those Americans are still in the cafeteria trying to figure out how to pay for lunch.
StuttgartReturn to top