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Washington lawmakers readily recognize the populist sentiments aroused by the spectacle. "What's going on is corporate cannibalism," says Congressman Edward Markey. "We have to ask whether it is in the national interest to allow companies to go so heavily into debt." As chairman of a House subcommittee that covers finance, the Massachusetts Democrat will play a key role in drafting any legislation to curb LBO excesses when Congress reconvenes next year. But lawmakers are uncertain how to limit buyouts, or even if they should.
Washington's reformers concede that the stock market is still edgy after its collapse. Wall Street showed just how nervous it was when stocks dropped nearly 79 points in the week that George Bush was elected President. "Nobody wants to be blamed for setting off another stock market crash," says a brokerage-house lobbyist. Legislators are still haunted by charges that proposals to restrain takeovers last year helped cause Black Monday. Many Wall Street insiders are now convinced that buyouts and mergers are among the market's few remaining props.
Yet Congress cannot ignore growing public fears that greed, debt and buyouts are all spiraling out of control. "The dealmakers have gone too far," says Samuel Hayes, professor of finance at Harvard Business School. "They have defied that tolerance that allowed them their freedom." Federal Reserve chairman Greenspan urged the Senate in October to consider tax-law changes to curb the debt buildup. Said he: "The laws still provide substantial incentives to borrow."
House Speaker Jim Wright last week urged steps to slow the pace of buyouts, which he said were having a damaging "psychological and economic impact." Meanwhile, members of the Senate Finance Committee have been quietly pondering measures that would reduce the tax loopholes for interest payments and give a break to dividends. To cushion the Wall Street impact of such provisions, they might be included as part of a general tax bill that would seek to narrow the budget deficit.
LBOs do have some strong defenders, and not just among the executives who grow rich from them. Some financiers and economists argue that increased leverage can be a benefit to companies, especially those in mature industries like tobacco. Reason: these businesses produce a lot of cash but call for relatively little research or development. For them, one efficient way to distribute profits to shareholders is simply by buying up stock.
Proponents say many companies have become stronger than ever after being taken over and reorganized. The point is driven home in a study by Abbie Smith, a University of Chicago economist who surveyed 58 acquired companies -- among them, R.H. Macy, Mary Kay Cosmetics and Uniroyal -- most of which had been bought out since 1984. The findings indicated that the firms were generally more profitable and productive after they were bought.
Even so, the results underscored a common criticism of the motives for buyouts. Richard Thevenet, vice president of Stern Stewart & Co., a Manhattan- based management efficiency consultant, put it bluntly: "Managers have an incentive to underperform before a buyout. Records of dramatic turnarounds after an LBO raise a troubling question. Why were these managers unable to accomplish these feats before the LBO? Shareholders bear all the costs, but not the rewards of the turnaround."