Stephen Schwarzman’s Foolish Antics

Slate’s Daniel Gross looks at the recent behavior of Blackstone’s Stephen Schwarzman:

First, he threw himself a (much-covered) 60th-birthday party at the Park Avenue Armory in February. It featured, among others, Martin Short, Rod Stewart, Marvin Hamlisch, and Patti LaBelle leading the Abyssinian Baptist Church choir singing, according to a great article in the Wall Street Journal, “a tune about Mr. Schwarzman.” (“He’s Got the Whole World in His Hands”?) The best bit: “A huge portrait of Mr. Schwarzman, which usually hangs in his living room, was shipped in for the occasion.” (I wasn’t invited, but my gift would have been a first edition of Christopher Lasch’s Culture of Narcissism.)
Next came a cover story in the March 5 Fortune declaring Schwarzman, who had just completed the gigantic acquisition of Equity Office Properties, “The New King of Wall Street.” Then, only a few months after saying that Sarbanes-Oxley was deterring companies from going public, he filed a huge IPO for the Blackstone Group. If it goes through as planned, according to the Wall Street Journal, Schwarzman’s sale will be worth $7.5 billion. This offering included several wrinkles that solidified Schwarzman’s smartest-guy-in-the-room reputation but also seemed designed to elicit scrutiny. As the Financial Times reported ($ required), the preliminary prospectus said the firm planned to “book profits from private equity at the time an asset is bought”—not when the assets are sold, as most businesses do. More significantly, the offering was structured as a “publicly traded partnership” to take advantage of an absurd wrinkle in the tax code. Under current rules, the asset-management fees that private-equity partnerships like Blackstone reap are taxed not at the 35 percent corporate income-tax rate, but at the 15 percent long-term capital-gains rate, allowing Blackstone to save tens of millions of dollars annually on its tax bill. Finally, in May, at a time when concerns about China’s role in the global economy and its influence on the United States were at a fever pitch, Schwarzman agreed to sell a 10 percent stake in Blackstone to an entity controlled by China’s government.

The stock is expected to hit the world tomorrow. But now some people are wondering if the share price is too high.

If Blackstone goes public at $30, its price-earnings ratio (share price divided by earnings per share) would be about 14, based on the company’s 2006 results. By comparison, premier investment bank Goldman Sachs Group Inc., which has a large private equity operation, trades at about 11 times profit.
Shares of Fortress Investment Group had a price-earnings ratio of about 15 when the company went public in February at $18.50 a share. With the shares now at $26.52, the ratio has risen to about 22.

Bloomberg reports that the Blackstone underwriting group is being forced to accept a lower in return for more business in the future:

Morgan Stanley, Citigroup Inc. and the 15 other investment banks that Blackstone hired to distribute shares in today’s IPO will get a 3.6 percent commission, or as much as $170 million, according to regulatory filings. That’s slightly more than half the 6.2 percent average rate banks charged U.S. companies to go public this year.
The securities firms are accepting the lower fee because they expect to make a lot more arranging and financing takeovers when New York-based Blackstone invests its $19.6 billion buyout fund, the second-biggest ever raised. Schwarzman’s firm paid $571.4 million for those services last year and $248.1 million in the first quarter of 2007 alone, according to estimates by industry consultants at New York-based Freeman & Co.

Posted by on June 21st, 2007 at 9:12 am


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