While Mr. Gladwell may be revising history to be provocative, his observations say a lot about the way much of the public still views the buyout world. Indeed, the private equity industry and its many lobbyists have been fighting for years to prove their value to the public, producing all sorts of studies and white papers to back up their claims.
And yet, Mr. Gladwell gets to the nub of the image problem confronting the industry in the blink of a sentence (pun intended): “The mythology of the business is that the specialists who swoop in from Wall Street are not economic opportunists, buying, stripping and selling companies in order to extract millions in fees, but architects of rebirth.”
In truth, G.M. would be worth a lot less, even after the restructuring, if its cars were all lemons. Mr. Gladwell is right about that. And Mr. Wagoner and his team should be given credit for the vehicles that G.M. has on the road today.
Mr. Gladwell, however, then goes further, suggesting that the turnaround was “an act of financial engineering.” He said Team Auto “used the power of the bankruptcy process to rid G.M. of some of the liabilities that had been holding it back.”
He’s right: the GM turnaround is ultimately an act of financial engineering. While “financial engineering” has become an expletive of sorts, in this case it is actually a good thing. Indeed, G.M.’s turnaround should become a case study for when and why the private equity and restructuring business can work.
That’s not to say that private equity is perfect. It often falls short. Of course, it’s rare that the private equity industry develops new technologies or industry-redefining products. But that’s not its mandate. And all too often private equity firms leverage up companies with too much debt, making it difficult for them to meet their obligations.
But just as often, private equity firms make the hard decisions that current management can’t — or won’t — make. For all the credit that Mr. Wagoner may deserve for G.M.’s auto lineup, he wasn’t able or willing to cull failing brands like Pontiac, for example, or get his arms around out-of-control legacy costs.
That’s when private equity makes sense. Mr. Gladwell makes a lot of the fact that neither Mr. Rattner nor Mr. Wagoner’s chosen successor, Edward E. Whitacre, came from Detroit or knew a thing about the automobile industry. (He could say the same thing of G.M.’s new chief executive, Daniel F. Akerson, another private equity man, from the Carlyle Group and a former telecommunications executive, or some of G.M.’s directors, including David Bonderman, the turnaround specialist who co-founded the Texas Pacific Group.)
But for certain companies — and only in certain circumstances — there is something to be said about bringing in an outsider with this credential on the résumé: financial engineering experience.