Locals always have trepidation when Hoosier companies are sold, especially when the buyers are private equity firms. PE firms are burdened with a reputation for making money in part through steep fees and financial gymnastics. And because they ratchet up debt to juice returns, the companies they buy sometimes careen into bankruptcy.
General Motors’ $5.6 billion sale of Indianapolis-based Allison Transmission to two private equity firms in August 2007 seemed at risk of an ugly ending, given that the onset of the financial crisis the next year kicked the legs out from one of Allison’s key markets: automatic transmissions for medium- and heavy-duty highway trucks. By 2009, credit analysts were fretting Allison might default on more than $4 billion in debt.
In fact, “we never had any financial issues at all,” said Greg Ledford, head of the industrial and transportation team at Carlyle Group, which teamed on the acquisition with Canada-based Onex Group. Ledford said the 2,700-employee firm didn’t have more debt than it could service. Plus, he said, strong sales during that span to military and energy customers helped pick up the slack.
The highway market has since rebounded, and today Carlyle and Onex are counting their winnings. They began to cash out through Allison’s March 2012 initial public offering, and completed their exit strategy by selling their last shares this month.
The final tally is impressive. Carlyle and Onex each invested $763 million. Onex says it received total proceeds of $2.4 billion—3.2 times what it put in. Carlyle says its take was in the same ballpark.
Such returns put Allison in the top quarter of private equity investments.
In fact, the private equity ownership ultimately served as a safe haven of sorts for Allison, whose former owner, GM, skidded into bankruptcy in 2009.
The returns are “very impressive if you look at how many large industrial companies either went bankrupt or did not recover to the degree Allison has,” said Jim Birge, a partner at the law firm Faegre Baker Daniels active in mergers and acquisitions.
In addition to reaping proceeds from share sales and from quarterly cash dividends, Carlyle and Onex together received more than $25 million in fees from Allison under a consulting and advising contract, regulatory filings show.
Filings show the two firms acquired Allison at $8.44 per share in 2007. Five years later, they took the company public at $23 a share. The stock has since climbed to around $29.50, and some analysts think it is poised to go much higher. Susquehanna Financial Group analyst Ted Grace initiated coverage on the company this month with a price target of $37.
Ledford said part of the reason for the success was strong management—especially CEO Lawrence Dewey, 57, a 25-year Allison employee who adeptly guided the company from a GM division to a stand-alone company and then to a public company. Ledford noted that nine of the 10 top Allison executives when Carlyle and Onex bought Allison remain in place today.
Dewey’s executive team helped reduce costs by opening lower-cost factories in Hungary and India, as well as by negotiating a 2008 agreement with the UAW that included a two-tier wage structure. That pact had the additional benefit of helping foster harmony with hourly workers by tying their annual profit-sharing payments to exactly the same metrics as those used for executives and other employees.
Ledford said Allison’s success also stemmed from stepped-up investments in R&D, which paid off with the launch of hybrid propulsion systems for buses and fuel-efficient automatic transmissions for city delivery vehicles. In addition, Allison improved existing transmission lines, boosting fuel efficiency while maintaining performance.
“We spent more on R&D during the seven years of ownership than GM had spent in the prior 40 years,” Ledford said.
Susquehanna’s Grace said in a report that the company has spent more than $750 million on R&D since 2006—huge outlays that help provide it “with a sustainable advantage in its key markets and limit the threat of new entrants.”
Carlyle’s partners believe Dewey and his management team have done such a yeoman’s job that this month they named him winner of their Louis V. Gerstner Jr. Excellence Award.
The firm gives the prize—named for the former IBM CEO, who is now an operating executive with Carlyle—to the CEO of one of its more than 200 portfolio companies exhibiting the most effective leadership.
“This was the best CEO leadership performance I’ve witnessed in my 26-year career at Carlyle,” said Ledford, an Allison board member.•