Ken Skarbeck

Investors can expect to see some large transactions involving big companies going private soon. While the $25 billion leveraged buyout of RJR Nabisco accomplished by Kohlberg Kravis Roberts & Co. in 1989 still ranks as the largest LBO in history, that could soon change. Today, several multibillion-dollar private equity funds are actively competing for deals. Groups such as Warburg Pincus, Carlyle Group, Blackstone Group and Apollo Management each have raised funds of $8 billion to $10 billion. In addition, several…

This month, the DePauw University Foundation revealed that, based on the advice of a high-paid consultant, it had invested $3.25 million in the Bayou Management hedge fund, which has collapsed amid allegations of fraud. As IBJ Daily reported Oct. 17, DePauw has filed a federal lawsuit against the consultant. Bayou, formed in 1996, had over time amassed more than $400 million from about 100 investors. The list of other investors caught in the debacle include the Massachusetts Bay Transit Authority…

A performance, or incentive, fee is an arrangement where the investment manager is compensated by collecting a percentage of the annual profit earned by an investment fund. Performance fees, when properly structured, can be a fair deal for both the investor and the investment manager. However, pay for performance is a bit of a misnomer when it comes to the fee structure of many hedge funds today. Often, hedge fund managers can receive substantial compensation even if their fund produces…

As the third quarter winds to a close, investors find the stock market behaving much as it did last year. At this point in both 2004 and 2005, the S&P 500 index (with dividends reinvested) had risen about 2 percent. Most Wall Street pundits are predicting the market will finish this year with a repeat of last year’s performance, when a post-election rally pushed the S&P 500 to a 10.9-percent return. One group of investors is praying they are right:…

We’ve recently explored some of the alternatives companies have to deploy “free cash flow” to enhance value for shareholders. We defined free cash flow as what a company has left after making the expenditures needed to maintain its standing in its industry. A company typically has multiple options, including making incremental investments in plant and equipment to spur internal growth, paying or increasing dividends, and repurchasing the company’s stock on the open market. Perhaps the most exhilarating use of excess…

Long-term investors benefit greatly when a company is able to reinvest its excess earnings into projects that, in turn, produce a high rate of growth in future earnings. When management can expect these investments will produce more than a dollar of value for each dollar spent, the internal compounding of reinvested earnings creates business value and will be reflected in the stock market by a rising stock price. In addition to reinvesting earnings, a company has other alternatives available in…

In a previous column, I described “free cash flow” as the earnings remaining after a company makes the necessary expenditures to keep the business viable in its industry. Executives at companies that generate unrestricted earnings, or free cash flow, have critical decisions to make on how to allocate those funds. One choice is to pay out dividends to shareholders. Decades ago, dividends composed a significant portion of the overall return achieved by investing in common stocks. Following the post-WWII economic…

Companies report their earnings as net income, a figure calculated according to generally accepted accounting principles, or GAAP. But that number often provides the investor with a distorted picture of what really took place. Net income often includes various non-cash items that obscure the actual cash flows within the company. Because of this problem with reported earnings, analysts often turn to a company’s “statement of cash flows” and retrieve a figure called “cash flow from operations” or “operating cash flow.”…

At Independence Day, it seems appropriate to examine quotes from the writings of the quintessential American capitalist, Warren Buffett. “Mentally, we are always buying businesses. It’s just that sometimes we can buy all of them and sometimes we can only buy little pieces of them.” “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.” “For the investor, a too-high purchase price for the stock of an excellent…

Conflicts of interest in the securities business have probably existed ever since the first stocks were traded in 1792 under the buttonwood tree at the tip of Manhattan. With the formation of the Securities and Exchange Commission in 1934, regulators attempted to mitigate conflicts via securities laws and full disclosure requirements. An issue that is receiving attention these days from the SEC, one investors are probably not aware of, are the “soft-dollar” arrangements prevalent in the industry. In May 1975,…