Backlash prompts careful steps at TXU : US Business

By Jessica Hall

PHILADELPHIA (Reuters) - Shareholder criticism over some recent management-led buyouts prompted TXU Corp. to step carefully in forging its record-breaking $32 billion takeover pact.

The Texas power company wanted to avoid any appearance of a sweetheart deal between its executives and the potential buyers. It also wanted to make sure its managers wouldn't have some personal stake in any deal at the expense of shareholder value.

TXU said on Monday that it had accepted a bid from a group led by private equity firms Kohlberg Kravis Roberts & Co. and Texas Pacific Group . The company can solicit other offers through April 16.

Members of TXU's management, including Chairman and Chief Executive John Wilder, did not invest with the buyout firms and have made no commitments to stay if the deal goes through.

Wilder said that would allow management to remain neutral if any superior offer emerged since they would not be wedded to the current deal.

Wilder and the management team were excluded from talks with the buyout firms until the terms were already set, said a source familiar with the TXU discussions. That was done specifically to protect the company from any criticism that management and the board favored a specific buyer.

"Let's make it as independent as possible so that, when tested in retrospect, we look as objective as possible," the source said.

TXU was not immediately available for comment.

MBO BOOM

The number of management buyouts has surged in the past year, fueled in part by a cash-rich private equity firms that want partners to ensure a smooth path for their multibillion-dollar takeovers. The increased popularity of such buyouts has even brought them their own acronym -- MBO.

In 2006, 29 management buyouts were launched, up from seven the previous year, according to research firm MergerMetrics.com. Meanwhile, the number of those deals that went to the definitive merger agreement stage rose to 14 from three.

MergerMetrics.com said the biggest MBOs last year included the $21 billion purchase of hospital operator HCA Inc. by its founders and private equity firms, and $18.6 billion takeover of Clear Channel Communications Inc., the largest U.S. radio-station operator. Directly behind them were the $14.4 billion buyout of Kinder Morgan Inc. and $6.1 billion takeover of Aramark Corp.

Some recent MBOs faced shareholder criticism that management participation in the deals discouraged the boards from considering other offers or dissuaded rival suitors from emerging with more lucrative bids.

"The process of financial alignment (of the management team) often makes it difficult for competing bidders to emerge," said Allen Michel, professor of finance and economics at Boston University's School of Management.

In the cases of Kinder Morgan and HCA, members of the companies' management teams were holding discussions with the buyers well before the boards of directors were informed.

Executives at Kinder Morgan took more than two months to tell the company's board about the potential buyout, while HCA management took about a month, according to filings with the U.S. Securities and Exchange Commission.

Kinder Morgan and HCA were not immediately available for comment.

MANAGEMENT'S STAKE

Even some deals where management doesn't invest with the buyout firms have come under fire because they guarantee employment contracts and stakes in the company to some executives.

In the pending $17 billion takeover of casino operator Harrah's Entertainment Inc. , Vice Chairman Charles Atwood and Chairman Gary Loveman talked to the buyout firms in August, according to filings with the U.S. Securities and Exchange Commission.

It took another month before Loveman -- who is expected to become CEO following the buyout -- told certain other board members about the private equity firms' interest in the company, according to filings with the U.S. Securities and Exchange Commission.

"The role of co-investors raises red flags obviously, but the tie-in (by management) can be implied through employment agreements," said Charles Elson, chairman of the Center for Corporate Governance at the University of Delaware.

"Many of these employment agreements are so lucrative and have long-term commitments," he said, "so what is being called a job contract is essentially a co-investment."

Harrah's had no immediate comment.

(Additional reporting by Caroline Humer in New York)

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