Monday, October 4, 2010

How does this acquisition create value?

TPG, a large private equity group has just purchased 35% of CAA, a talent agency that manages movie stars and athletes.  It is easy to see how the acquisition benefits CAA:

What the investment will do is provide a way for the partners to value and monetize their stake, provide CAA employees a bonus payment at every level and most importantly place the agency on a stronger financial footing at a time its clients' traditional businesses -- movie, TV and music production and distribution -- are under pressure and in some cases declining owing to factors including the global economic downturn, dilution of the marketplace with the growth of new media and falling DVD sales.

What is much harder to see is how the acquisition benefits TPG. If the agency is a collection of individual agents, then each agent has to be paid their marginal value, lest they walk out the door with their clients. So the brand "CAA" doesn't carry much economic value. Furthermore, if you weaken the incentive compensation that ownership stakes for the partners implies, then they may start shirking.

If anyone can "see" what I am missing (how does this merger create value), I would love to become enlightened.


  1. TPG is a private equity firm. It is providing the capital to CAA as a financial investment, not a strategic merger. Within 5 years (plus or minus) they will either sell their ownership interest to another party, sell it back to CAA, or lead CAA to go public, presumably for 2-3x what TPG is investing.

    This is the reason a lot of partnerships either sell or go public- the senior partners want full market value for their equity ownership rather than practically giving it away to the next generation of partners (or, in the case of family-owned businesses, the next generation has no interest/aptitude for the family business).

  2. AKA, the greater fool theory of investment.