Utterances.net edited by Jalel Harchaoui.

18 December 2012

Private-equity firm now seeking to sell maker of massacre guns
Impact of Sandy Hook on New York fund Cerberus
by Jalel Harchaoui.
The maker of the semi-automatic rifle used to slaughter 20 children is owned by New York private-equity firm Cerberus.
Impact of Sandy Hook on New York fund Cerberus

Bushmaster long-guns were used by the Wash., D.C., sniper in 2002.

Splashed all over the media today: “Cerberus is now seeking to sell the company which manufactures” the heavy-duty firearms utilized Friday at Sandy Hook. Major private-equity fund Cerberus Capital Management owns Bushmaster, the maker of the semi-automatic rifle used to slaughter 20 children. The latter said that it now “will immediately engage the selling process”. The California State Teachers’ Retirement System announces it would ‘review’ its $500 million investment commitment to the New York-based private-equity firm. The California Teachers pension fund is filled with outrage and surprise. The private-equity giant is shivering with remorse.

Major event, judging by the headlines. The only problem is that no event occurred. All those announcements convey nothing deserving of such sensational articles and news releases.

Cerberus founder Stephen A. Feinberg has been, since late 2005, buying up gunmakers and merging them under one entity name, the Freedom Group[1]. The information has been available publicly in the mainstream media for over a year. “Available publicly” means “available to the California Teachers’ pension fund”. There is no justification for the Sacramento-based teachers’ retirement giant expressing such vivid surprise over the last several hours.

Much self-righteous shock was also manifested when it was discovered that a firm as impeccable as Park Avenue’s Cerberus was behind the powerful long-gun used in Newtown, Conn.

If an incident involves a cell phone, can anybody genuinely deem themselves shocked that the device turns out to be an Apple iPhone? Of course not.

The Apple iPhone has a 17% share of America’s cell-phone market. In America, 21.5% of long-gun sales are made by Freedom Group companies. So again, nothing to write home about. Those details are hardly newsworthy. Totally predictable. If you manufacture and commercialize over 20%; of the long-guns sold in the States, you cannot show up out-of-breath at the crime scene pretending to be taken aback: “What just happened? We’re just a private-equity firm from Manhattan; we’re not really in this whole ‘gun’ business, you know.” Bushmaster long-guns were used by the sniper that terrorized the Washington, D.C., area in 2002.

The various declarations today cannot sustain a minute’s examination. A mendacious dynamic is at play.

(The overall gun market in America amounts to $4bn annually: 4 out of 10 adults in the U.S. owns firearms. Cerberus sells 1.3 million long-guns per year approximately.)

Now, the crux of the sensational news—what about the “Cerberus is now seeking to sell the company” part of the announcement today?

A private-equity firm, by definition, acquires undervalued, often poorly-run, companies, using borrowed capital and outside-investor money, and restructures them to make them more efficient. Once that is done, the private-equity firm turns around and attempts to sell the business, preferably at a profit, to some other entity. (Either by taking the ~$1.2bn portfolio via an I.P.O., or by conducting an over-the-counter deal.)

That is what private-equity firms do. In all instances, all the time.

Cerberus filed for an I.P.O. of the Freedom Group public in October 2009, but cancelled it. It prepared for an I.P.O. again in April 2012, and backed out again. Cerberus, known for its quiet ways, hasn’t disclosed the reasons for the eleventh-hour cancellations, but all of those moves were public. Therefore anybody with half a brain-cell functioning can deduce that Cerberus has been happy with its wide-ranging operation initiated in late 2005, and has actively been trying to sell the Freedom Group portfolio over the last couple years.

The I.P.O. market in general has been tepid in recent years. A prestigious, $20bn fund such as Cerberus can afford to try and “time” the market. I.e., prepare for the I.P.O. and pull out of it if the “feel” isn’t propitious on the Street. In the mean time, it always searches for over-the-counter sale opportunities. That’s “business as usual”. In the case of Cerberus / Freedom Group, everything has been going as normally as any private-equity operation of this size can go (given the economic environment, that is).

In other words, it has been an established fact, in the mainstream media, that Cerberus has been actively attempting to get rid of its Freedom Group portfolio.

So why make a big announcement today out of the fact that “Cerberus now seeks to sell Freedom Group”? Other than feel-good propaganda: no reason whatever, none.

(The word “seek” is interesting in this context. “To seek” does not constitute an event. When the Internal Revenue Service contacts you because you haven’t paid your taxes yet, try telling them that you’re “seeking” to mail the check out to them.)

Earlier today Cerberus declared—in a very solemn fashion—that “It is not our role to attempt to influence the gun-control policy”. I am not sure that that is accurate: again, by definition, anti-"gun regulation” lobbies do attempt to influence public policy. Cerberus executive George Kollitides is a trustee of the N.R.A. Foundation and a director of the New York State Rifle and Pistol Association. In addition, George H. W. Bush’s vice-president Dan Quayle is chairman of its global-investments division. Additionally, Cerberus added two retired generals to the Freedom Group’s board: George A. Joulwan (Supreme Allied Commander of Europe); and Michael W. Hagee (commandant of the Marine Corps).

So it seems that Cerberus does consider that it is “its role to attempt to influence the country’s gun-control policy”. That part of the news release is mendacious, as well. Why publish it at all?

Another part however is accurate. “To shape gun-control policy is the job of our federal and state legislators.” True. At least one particle amid today’s extravaganza corresponds to factual reality.

Does that amount to suggesting that Cerberus has done anything illegal? No condemnation would make cogent sense here.

It is simply that the headlines today are misleading. They give the general population the illusion that there is “a debate” within the Corporate Sector; there is none. They give the illusion that the California State Teachers’ Retirement System is behaving as an activist entity or a moral agent. It is not. It has been willfully cooperative, and still is; there is no activism (again, the pension fund certainly has not done anything illegal). The media circus also creates the impression in the Average Joe’s mind, at this moment of national tragedy, that Cerberus “has decided to take action” and, to that end, is ready to record a loss. There is no reason on earth to think that Cerberus lost money on its ambitious 7-year-long operation. You don’t file for an I.P.O. when you have lost money.

Cerberus’ strategy has been meticulous and methodical: slash costs by eliminating extra manufacturing capacity associated with the rifles’ production. Cerberus has been cultivating military-looking designs (as opposed to hunting-oriented weapons) so as to take advantage of the buzz generated among “avid firearm enthusiasts” by Washington’s wars of aggression in the Middle East. It even bought SandK, a maker of wood and laminate for gun stocks, as well as the Advanced Armament, which makes silencers. Again, nothing illicit prima facie. It is just that, today, the private-equity giant by issuing a sanctimonious news release and suddenly announcing ‘the planned sale’ should have, out of decency for the general population, specified that the ‘planned sale’ has been in the works for three years already. The 20 kids slain Friday aren’t having any impact on Cerberus’ actual demeanor.

The reason usually-silent Cerberus has taken a bit of poetic license with its announcement today is in great part because, in 2009, it was bound to lose 100% of the “high risk” capital ($7.4bn) it had poured into General Motor’s financing arm three years prior. Thanks to a bailout from the American taxpayer, Cerberus happily recouped 90% of its bet. Big Government sometimes is appreciated even by Republicans, not just the 47%.

Note: In all the flurry of scrutiny today by the corporate media into gun-industry economics, there has not been one mention of the fact that gunmakers such as Cerberus, Smith and Wesson and Sturm-Ruger make substantial profits selling their products in Arizona, New Mexico and Texas to drug cartels operating in Latin America and selling narcotics back into the U.S. It is a bit like talking about Dow Chemical without mentioning the money made off of chemical components and clandestine laboratories sold into Latin America. Same level of absurdity.

~ Jalel Harchaoui.

[1] No figure has been disclosed by Cerberus but, in all likelihood, Freedom Group’s equity value amounts to ~$1.4bn as of today, approximately.