Ever wondered how those private equity companies we’re hearing so much about make their money? Here’s a great story by Ianthe Jeanne Dugan on the repercussions of the Travelport/Blackstone acquisition and breakup which recently appeared in the Wall St Journal Online:
Not long after the Blackstone Group bought Travelport Ltd. last August, workers at the company’s office campus began feeling the squeeze.
Two months after the deal closed, scores of employees were lugging boxes of personal belongings to their cars, having lost their jobs. Under Blackstone’s ownership, the travel-reservations conglomerate has laid off 841 people, about 10% of its work force. Blackstone, a private-equity firm, has already recouped all of the money it invested in Travelport.
Similar scenes have been unfolding at companies around the nation, a human toll of the corporate-buyout boom. Private-equity firms, which say they bring sorely needed financial discipline to poorly run companies, have been slashing costs and extracting profits at warp speed. As the cycle of buying and selling companies has intensified, life in the trenches can be unstable and traumatic.
By the end of 2007, Travelport expects to slash costs by $150 million. Last week, it brought public its online reservations unit, Orbitz Worldwide Inc., using the proceeds to pay off debt. Its Galileo unit, which feeds airline information to travel agents, is the focus of much of the overhaul. Many of the job cuts have occurred at the company’s data-operations center outside Denver, where some jobs have been outmoded by shifts in technology and in the way people buy airline tickets and rent cars, executives say.
John Kliegel, 41 years old, a computer-systems analyst, and his twin, Russell, a technical writer, were both laid off. They’re selling the house they share because they can no longer afford it. Don Kleppinger, a 46-year-old software engineer with five sons, lost his job, leaving him without health insurance for several months. Grace Covyeau, 63, who lost her job as a teleco engineer, took a part-time job last month making sandwiches and coffee at King Soopers grocery store.
"It came as a shock," says Michael Berson, 49, who lost his job as a data engineer in October, three years after receiving a "Super Star" award for saving the company $1.2 million on telecommunications costs. Mr. Berson has moved to Tulsa, where he is looking for a new job.
In addition to the 841 layoffs, 1,500 Travelport workers have left voluntarily since the buyout. The company says it has hired 1,582 new workers during that period, and has invested heavily in new technology.
Travelport Chief Executive Jeff Clarke describes the Centennial operation as the "factory" through which thousands of transactions pass every second. "We need to shift into new technologies," he says. "Some require productivity improvements and often will lead to layoffs."
To complete their $4.3 billion Travelport purchase, Blackstone and Technology Crossover Ventures, a Palo Alto, Calif., venture-capital firm that now owns 11%, invested $1 billion and borrowed the rest. That debt landed on Travelport’s balance sheet. In March, Travelport borrowed an additional $1.1 billion and paid it out as a dividend to the two firms, returning all their money in just seven months.
"This is likely one of the quickest returns of invested capital for a private-equity deal of its size," Travelport’s new chief financial officer, Michael Rescoe, said in a May conference call with analysts.
The buyout boom has been lucrative for Blackstone partners and investors, which include large institutions such as pension funds. Last year, Blackstone managed assets valued at about $88 billion and earned $2.27 billion, according to a prospectus for its own initial public offering in June. Its chief executive, Stephen Schwarzman, who resides in a 35-room Manhattan apartment, made more than $650 million on the offering and retained a 24% stake now worth more than $5 billion.
Such riches raise hackles among laid-off workers. "These investments are helping the fat cats by hurting the little guys," says Ms. Covyeau. "It’ll make you sick."
Over the past five years, private-equity firms have bought more than 10,000 companies. This year, through June, 1,399 deals worth $582 billion have been announced, according to data provider Dealogic.
In order to recoup their investments quickly, buyout firms are speeding up everything — closing deals more swiftly, cutting jobs and restructuring companies faster, and taking them public sooner. They’ve also been taking big cash payments out of the companies they buy, as Blackstone did with Travelport. These payments, known as "dividend recapitalizations," reached a record $25 billion in 2006, and are on pace to exceed that amount this year, according to Standard & Poor’s Corp. In 2001, they amounted to just $1 billion. The payments increase pressure to cut costs.
"None of us wants a single job to be cut," says Paul "Chip" Schorr IV, the Blackstone senior managing director who orchestrated the purchase of Travelport and now serves as its chairman. Mr. Schorr, 40, joined Blackstone in 2005 from the venture-capital arm of Citigroup Inc.
The layoffs at Travelport were one of many steps taken to revamp the company. All told, Travelport has reduced operating costs by 6%, the company says.
Before Blackstone bought it, Travelport was operating as the Travel Distribution Systems unit of Cendant Corp., a travel and real-estate conglomerate based in Parsippany, N.J. Cendant’s founder and chief executive, Henry Silverman, a former Blackstone partner, had cobbled together Cendant’s travel unit through a series of acquisitions.
Galileo, which Cendant bought in 2001, gets paid by airlines to feed information about airline schedules, pricing and inventory to travel agents. In addition, it runs the reservations system for United Airlines. Galileo is the largest contributor of Travelport revenue, which totaled $2.6 billion last year.
That business has been suffering. The Sept. 11 attacks curtailed airline travel, as did the outbreak of severe acute respiratory syndrome, or SARS. In 2003, struggling airlines reduced the fees they paid to middlemen such as Galileo.
Cendant also had gotten into the online travel-agency business by buying Orbitz, which competes with Travelocity, Expedia and others. Each time consumers use the site to book reservations for flights, rental cars and hotels, Orbitz collects a fee. As more consumers turned to the Internet for travel planning, the business grew.
But as airlines and hotels began handling reservations through their own Web sites, the middlemen lost business. In 2001, systems such as Galileo had handled 70% of airline reservations, according to Forrester Research, a market-research firm. These days, such systems handle just 50%. Cendant began laying off employees, and in 2005, it decided to split itself into four parts.
Mr. Schorr believed that Cendant hadn’t fully integrated the systems behind the travel businesses it had acquired. "It was like having a house with eight kitchens," he says. If it eliminated overlapping systems, he believed, the business could become more efficient. He also saw growing opportunities in foreign markets such as the Middle East and Asia.
On Aug. 23, the day Blackstone took over, Mr. Clarke wrote to employees on an internal blog: "For most of us, our jobs won’t change." Mr. Clarke, who had become chief executive a few months earlier, previously held senior positions at Computer Associates and at Compaq Computer Corp.
Some employees believed Blackstone’s arrival would ease the belt-tightening and stress that had begun under Cendant. "A lot of us thought these layoffs would stop," says Gina Fugazzi, 51, who oversaw the company’s voice systems in the U.S. "There was no more to cut."
Others had heard enough about how private-equity firms operate to be concerned about their jobs. Ms. Covyeau, the telecommunications manager, says many employees were "aware that the pattern at private-equity firms was streamlining work forces." Anxiety, she says, began rising.
In the blog, Mr. Clarke noted to employees that Travelport intended to re-engineer operations to reduce overlap and to eliminate "activities that are not contributing to our success."
The company decided to overhaul the telecommunications center housed in Centennial. "We are automating work that was done manually," explains Mr. Clarke.
Within weeks of the buyout, at a meeting with employees in Centennial, some managers warned that more cuts were coming. Ms. Covyeau says she began packing her boxes and told a manager: "Please, just give me a severance package and let me out of here."
One morning in October, managers in Centennial sent emails instructing employees to report to various conference rooms and cafeterias. Ms. Fugazzi says her heart sank when she walked into her designated room and found only about 20 people. "I suddenly realized I was in a group getting laid off," she says. A colleague, she recalls, spotted a tray of bagels and coffee and chortled: "Looks like this is our last supper."
A manager told them their jobs were being cut for economic reasons, according to several people who were there. Some employees burst into tears; others stared stoically. "I was devastated," recalls Ms. Fugazzi, who says she had planned to retire in four years. "I had the mentality that if you worked hard, you could keep your job forever."
When they got back to their desks, their email had been disabled. Guards lingered while employees filled boxes with belongings. The company declined to provide written references. In the confusion, some employees say, they were inadvertently given a wrong number to call about benefits — it was a sex line. A company spokesman says only eight employees received the incorrect number, and the company corrected the mistake right away.
All told, Travelport laid off about 500 people that month, including veterans in their 50s and 60s who say they had good performance reviews and relatively high salaries of about $100,000.
Most of the layoffs occurred at Galileo. Gordon Wilson, Galileo’s London-based chief executive, said in a written statement that many of the jobs had been outmoded by technology. For example, travel agents used to connect to Galileo’s system by phone. Now, many of them access it via the Internet.
The company offered laid-off employees two weeks severance for every year they worked, according to several employees. Mr. Wilson declined to provide details about the severance packages, which he called "generous."
In December, Travelport announced the acquisition of Worldspan, one of Galileo’s chief competitors, for $1.4 billion. At a Christmas party at the Denver Museum of Nature and Science, a Travelport executive assured remaining employees that 2007 would be more stable, according to people who were there.
In January, Mr. Clarke, the chief executive, reorganized Travelport into three brands — Orbitz, Galileo and Gullivers Travel Associates, a wholesaler of hotel rooms and group tours. The company continued to cut jobs.
Galileo’s Mr. Wilson says he has warned employees of "further changes" as the company completes the Worldspan acquisition. The deal could produce about $100 million in cost savings through the consolidation of sales staffs, data centers, and other operations, Mr. Clarke says.
In this year’s first quarter, Travelport’s profits were up 36% over the year-earlier period, to $157 million. Half of the profit improvement was because of revenue growth, the company says, 25% was because of vendor-related cost reductions and 25% was from productivity improvements, including reductions in the work force.
Mr. Wilson says Travelport’s debt load has made it more urgent to generate cash. "If we can accelerate the reduction of our debt and therefore lessen our interest payments," he says, "no one would expect management to do otherwise."
With the Worldspan merger looming, employees at both companies say they are worried about their jobs. "We are all on pins and needles," says one employee. "Everybody here feels it’s only a matter of time." Travel Trends: August 2007