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The Blackstone Group IPO Case Solution

Solution Id Length Case Author Case Publisher
961 2015 Words (6 Pages) G. Felda Hardymon, Josh Lerner, Ann Leamon Harvard Business School : 808100
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The Blackstone Group was established in 1985 with four major business lines. It gradually developed into one of the most respectable asset management companies in the world. Over the years, it has expanded to almost all the important economic hubs of the world.

Blackstone has declared itself an investment company. Currently it operates as a partnership, but in order to expand, it is considering a change in capital structure. The Blackstone Group is evaluating the benefits and costs of transforming into a Master Liability Partnership with CIC. This will form a business structure where the current partners will continue running the operations, and the limited partner will only contribute capital to finance the expansion. In return the limited partner, in this case CIC, will end up earning a share from the total profit of the company, as well as, the fixed dividend promised to them.

Following questions are answered in this case study solution

  1. What would be the worst thing if he increased the size of public offering to, say, and 20% of the firm?

  2. How might that affect the entire delicate structure that had been created? 

Case Analysis for The Blackstone Group IPO

This transformation will help Blackstone’s notion of global presence and enhance the revenues and profits for the company. There are some disadvantages or risks involved with this transformation that the partners need to consider before making this change. Before the risks are discussed in detail, it is important to review the exact business structure of MLPs.

MLPs contrast from normal enterprises in that they have two classes of partners: Limited and General. When you buy freely exchanged offers, you are a Limited partner. In spite of the fact that general Partners claim just a modest rate of the exceptional offers, they have very nearly finish control of the business. Then again, their recompense is impressively dependent upon how well the confined associates do. So, it’s in the best interest of the General partner to compensate the limited partner.

MLPs join the assessment points of interest of a restricted partnership with the liquidity of openly bartered securities. MLPs ordinarily pay yields quarterly. To meet all requirements for MLP status, no less than 90 percent of the salary should be circulated to constrained mates.

1. What would be the worst thing if he increased the size of public offering to, say, and 20% of the firm?

The business structure of MLP consists of a general partner and a limited partner. The general partner normally holds only 2% of the company’s shares in the beginning while it is entitled to make all the decisions. The limited partner contributes capital for expansion and is more of a silent manager. The only responsibility it has is to oversee the operations of the company and ensure that the business is moving in the right direction. Over time, the business structure changes as the increase in profits enable the general partners to increase their holding in the company.

In this case, it can be seen that Blackstone is allowing CIC to hold only 10% of the total value of the company which has been estimated at 4 billion dollars. However, the Chinese company is only interested in investing 3 billion dollars in Blackstone.

Also, if the company decides to sell 20% of the company than this will mean that the limited partner will hold a greater portion of the firm’s holdings. This will also increase operations in the direction of those preferred by the limited partner. The Chinese companies are more interested in multiplying their foreign exchange holding. Although it will not be entitled to any voting right or participation in the decision making. It will nonetheless dilute the shareholding of the existing partners.

This will result in an increase transparency requirement and a complex tax calculation procedure. Although, the Blackstone group will not be taxed as a corporation, but it will be required to submit tax complex tax returns statements. This will increase cost for the company as a whole.

Also, the returns (profits) will be shared in a way that CIC will end up getting a higher share as compared to a 10% holding. The profitability of the company after this transformation will be the key to success of this venture. If the company fails to increase its profit margins and expand successfully into other markets it might result in the fall in stock price of the company. This will lead to decrease in value.

The fact that China is involved in this venture will create an influence in the market. It might positively boost the revenues as the investors will be satisfied with the presence of a stable economy’s holding in the company or in the worst case, they might be put off with foreign involvement and profit sharing in this reputed firm. The worst case might lead to an increase in revenues at a decreasing rate while the costs continue tor is at an increasing rate. The company has to pay a fixed dividend as per its promise. A 20% share for the CIC will result in a higher amount of a dividend being paid to it. This will leave fewer profits for the general partners in the firm. As a result, the company might not be able to provide the right compensation to its employees. This will in the worst case lead to a decrease in employee motivation and satisfaction that will cause a big problem for the operations of the company.

Thus, if the partners decide to increase from 10% of the company to 20%, then there are possible disadvantages to the compensation, governance and the partners themselves. Not only will this move put the performance of the company at risk, but it might also lead to incidents of investors losing confidence in the company. Blackstone is an ideal company to invest in; it has guaranteed huge returns to investors over time. It has maintained a healthy rate of return for its investors. However, with this move, it will be required to increase transparency in its operations, fulfill the tax obligations, cater to the rights of the limited partners and ensure that the company maintains a healthy growth rate on the return on investments to the investors. It is highly probable that the company might not be able to withstand the change in transparency requirements and might not be able to maintain its good streak. This challenging task will require a lot of management skills and effective communication within the organization to ensure that the revenues are achieved in the most cost effective manner without increasing burden on the organization.

2. How might that affect the entire delicate structure that had been created?

The Blackstone group takes a lot of pride in its employees and the culture that has been created by the management within the organization. The company has operated as a partnership and enjoyed all the benefits available to a partnership. However, at this point, it is considering an expansion globally through change in business structure. When the company shifts from a partnership to a Masters Liability partnership, it will not only have access to increased capital but will also enjoy certain tax benefits. Raising capital through IPO is the cheapest and most effective way of financing expansion. However, the company is exposed to a lot of risks. If the management decides to accept the offer from CIC, it will have to change the entire structure of the company. The negative effects have been mentioned previously in this document. The effects of this transformation will leave a mark on the performance of the company if the worst case comes true.

First and foremost, it is to be realized that the organizational structure and compensation is of key value at the Blackstone group. The company does not favour a breach in its privacy. An increase in a public offering to 20% will not only increase the involvement of a third party in the company, but it will also make the company subject to additional disclosure requirements and transparency in its operations. Thus, the company will have to be regulated. The limited partner in this case will manage the operations of the company. This will certainly affect the atmosphere at work for most of the employees and the general partners. The company has strived on its ability to generate profits for its partners. With this change in structure, it is exposed to risk of decrease in performance or the fact that it might have to adhere to investor’s expectations in addition to its own calculations, and targets.

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