Posted on: Monday, October 11, 2004
COMMENTARY
PUC must understand Carlyle's true intent
By David Polhemus
The state Public Utilities Commission has the reputation in some quarters as more helpmate than taskmaster for the companies it regulates.
One indication may have been the PUC's original intention to decide on the Carlyle Group's proposal to acquire Hawai'i's largest telephone company, Verizon Hawaii, without the benefit of public hearings.
The PUC relented to expressions of protest and scheduled seven hearings. The first of them, the only one on O'ahu, witnessed a mixture of opposition to and support for the $1.65 billion Carlyle takeover.
What we've been hearing about Carlyle offers both promise and cause for concern.
Internet bloggers have had a field day with Carlyle's colorful past, such as a questionable luncheon shared by Defense Secretary Donald Rumsfeld and former Carlyle chairman (and former defense secretary) Frank Carlucci at a time when a Carlyle company was desperately trying to keep the Pentagon from pulling the plug on its $11 billion Crusader howitzer program.
Carlucci and Rumsfeld, former Princeton wrestling teammates, insist they didn't talk business.
Carlyle bought the company, United Defense, in 1997 for $180 million. Four years later — just before Rumsfeld canceled the Crusader program — Carlyle took United Defense public and sold about half the stock for $588 million.
The Crusader experience in many ways typifies Carlyle's pattern of buying often-troubled companies, followed in relatively short order — four years on average — by their highly profitable sale.
The connections have been enhanced by Carlyle's stable of former government luminaries: Carlucci, former president George H.W. Bush, former secretary of state James Baker, former Office of Management and Budget director Richard Darman, former SEC chairman Arthur Levitt, former Clinton chief of staff Thomas "Mac" McLarty, former Philippines president Fidel Ramos, former British prime minister John Major.
Perhaps to reposition the company in a post-9/11 environment, Carlyle cast loose Bush, Major and Ramos, along with some Saudi investors, including a brother of Osama bin Laden, while replacing Carlucci (now styled chairman emeritus) with Louis Gerstner, retired CEO and chairman of IBM.
In selling its Hawai'i company, Verizon is following an industry trend of unloading land lines and other aging infrastructure to fund investment in wireless and fiber (indeed, Verizon is hanging on to its wireless operations here).
What's not clear is why that seems a good opportunity to Carlyle.
Carlyle's announced plans for the phone company sound good but are couched in sometimes slippery terms. Its business plan, for instance, calls for no rate increases for a decade, but that's not a guarantee, it says. Employees will get benefits that are "comparable in the aggregate," whatever that means, to what they're now receiving.
And the company will be "a local company again" — Hawaiian Tel, no less — although "to me," Keali'i Collier observed at last Tuesday's hearing, "it's kind of an oxymoron because you're talking about a local company owned by a global equity firm."
Indeed, it's a Washington-based investing powerhouse, managing more than $18 billion in assets, 250-plus investments, in 14 countries. It says its primary business "is buying healthy private companies and making them better by combining our know-how with the insights of local management" — which in Hawai'i will include First Hawaiian Bank chairman Walter Dods as an investor and a board member.
Carlyle says its investors are mostly pension funds, including the California Public Employees Retirement System. Individuals must have at least $5 million in invested assets before they're invited to pony up.
To arguments that it lacks experience to run a phone company, Carlyle lists a couple of executives who formerly ran MCI, Nextel, General Instruments and XO Communications; one who was an executive vice president of Verizon and GTE; and one who served as chairman of the Federal Communications Commission under President Clinton.
What's not clear, however, is whether Carlyle's intention is to settle in for the long run in the Hawai'i telephone business, to dress the company up for a quick and profitable resale, or to pirate the company and sell off its parts.
What Carlyle is known for is rewarding its investors with a 36 percent average annual rate of return by doing deals such as its $165 million purchase of Magnavox Electronic Systems in 1993, which it sold two years later for $370 million.
Carlyle's business is investment, not long-term management of a public service corporation. Will the Hawai'i phone company be different? It's vital that the PUC understand Carlyle's true intent.
In advertisements run in The Advertiser and elsewhere, Pat Bustamante, president and CEO of Verizon's only competitor in Hawai'i, Pacific LightNet Communications, raises some cogent questions that the PUC also must answer:
• How can Carlyle move Verizon's back-office operations back to Hawai'i and upgrade its old technology without raising prices? • Why can California residents choose from over 200 companies when Hawai'i residents are limited to no more than two? • How does Carlyle project zero cash taxes in Hawai'i at the same time it projects net income of $20 million to $75 million a year? The daunting degree of technological and organizational complexity in today's telecommunications industry demands that most of us are highly dependent on the PUC to be our informed and concerned surrogate in determining what serves the public interest. It's time for the PUC to answer that challenge.
David Polhemus is an editorial writer for The Honolulu Advertiser.
