Blackstone Delivers at Its Stock Market Debut

In a bit of Wall Street irony, an investment giant that has made billions by taking companies private has gone public. Blackstone Group's initial public offering of stock raised more than $4 billion —- along with some concerns among lawmakers. Linda Wertheimer talks with Joe Nocera of the New York Times.

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LINDA WERTHEIMER, host:

Blackstone Group is an investment giant that has made billions by taking companies private. Now in a bit of Wall Street irony, Blackstone has gone public. Its initial public offering of stock raised more than $4 billion along with some concerns among lawmakers here in Washington.

Joining us from our New York bureau to unravel the intricacies of the Blackstone IPO is our friend from the business world, Joe Nocera.

Welcome, Joe.

Mr. JOE NOCERA (Columnist, New York Times): Thanks for having me, Linda.

WERTHEIMER: So why is the Blackstone IPO such a big deal on Wall Street?

Mr. NOCERA: Well, there's two reasons really. The first is that every once in a while, a company comes down the pike that really exemplifies its moment. Google is a great example of that, you know, that stock just exploded when it went public.

And Blackstone is like that. We live in an age when private equity is buying up everything. These firms, not just Blackstone, but KKR and the Carlisle Group and Texas Pacific - there 's nothing they don't seem to be able to buy. And company after company is going private with these buyouts.

And so Blackstone itself has become a curiosity. People wonder about how much money it's making. And when Anatsu(ph) was going public, there was an enormous public interest, which has unleashed basically a very successful IPO.

WERTHEIMER: The initial offering price was $31 a share, but in the first day of trading, they went up considerably over that.

Mr. NOCERA: Well, not really considerably. They went up 15 percent, 18 percent. They were fluctuated around that range pretty much all day. It is a financial company. There is a lot of risk involved, people seemed to understand that, but there also has a lot of pent-up demands for the stock.

WERTHEIMER: Now, the IPO has also drawn a great deal of attention in Congress, which is looking into how the partners of private equity firms like Blackstone are compensated. What's the concern there?

Mr. NOCERA: In a word, Linda? Taxes.

WERTHEIMER: Aha.

Mr. NOCERA: Now, you know, this is what happens when you have a group of people or an institution that has been very quiet and low key, and then suddenly it becomes sort of public, you know, where all these guys make immense sums of money. Even before the IPO, they were billionaires.

And so people start to look at - Congress starts to look at how are they making their money. And they start to realize that they're not paying corporate taxes. They're paying capital gains taxes on much of the money they make because of complications in the tax codes. And so what's really happened is that this IPO and the current boom in private equity has caused Congress to take another look at the tax structures of these things and to come to the conclusion that they're only paying 15 percent in capital gains tax for what amounts to their income, whereas corporations have to pay, you know, 30, 35 percent. And that's why, you have seen, actually just on Friday, a group of 15 Democrats submitted a bill that would change the tax status of hedge funds and private equity funds.

So there's a lot of private equity funds that aren't all that happy with Steve Schwarzman, the chief executive of the Blackstone, because they sort of think that his decision to go public has caused this new scrutiny on the way they make their money.

WERTHEIMER: This IPO was a very big payday for Blackstone's co-founder, the chief executive Stephen Schwarzman.

Mr. NOCERA: What do you mean? What do you mean? He's only going to be worth $7 billion after this. You call that a big payday, Linda?

(Soundbite of laughter)

WERTHEIMER: Seven whole Bs, huh?

Mr. NOCERA: Yeah, that's right.

WERTHEIMER: Well now, I've realized I'm mixing apples and oranges to some extent here. But the notion that he should pay 15 percent on his $7 billion is kind of an extraordinary notion to those of us who pay a much higher rates of income tax.

Mr. NOCERA: They would basically argue that they are a partnership, and all partnerships have different tax structures than a corporate tax structure. Do you buy it? Do I buy it? Not necessarily, but this will get fought out. Believe me, they've already hired first-rate lobbyists, you know.

WERTHEIMER: Made a few contributions here and there.

Mr. NOCERA: That's right. Well, Blackstone already has a deal where if a bill gets passed, they get a kind of a five-year exemption before it kicks in with them. That's so much lobbying they did before all of these happened.

WERTHEIMER: Joe Nocera is a columnist for the New York Times. Joe, thank you very much.

Mr. NOCERA: Thanks for having me, Linda.

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Blackstone Raises $4 Billion in Initial Stock Sale

Shares of Blackstone Group were up more than 13 percent on the first day of trading Friday, a day after the company launched the biggest initial public offering in five years on the New York Stock Exchange.

The private-equity firm overshadowed the stock market with its eagerly awaited IPO on Thursday. Shares sold at $31 each, the top of its $29-$31 range.

In afternoon trading on Friday, the stock rose to $38 on a volume of 113 million shares. The stock closed at $35.

The New York-based company's offering represents the growing power of private-equity firms. It began in 1985 with $400,000 on its books and raised $4.13 billion in Thursday's IPO, giving it a market value of $33 billion. Blackstone controls names such as Universal Studios Florida and real estate powerhouse Equity Office Properties Trust.

The big appeal is that investors have a chance to participate in the booming private-equity industry, where firms buy companies, turn them around, and seek to sell them at a profit.

And investor appetite was strong for a part of Blackstone, even though the stake in its management business has little voting power or any direct connection to its portfolio of companies. The initial public offering gave the public a 12.3 percent stake in the business.

"Blackstone is like any dominant player in a maturing industry, they are successful because they have a great management team," says Peter Shabecoff, founding partner of Stamford, Conn.-based private-equity firm Atlantic Street Capital Management. "And now they have the scope and brand name to be successful, and that's people are buying into."

The company could take in as much as $4.7 billion on the deal if underwriters exercise their option to purchase additional shares.

The deal also shows off the clout of the executives that run them.

Stephen Schwarzman, the co-founder and chief executive of Blackstone, became Wall Street's latest $10 billion man after the deal.

He moves even higher on the list of Manhattan's elite with his $7.7 billion stake in the company. That comes on top of the estimated $3.5 billion net worth he already has.

Washington was critical of the deal, in part because of the huge payout to executives.

Lawmakers tried to change the tax status of Blackstone and similar firms.

Under current law, private-equity companies have been able to go public paying a partnership tax rate of 15 percent, compared with the corporate tax rate of 35 percent.'

The Senate recently proposed a bill that would require financial-service and asset-management partnerships that go public after June 14 to pay corporate taxes. The House is examining whether to follow suit.

Blackstone acknowledged Thursday that it could face much higher taxes as early as next year. It said in a regulatory filing that taxing the firm at 35 percent would cause its earnings to falter.

Still, investors would not be deterred. They even shrugged off a last-minute attempt by two powerful members of Congress to have securities regulators block the deal.

Democratic Reps. Dennis Kucinich of Ohio and Henry Waxman of California asked the Securities and Exchange Commission late Thursday to delay the offering though their requests apparently went unanswered.

From NPR reports and The Associated Press

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