KKR doesn’t need an IPO to understand first-hand the frustrations of being a public investor. In January, the firm invested $700million (Rs2,870 crore) into Sun Microsystems by acquiring securities that can be converted into the computer manufacturer’s stock. But the deal first lauded as a winner has gone pear-shaped.
The buyout firm set the terms of its investment just days before Sun Micro released bumper fiscal second-quarter results. These combined with news of KKR’s investment to send shares surging close to the convertible price. It seemed a perfect example of a transaction that private equity firms could structure by using their good names to gain an advantage in peering into the vaults of a public company.
But six months later, things aren’t looking so good. Sun Micro was too optimistic with its forecasts. In April, its third-quarter results disappointed investors. Its stock lost all of the January pop, and then some. The shares are about 25% off the convertible price, and the value of KKR’s investment is in the red.
KKR says it invested in Sun Micro for the long term, and isn’t discouraged by fluctuations in the stock price. In fact, that’s one of the reasons the private equity firm opted for a convertible instead of investing in the stock outright. Sun Micro’s stock is very volatile, and the convertible helps to protect the firm from sharp dips.
Still Sun Micro’s stock has dropped enough to make the price of the convertible fall as much as 4%. While a little momentum in the past few days has helped regain some of that drop, the investment is still a far cry from the nearly 30% annual returns that KKR posts on its buyouts.
Furthermore, unlike the deals it usually does, KKR has little control over the publicly traded Sun Micro. It has one director on a board of 11, so its entreaties to cut costs or shift strategy can be drowned out by a minion of directors. For investors weighing up the possible merits of an investment in KKR’s upcoming IPO, the buyout firm’s Sun Micro experience may prove a cautionary tale. Even KKR, which has more pull than the average investor, can struggle with public investing.