[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]





      THE ROLE OF PRIVATE EQUITY IN THE COMMUNICATIONS MARKETPLACE

=======================================================================

                                HEARING

                               BEFORE THE

          SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE Internet

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 11, 2008

                               __________

                           Serial No. 110-100


      Printed for the use of the Committee on Energy and Commerce
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                    COMMITTEE ON ENERGY AND COMMERCE

                 JOHN D. DINGELL, Michigan, Chairman
HENRY A. WAXMAN, California            JOE BARTON, Texas
EDWARD J. MARKEY, Massachusetts           Ranking Member
RICK BOUCHER, Virginia                 RALPH M. HALL, Texas
EDOLPHUS TOWNS, New York               J. DENNIS HASTERT, Illinois
FRANK PALLONE, Jr., New Jersey         FRED UPTON, Michigan
BART GORDON, Tennessee                 CLIFF STEARNS, Florida
BOBBY L. RUSH, Illinois                NATHAN DEAL, Georgia
ANNA G. ESHOO, California              ED WHITFIELD, Kentucky
BART STUPAK, Michigan                  BARBARA CUBIN, Wyoming
ELIOT L. ENGEL, New York               JOHN SHIMKUS, Illinois
ALBERT R. WYNN, Maryland               HEATHER WILSON, New Mexico
GENE GREEN, Texas                      JOHN B. SHADEGG, Arizona
DIANA DeGETTE, Colorado                CHARLES W. ``CHIP'' PICKERING, 
    Vice Chairman                          Mississippi
LOIS CAPPS, California                 VITO FOSSELLA, New York
MIKE DOYLE, Pennsylvania               STEVE BUYER, Indiana
JANE HARMAN, California                GEORGE RADANOVICH, California
TOM ALLEN, Maine                       JOSEPH R. PITTS, Pennsylvania
JAN SCHAKOWSKY, Illinois               MARY BONO, California
HILDA L. SOLIS, California             GREG WALDEN, Oregon
CHARLES A. GONZALEZ, Texas             LEE TERRY, Nebraska
JAY INSLEE, Washington                 MIKE FERGUSON, New Jersey
TAMMY BALDWIN, Wisconsin               MIKE ROGERS, Michigan
MIKE ROSS, Arkansas                    SUE WILKINS MYRICK, North Carolina
DARLENE HOOLEY, Oregon                 JOHN SULLIVAN, Oklahoma
ANTHONY D. WEINER, New York            TIM MURPHY, Pennsylvania
JIM MATHESON, Utah                     MICHAEL C. BURGESS, Texas
G.K. BUTTERFIELD, North Carolina       MARSHA BLACKBURN, Tennessee
CHARLIE MELANCON, Louisiana            
JOHN BARROW, Georgia   
BARON P. HILL, Indiana                

   _________________________________________________________________

                           Professional Staff

                Dennis B. Fitzgibbons, Chief of Staff
                  Gregg A. Rothschild, Chief Counsel
                     Sharon E. Davis, Chief Clerk
               David L. Cavicke, Minority Staff Director

                                  (ii)







          Subcommittee on Telecommunications and the Internet

               EDWARD J. MARKEY, Massachusetts, Chairman
MIKE DOYLE, Pennsylvania             FRED UPTON, Michigan
    Vice Chairman                        Ranking Member
JANE HARMAN, California              J. DENNIS HASTERT, Illinois
CHARLES A. GONZALEZ, Texas           CLIFF STEARNS, Florida
JAY INSLEE, Washington               NATHAN DEAL, Georgia
BARON P. HILL, Indiana               BARBARA CUBIN, Wyoming
RICK BOUCHER, Virginia               JOHN SHIMKUS, Illinois
EDOLPHUS TOWNS, New York             HEATHER WILSON, New Mexico
FRANK PALLONE, Jr., New Jersey       CHARLES W. ``CHIP'' PICKERING, 
BART GORDON, Tennessee                   Mississippi
BOBBY L. RUSH, Illinois              VITO FOSELLA, New York
ANNA G. ESHOO, California            GEORGE RADANOVICH, California
BART STUPAK, Michigan                MARY BONO, California
ELIOT L. ENGEL, New York             GREG WALDEN, Oregon
GENE GREEN, Texas                    LEE TERRY, Nebraska
LOIS CAPPS, California               MIKE FERGUSON, New Jersey
HILDA L. SOLIS, California           JOE BARTON, Texas (ex officio)
JOHN D. DINGELL, Michigan (ex officio)







                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Edward J. Markey, a Representative in Congress from the 
  Commonwealth of Massachusetts, opening statement...............     1
Hon. Cliff Stearns, a Representative in Congress from the State 
  of Florida, opening statement..................................     2
Hon. Anna G. Eshoo, a Representative in Congress from the State 
  of California, opening statement...............................     4
Hon. John Shimkus, a Representative in Congress from the State of 
  Illinois, opening statement....................................     5
Hon. Jane Harman, a Representative in Congress from the State of 
  California, opening statement..................................     5
Hon. Greg Walden, a Representative in Congress from the State of 
  Oregon, opening statement......................................     6
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, prepared statement................................    37
Hon. Eliot L. Engel, a Representative in Congress from the State 
  of New York, prepared statement................................    51
Hon. Gene Green, a Representative in Congress from the State of 
  Texas, prepared statement......................................    52

                               Witnesses

Carlito P. Caliboso, chairman, Hawaii Public Utilities Commission     7
    Prepared statement...........................................     9
Richard Bressler, managing director, Thomas H. Lee Partners......    11
    Prepared statement...........................................    14
Eli M. Noam, Ph.D., director, Columbia Institute for Tele-
  Information, professor of finance and economics, Columbia 
  Business School................................................    18
    Prepared statement...........................................    20
Josh Lerner, Ph.D., Jacob H. Schiff professor of investment 
  banking, Harvard Business School...............................    23
    Prepared statement...........................................    25

                           Submitted Material

Committee letter, dated July 12, 2007, to Chairman Kevin J. 
  Martin, Federal Communications Commission......................    54
    Chairman Martin response.....................................    57

 
      THE ROLE OF PRIVATE EQUITY IN THE COMMUNICATIONS MARKETPLACE

                              ----------                              


                        TUESDAY, MARCH 11, 2008

              House of Representatives,    
         Subcommittee on Telecommunications
                                  and the Internet,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 9:30 a.m., in 
room 2123 of the Rayburn House Office Building, Hon. Edward J. 
Markey (chairman) presiding.
    Members present: Representatives Markey, Harman, Gonzalez, 
Inslee, Eshoo, Green, Dingell (ex officio), Stearns, Shimkus, 
Pickering, Fossella, Walden, Terry, and Ferguson.
    Staff present: Amy Levine, Tim Powderly, Mark Seifert, 
Maureen Flood, Colin Crowell, David Vogel, Philip Murphy, Neil 
Fried, Courtney Reinhard, and Garrett Golding.

OPENING STATEMENT OF HON. EDWARD J. MARKEY, A REPRESENTATIVE IN 
        CONGRESS FROM THE COMMONWEALTH OF MASSACHUSETTS

    Mr. Markey. Good morning. Today's hearing is on the role 
that private equity plays in our Nation's telecommunications 
markets. Private equity and other instruments of risk capital 
have long nurtured start-ups and grown new industries, 
particularly in the area of telecommunications. For instance, 
many pioneering companies in the cable business, the wireless 
industry, and the Internet marketplace might not exist today if 
it had not been for the seed capital extended by private equity 
firms. Over the last few years, however, private equity firms 
have moved beyond fostering start-up companies and have played 
an increasing role in acquiring mature telecommunications 
assets. These acquisitions have included well-known companies 
in the mass media, wireline telephone, cable and wireless 
markets. These companies include IntelSat, Alltel, Univision, 
Clear Channel and Hawaii Telcom, amongst others.
    This hearing is designed to examine the effect that private 
equity may have on the important public policies that have 
historically been advanced in the telecommunications sector. In 
conducting this analysis we hope to shed light on the impact 
private equity financing has on innovation, competition, 
employment, diversity, localism and universal service. 
Proponents of private equity often note that taking a hitherto 
public company private has the benefit of relieving senior 
management of intense pressure to report high quarterly 
earnings and to produce significant shareholder dividends. It 
also removes the disincentive to invest that Wall Street 
cultivates when stocks are punished after companies announce 
increased capital spending for infrastructure upgrades on 
research and development.
    In short, private equity supporters suggest that private 
equity ownership permits companies to invest in the long-term 
health of the commercial enterprise acquired.
    Another view of private equity's role suggests that 
achievement of long standing telecommunications policies may be 
put at risk by private equity owners who seek to quickly flip 
an acquired company after cost-cutting measures are employed. 
These cost savings, they assert, come at the expense of workers 
who lose jobs, service quality, newsroom budgets, and 
underfunded research and development. A potential policy 
benefit of private equity ownership that some have noted is 
that a sell-off of assets performed in order to reduce debt may 
result in the desegregation of media conglomerates. This has 
occurred in several transactions, most notably with respect to 
Clear Channel, which is shedding radio stations in a 
deconcentration of media ownership. Another issue that has been 
raised by the rise of private equity ownership is the alleged 
lack of transparency in ownership and control. A lack of 
transparency may frustrate the ability of regulators at the 
federal and state levels to adequately fulfill their statutory 
responsibilities. The Federal Communications Commission, for 
instance, has rules governing disclosure of ownership and 
control in order to police cross ownership, licensing and 
foreign ownership laws. With private equity firms, the 
consortia of private equity firms now having so much ownership 
stakes throughout is an issue. It is unclear whether the 
regulatory apparatus at the Commission or in state commissions 
has sufficiently caught up with changes in the financial and 
capital markets.
    I would like to welcome our distinguished witnesses.
    Mr. Markey. I now turn to recognize the ranking member of 
the Subcommittee, the gentleman from Florida, Mr. Stearns.

 OPENING STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF FLORIDA

    Mr. Stearns. Thank you, Mr. Chairman, and good morning. I 
also welcome the witnesses here this morning.
    Mr. Chairman, as far as I can remember serving on the 
Telecom Subcommittee, most of my career, the issue of private 
equity in the communications marketplace is not something that 
this subcommittee has ever examined. Be that as it may, we will 
follow wherever you aspire to go, Mr. Chairman. So we are with 
you here on this important issue, and we look forward to 
hearing from our witnesses.
    My colleagues, private equity firms typically buy or invest 
in companies that are undervalued or under-performing or need 
capital to expand. Without the pressures from public 
shareholders looking for short-term gains, private equity 
owners can focus on what is required to improve long-term 
performance in making an investment needed to become more 
competitive. Private equity investment can help companies focus 
on long-term strategies for improving service, rather than the 
quarterly earnings, and can bring troubled companies back to 
health. We know that from experience. This past July, Chairman 
Dingell and Chairman Markey sent a letter to the FCC Chairman, 
Mr. Martin, asking whether private equity ownership leads to a 
lack of transparency and an unhealthy focus on cost cutting. In 
responding, Chairman Martin said that the FCC applies the same 
ownership reporting requirements regardless whether a company 
is owned by private equity investors or not. Parties must 
identify their organizational structures, their owners, their 
equity, and their voting interests. According to Chairman 
Martin, the FCC's rules identify financial and ownership 
interests including those held by private equity firms that 
affect the programming and other decisions of media entities. 
And there is no evidence of private equity having a negative 
impact on quality of service.
    Private equity offers telecommunications and media 
companies an important option for funding, and the FCC rules 
appear to apply to privately funded entities no differently 
than publicly funded ones. So my colleagues, in the end, 
consumers in the marketplace will determine a company's 
success, not its particular source of financing. The 
involvement of private equity in the communications marketplace 
has indeed a very long history. For example, private equity 
funding enabled early wireless operators, like Aerial 
Communications, Omni, Voice Stream, to build out networks and 
launch new services. The company eventually grew to become T-
Mobile, which now provides nationwide service, which is in 
competition with Verizon Wireless and AT&T. Also, when Wall 
Street was looking unfavorably on rural markets because of the 
high cost of deployment, private equity firms invested in 
Western Wireless and helped improve cellular coverage for 
millions of people. Western Wireless is now part of regional 
wireless provider Alltel. Private equity owners similarly 
invested in Hughes Communications, helping to launch a new 
satellite giving 10 million rural Americans access to high 
speed service. With billions of dollars of private equity 
investment, competitive local exchange carriers such as Brooks 
Fiber, Niklea, entered the domestic telecommunications market 
with significant benefits in terms of both services and prices 
for their consumers.
    Private equity firms can also help preserve a diverse 
telecommunications and media market. First, they often compete 
with incumbent providers to buy companies, thereby providing a 
check to consolidation. For example, by purchasing Alltel, 
private equity kept the company independent and out of the 
hands of AT&T, Verizon, Sprint or T-Mobile. Second, private 
equity often provides funding to small businesses and minority 
entrepreneurs. Indeed, private equity enabled the Bustos 
brothers to first form the Z-Spanish Radio Network, 
Incorporated, in 1992, and then in 2002, Busto Media, which 
operates both radio and television stations. Private equity 
also helped Katherine Hughes create Radio One, a radio station 
group aimed at African American listeners that now owns 54 
stations in 17 markets.
    As these examples demonstrate, private equity's continued 
participation in the telecom and media sector helps fulfill the 
twin policy goals of diverse ownership both in terms of the 
number of owners, as well as the type of owners.
    This is not to say that there are no public policy 
ramifications in the trend toward private equity. I am 
interested to hear from our witnesses about the impact of 
private equity on consumer protection. According to Chairman 
Martin, private equity owners are covered by industry-wide 
consumer protection initiatives to the same extent as other 
owners. However, is this the case in practice? That is the 
question. And does the FCC hold private equity owners to the 
same standard?
    With that, Mr. Chairman, I yield back.
    Mr. Markey. The gentleman's time is expired.
    The Chair recognizes the gentlelady from California, Ms. 
Eshoo.

 OPENING STATEMENT OF HON. ANNA G. ESHOO, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Eshoo. Thank you, Mr. Chairman.
    And good morning to the witnesses. Thank you for having 
this hearing, and I look forward to what we are going to learn 
from it.
    In your letter, Mr. Chairman, of July of last year to the 
FCC, you raised several concerns about private equity firms, 
including whether their business model is inconsistent with 
serving the public interest.
    I agree that this is a concern, but my broader concern in 
all of this is the issue of broadcast licenses and whether 
people are really serving the public interest regardless of who 
holds the license. I think that that is the larger issue 
myself. I think there is a real abuse in this area. Licenses 
are applied for by postcard, and they are rubber stamped, and 
that is just really one heck of a system. When you think of the 
power that goes with these licenses and the obligations that 
people have, I think that we are falling down in this area. And 
I think the statistics demonstrate it. Television stations 
devote less than half of one percent of total programming time 
to local public affairs. Four out of ten commercial TV stations 
surveyed in 2003--I don't know what has happened since, but 
since 2003--aired no local public affairs programs. Ninety-two 
percent of the election coverage aired by the national networks 
in the 2 weeks before Election Day in 2004 was devoted to the 
presidential contest, leaving only eight percent for local 
elections and referendums. The idea that broadcasters are 
public fiduciaries I think has been lost. I think that the 
relaxed ownership rules and the rubber stamped postcard license 
renewals have contributed to the degradation. And when a 
broadcaster receives a license, I think that they are supposed 
to be investing in public responsibility and some public 
service.
    So I have introduced a bill, the Broadcast Licensing and 
the Public Interest Act, H.R. 4882, to revive the public 
interest standard. So, Mr. Chairman, I can talk more about 
this, but I want to ask some questions when it comes time to. I 
think we are in sad shape when it comes to the public 
interests. Yes, there is an investment both public and private 
in the companies, and I think it is important to review them, 
but I think that we need to look at licenses as well, and I 
would urge you to do that. I think that all the members should 
have an interest in this public interest and examine exactly 
how people get their licenses and then what they are living up 
to. Public interest has just been stripped out of this as far 
as I am concerned.
    So thanks again, and if I have the 7 seconds I will yield 
back.
    Mr. Markey. Thank you. The gentlelady's time has expired.
    The Chair recognizes the gentleman from Illinois, Mr. 
Shimkus.

  OPENING STATEMENT OF HON. JOHN SHIMKUS, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Shimkus. Thank you, Mr. Chairman. I will try to be 
brief.
    I want to welcome the panel. We got a chance to visit with 
a few of you prior, and I look forward to hearing your 
testimony.
    I want to thank Chairman Markey and ranking member Stearns 
for organizing this hearing to discuss the role of private 
equity. And hearings are an opportunity for us to learn more, 
and that is what we hope to do.
    You know, I have always been a believer in the challenge of 
raising capital and the assumption of risks that goes with the 
reason why you are raising the capital and hopefully a return 
on that. I mentioned that earlier. And I believe that is what 
the private equity firms do. Maybe I will be disproven in the 
hearing. I don't think so, but I do think it is an educational 
opportunity to talk about raising major capital funds in the 
telecommunications arena and how people can expand--or 
satellite. And there are probably more examples of benefits 
versus disadvantages. We don't want to diminish the 
disadvantages and the challenges and maybe seek to have 
transparency. But I do believe that we need--if we have issues 
with employment in this country, we have to have employers and 
we have to have business. And that is all good for our country, 
and sometimes it doesn't seem like that from the voices you 
hear in Washington.
    So again, I look forward to the testimony. I am keeping my 
opening statement short. Thank you for coming. And I hope to 
listen and learn from your testimony.
    I yield back, Mr. Chairman.
    Mr. Markey. Great. The gentleman's time is expired.
    The Chair recognizes the gentlelady from California, Ms. 
Harman.

  OPENING STATEMENT OF HON. JANE HARMAN, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Harman. Thank you, Mr. Chairman.
    I am camped out over here because I have to leave shortly 
for another hearing, and I thought I would try not to be 
disruptive.
    But I appreciate the fact that you are holding this hearing 
and think it is very important that we collect information on 
this topic. In as little as a week or two, the FCC may reveal 
that many of the 700-megahertz option licenses have been 
purchased by privately held companies. Over $19.5 billion worth 
to be exact. In telecommunications and media, private equity 
injects a new dimension into old questions about who owns news 
outlets and who controls public goods such as spectrum. But 
transactions such as the Tribune buyout and the privatization 
of Clear Channel aren't necessarily bad for the public. I agree 
with comments that have been made by other speakers. Private 
equity is not a dirty word. These firms have played an 
important part in some of telecom's biggest success stories, 
such as the emergence of T-Mobile and Western Wireless.
    Private investors often take risks where Wall Street will 
not. In this sense, private equity can bolster competition by 
restructuring and salvaging failing companies that would 
otherwise be out of business. That said, however, as Ms. Eshoo 
just said, the FCC has the authority and the obligation to ask 
tough questions about these transactions when they involve 
media and telecommunications companies. I see nothing wrong 
with, as Commissioner Copps suggests, the FCC asking those 
questions. If private equity challenges the traditional ways 
the FCC oversees competition and diversity in the market, then 
we must think harder about how to protect the public interest. 
And I would note that articles like this one in today's New 
York Times headlined, ``Buyout Industry Staggers Under Weight 
of Debt,'' raise very serious questions. If some of the major 
private equity firms are staggering and they may possibly have 
to shed some of their assets, then that ricochets down the 
chain. And those who have invested in some of these 
communications assets may face bankruptcy or at least some very 
hard times. That will impair the public interest, and the FCC 
has to be vigilant, and so do we.
    Thank you, Mr. Chairman.
    Mr. Markey. I thank the gentlelady.
    The Chair recognizes the gentleman from Nebraska, Mr. 
Terry.
    Mr. Terry. Thank you, Mr. Chairman.
    And my thought is I am just outraged that private equity 
would be involved in infrastructure. There is just no room for 
it in our socialist society.
    I yield back.
    Mr. Markey. I thank the gentleman very much.
    The Chair recognizes the gentleman from Texas, Mr. 
Gonzalez.
    Mr. Gonzalez. Waive opening.
    Mr. Markey. The gentleman's time will be preserved.
    The Chair recognizes the gentleman from Oregon, Mr. Walden.

  OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF OREGON

    Mr. Walden. Thank you very much, Mr. Chairman.
    And as fate would have it, for 21 years and 7 months my 
wife and I were in the radio broadcasting business. We are 
licensees of the FCC and believed in the public good and being 
involved in our communities. And we bought the beginnings of 
our company from my parents, who held the debt in trust, and we 
paid them every month. And when we went to sell we had grown 
the company to five stations from two, and it was a successful 
small business.
    But you know what? Nobody at Wall Street wanted to buy us 
out. And we weren't really excited about holding paper for 
somebody else to come in to very small markets and run our 
company and hope that every month they paid the bill. And as 
fate would have it, a small equity group got together, and they 
were purchasing stations in the region, and they were 
interested in our market.
    Now, the result of that is we had been bought out, which is 
a good thing. We are paying a hell of a lot of money to the 
Federal Government and the state government in taxes, as 
unfortunately we were a C corp for about half of the company. 
But the company continues to grow and expand, and they have 
access to capital we never had. They are doing things we 
couldn't have done, and the market works. The market works. And 
certainly there can be abuses in the market at any level, but 
private equity is a good thing. That is what capitalism is all 
about in America. And I am actually sort of surprised we are 
even having a hearing given all the other issues that are, I 
think, far more consequential in the area of media out there. 
But I understand it and look forward to hearing the testimony.
    And I yield back the balance of my time, Mr. Chairman.
    Mr. Markey. All right. The gentleman's time has expired.
    And all time for opening statements has been completed, so 
we will now turn to our first witness, who is Mr. Carlito--I am 
sorry. Excuse me.
    Let me just suspend for a second and recognize the 
gentleman from New Jersey, Mr. Ferguson, who has made a request 
that he waive his opening statement, and that he will be given 
extra time to ask questions.
    So again we will come back to you, Carlito Caliboso. Since 
2003 you have served as the Chairman of the Hawaii Public 
Utilities Commission, and he is also the State Public Utility 
Representative on the FCC's Intergovernmental Advisory 
Committee. We welcome you, sir. Whenever you are ready, please 
begin.

   STATEMENT OF CARLITO P. CALIBOSO, CHAIRMAN, HAWAII PUBLIC 
                      UTILITIES COMMISSION

    Mr. Caliboso. Good morning. Good morning, Chairman Markey 
and members of the Committee.
    Mr. Markey. Can you move the microphone up a little bit 
closer to you?
    Mr. Caliboso. Can you hear me now?
    Mr. Markey. Yes.
    Mr. Caliboso. Well, aloha and good morning, Chairman Markey 
and members of the Committee.
    My name is Carlito Caliboso. I am the Chairman of the 
Public Utilities Commission of the State of Hawaii. I am 
privileged to be here, and I thank you for this opportunity to 
testify.
    We were asked to provide testimony on the role of private 
equity in the communications marketplace and to share our 
unique perspectives and experiences as a state regulator. We 
wish to be responsive and hope that our testimony can be 
helpful to the subcommittee.
    We currently regulate a telecommunications public utility 
known as Hawaiian Telecompany, Inc., which is ultimately owned 
or controlled by a private equity firm known as the Carlyle 
Group. First, it should be recognized that each situation would 
probably be unique in its own way, and the proposed private 
equity investment would need to be reviewed in detail in the 
context of its industry, its market and service area. Second, 
the risks and concerns that may be associated with private 
equity ownership may not be unique to private equity ownership 
and may apply to other forms of ownership.
    In addition, the risks associated with private equity 
ownership can be appropriately managed and addressed in well-
balanced, flexible state regulatory frameworks that give 
companies an opportunity to earn a fair rate of return while 
protecting the interests of consumers and the public interest 
in general.
    With respect to our transaction, although the Commission 
recognized certain benefits of the proposed transaction 
involving the Carlyle Group in Hawaii, it also recognized 
several risks and was able to approve the transaction only with 
the addition of several conditions and requirements intended to 
address these risks.
    I would like to highlight a few of the pertinent conditions 
that the Commission adopted as safeguards. First, we imposed a 
rate case moratorium condition, essentially a rate freeze, 
until 2009, where this acquisition occurred in 2005. We imposed 
an equity commitment condition which required the infusion of 
additional equity and debt reduction immediately upon closing 
of the transaction. We imposed a dividend restriction condition 
to prohibit payment of dividends to investors until debt was 
reduced sufficiently. We also established a collaborative 
committee involving competitive local exchange carriers to 
monitor transition issues for the competitive local exchange 
carriers, otherwise known as CLECs. We also scheduled a service 
quality investigation commencing 6 months after the cutover to 
monitor service quality for consumers. And we also imposed a 
transfer restriction condition for directory assets where the 
buyer was required to obtain Commission approval prior to sale 
of any of its directory assets, or Yellow Pages.
    In addition to these specific conditions, any further sale 
or change in ownership, including any initial public offering 
or any form of transfer, encumbrance or mortgaging of assets, 
will require the review and approval of this Commission.
    Nonetheless, the transition to a stand-alone Hawaii company 
has not been smooth for Hawaiian Telcom. In fact, the 
transition could be described by some as very problematic, to 
say the least. Although actual telephone service has not been 
an issue, Hawaiian Telcom experienced many back office systems 
transitioning problems. At this time, however, I have not 
received any indication that these problems were necessarily 
due to private equity ownership. The same transition issues 
could have been present where the transaction involved 
transforming the company into a stand-alone operation that 
needed to redevelop all of its back office systems, whether the 
ownership was by private equity, publicly traded company or 
even a cooperative.
    Although this story's still being written and the 
investors' actions will eventually speak for themselves, it 
does appear that the investors have the capability and do 
intend to invest needed capital and resources into Hawaiian 
Telcom. However, whether the investors continue to follow 
through with their indicated commitment to continue to invest 
in Hawaiian Telcom remains to be seen.
    In conclusion, the risks of private equity investment in 
telecommunications companies can be appropriately managed with 
measured and balanced regulatory approaches as one would with 
any other form of ownership. In situations where regulatory 
authority exists, this can be done without the need for 
flexible nationwide approaches, which may not be appropriate or 
necessary in every situation. Such approaches may result in 
deterring needed investment in communications technologies and 
infrastructure, which could ultimately be to the detriment of 
consumers.
    With that, I appreciate this opportunity to testify today, 
and I hope our testimony has been helpful to this subcommittee. 
Please, let me know if we can be of further service. I will be 
happy to try to answer any questions that you may have.
    [The prepared statement of Mr. Caliboso follows:]

                    Statement of Carlito P. Caliboso

                              Introduction

    Aloha and good morning Chairman Markey and members of the 
Subcommittee. My name is Carlito Caliboso, Chairman of the 
Public Utilities Commission of the State of Hawaii (the 
``Commission''). I am privileged to be here today, and I thank 
you for this opportunity to testify.
    We were asked to provide testimony on the ``Role of Private 
Equity in the Communications Marketplace'' and share our unique 
perspective and experiences as a State regulator. We wish to be 
responsive and hope that we can be helpful to this 
Subcommittee.
    We currently regulate a telecommunications public utility 
known as Hawaiian Telcom, Inc. (``Hawaiian Telcom''), which is 
ultimately owned or controlled by a private equity firm known 
as The Carlyle Group (``Carlyle'').
    First, it should be recognized that each situation would 
probably be unique in its own way, and the proposed private 
equity investment would need to be reviewed in detail in the 
context of its industry, market, and service area. Second, the 
risks and concerns that may be associated with private equity 
ownership may not be unique to private equity ownership and may 
apply to other forms of ownership.
    As you know, there may be benefits to private equity 
investment in the communications marketplace, including the 
ability to infuse additional investment capital and resources 
that may not have otherwise been available to be invested in 
technology and communications infrastructure. Private equity 
ownership of a communications company may involve certain 
risks, such as a high-debt structure, and possible effects on 
employment and levels of customer service.
    The risks associated with private equity ownership can be 
appropriately managed and addressed in existing, well-balanced 
and flexible State regulatory frameworks that give companies an 
opportunity to earn a fair rate of return on their investments, 
while protecting the interests of consumers and the public 
interest in general.

                     The Hawaiian Telcom Experience

    In 2005, a company controlled by Carlyle sought to acquire 
Verizon Communications' Hawaii operations, known as Verizon 
Hawaii Inc. \1\ Verizon Hawaii Inc. was Hawaii's statewide 
incumbent local exchange carrier or ``ILEC.'' The proposed 
transaction would convert the ILEC from a small part of a large 
regional and international telecommunications carrier to a 
stand-alone ILEC serving primarily the State of Hawaii, which 
is now Hawaiian Telcom.
---------------------------------------------------------------------------
    \1\ See Docket No. 04-0140.
---------------------------------------------------------------------------
    Although the Commission recognized certain benefits of the 
proposed transaction, it also recognized several risks and was 
able to approve the transaction only with the addition of 
several conditions and requirements intended to address these 
risks. \2\
---------------------------------------------------------------------------
    \2\ See Decision and Order No. 21696, filed on March 16, 2005 
(``D&O No. 21696''), at 28-29.
---------------------------------------------------------------------------
    Potential benefits of the transaction advocated by the 
applicants included renewed local focus in the telephone 
company and the establishment of several back office systems 
\3\ in Hawaii (along with the jobs required to establish these 
functions), which were previously consolidated and operated 
out-of-state by Verizon Communications. In addition, more 
attention would be given to the local market and its needs, 
with the introduction of new products, services, and 
technology. The risks included the proposed high-debt capital 
structure of the new telephone company, which was proposed to 
be 82.5% debt and 17.5% equity, and the daunting requirement to 
re-establish all back office systems in Hawaii, which was 
necessary because Hawaiian Telcom would be a stand-alone 
telephone company.
---------------------------------------------------------------------------
    \3\ Examples of such functions performed on the mainland were 
billing, a network operations center, wholesale ordering, human 
resources, payroll, accounting, and marketing, among others.
---------------------------------------------------------------------------
    In short, after a detailed review, the Commission found 
that it needed to impose several conditions to address these 
and other concerns in an effort to mitigate the risks 
identified for the protection of consumers and the public 
interest. \4\ I would like to highlight a few of the pertinent 
conditions the Commission adopted as safeguards:
---------------------------------------------------------------------------
    \4\  D&O No. 21696 at 29-50.
---------------------------------------------------------------------------
     Rate Case Moratorium Condition (rate freeze): The buyer 
committed to not applying for a general utility rate increase 
that would utilize a test year earlier than 2009.
     Equity Commitment Condition: The buyer was required to 
immediately infuse additional capital to reduce its debt 
structure from 82.5% to 76.3% on a consolidated basis, with a 
goal to reduce its debt level to 65% in a shorter period of 
time.
     Dividend Restriction Condition: Dividends to any equity 
investor were prohibited without prior Commission approval 
until it reduced its debt to 65% on a consolidated basis.
     Collaborative Committee with CLECs: A collaborative 
committee was established that included competitive local 
exchange carriers, or ``CLECs,'' to monitor and resolve 
transition issues to minimize any adverse effects to 
competitive carriers.
     Scheduled Service Quality Investigation: A service 
quality investigation was scheduled for approximately 6 months 
after the transition from Verizon to Hawaiian Telcom's back 
office systems to monitor service quality standards and issues. 
\5\
---------------------------------------------------------------------------
    \5\ This matter is the subject of an ongoing and open Commission 
investigation. Docket No. 2006-0400.
---------------------------------------------------------------------------
     Transfer Restriction Condition for Directory Assets: The 
buyer was required to obtain Commission approval prior to any 
sale of its directory assets (or yellow pages) and that any 
sale would be conditioned on the imputation of revenues in a 
future rate case. \6\
---------------------------------------------------------------------------
    \6\ Hawaiian Telcom has since requested and received Commission 
approval to sell its directory assets, conditioned upon, among other 
things, the use of all sales proceeds to pay down and reduce debt. 
Docket No. 2007-0123, Decision and Order No. 23825, November 13, 2007.
---------------------------------------------------------------------------
    In addition, any further sale or change in ownership, 
including any initial public offering, or any other form of 
transfer, encumbrance, or mortgaging of assets, will require 
the review and approval of the Commission. The Commission also 
has broad authority to investigate the public utility and all 
of its dealings and operations. \7\
---------------------------------------------------------------------------
    \7\ Chapter 269, Hawaii Revised Statutes, as amended.
---------------------------------------------------------------------------
    These are just examples of some tools that may be available 
to address certain risks, when there is private equity 
ownership or any other form of proposed acquisition of a 
regulated company. We recognize that there may be other 
techniques that could be used in addressing issues raised in 
these types of transactions.
    Nonetheless, the transition to a stand-alone telephone 
company has not been smooth for Hawaiian Telcom. In fact, the 
transition could be described by some as very problematic, to 
say the least. Although actual telephone service has not been 
an issue, Hawaiian Telcom experienced many back office systems 
transitioning problems. These problems primarily involved 
billing systems and the ordering of services, where the amount 
of time needed to process customer orders and resolve billing 
matters increased tremendously. This was very frustrating to 
Hawaii consumers. At this time, however, I have received no 
indication that these problems were necessarily due to private 
equity ownership. The same transition issues could have been 
present where the transaction involved transforming the company 
into a stand-alone operation that needed to redevelop all of 
its back office systems whether the ownership was by private 
equity, a publicly traded company, or even a cooperative.
    Although this story is still being written and the 
investors' actions will eventually speak for themselves, it 
does appear that the investors have the capability and do 
intend to invest needed capital and resources into Hawaiian 
Telcom. For example, the company has expended additional 
resources to retain new executive management and senior 
leadership to guide the company. The company has also informed 
us that it has invested necessary resources to allow it to 
offer higher speed broadband Internet services and is 
developing offerings for video services to its customers. In 
addition, the company has stated that despite a recent 
reduction of approximately 100 management positions, its total 
count of employees of approximately 1,550 is approximately 
equal to the number of employees at the time of acquisition.
    However, whether the investors continue to follow through 
with their indicated commitment to continue to invest in 
Hawaiian Telcom remains to be seen. In the meantime, the 
regulatory authority and additional conditions I described 
earlier can be used to oversee the company's operations and 
actions to protect the interests of the consumers.

                               Conclusion

    Accordingly, the risks of private equity investment in 
telecommunications companies can be appropriately managed with 
measured and balanced regulatory approaches, as one would with 
any other form of ownership. In situations where regulatory 
authority exists, this can be done without the need for 
inflexible nationwide approaches, which may not be appropriate 
or necessary in every situation. Such approaches may result in 
deterring needed investment in communications technology and 
infrastructure, which could ultimately be to the detriment of 
consumers.
    I appreciate this opportunity to testify today, and I hope 
our testimony has been helpful to this Subcommittee. Please let 
me know if we can be of any further service. I will be happy to 
try to answer any questions that you may have.

                        SUMMARY OF MAJOR POINTS

     Each situation would probably be unique in its own way, 
and the proposed private equity investment would need to be 
reviewed in detail in the context of its industry, market, and 
service area.
     The risks and concerns that may be associated with 
private equity ownership may not be unique to private equity 
ownership and may apply to other forms of ownership.
     The risks associated with private equity ownership can be 
appropriately managed and addressed in existing, well-balanced 
and flexible State regulatory frameworks that give companies an 
opportunity to earn a fair rate of return on their investments, 
while protecting the interests of consumers and the public 
interest in general.
     Although the Commission recognized certain benefits of 
the proposed sale of Verizon Hawaii to Carlyle, it also 
recognized several risks and was able to approve the 
transaction only with the addition of several conditions and 
requirements intended to address these risks.
     In addition to these conditions, any further sale or 
change in ownership, including any initial public offering, or 
any other form of transfer, encumbrance, or mortgaging of 
assets, will require the review and approval of the Commission.
     The transition to a stand-alone telephone company has not 
been smooth for Hawaiian Telcom and has been frustrating to 
Hawaii consumers. At this time, however, I have received no 
indication that these problems were necessarily due to private 
equity ownership. The same transition issues could have been 
present where the transaction involved transforming the company 
into a stand-alone operation that needed to redevelop all of 
its back office systems, whether the ownership was by private 
equity, a publicly traded company, or even a cooperative.
                              ----------                              

    Mr. Markey. Thank you, sir, very much.
    Our next witness is Mr. Richard Bressler. He is a managing 
director at Thomas H. Lee Partners, one of the largest private 
equity firms in the United States. He has served as the chief 
financial officer at both Viacom and Time Warner and sits on 
the boards of the Nielsen Company, Univision, and Warner Music 
Group. We welcome you, sir.

STATEMENT OF RICHARD BRESSLER, MANAGING DIRECTOR, THOMAS H. LEE 
                            PARTNERS

    Mr. Bressler. Thank you. Thank you very much. Good morning, 
Chairman Markey, ranking member Stearns, and other members of 
the Committee.
    I am pleased to be with you today. At the outset, let me 
note for the record that I am speaking with you today in my 
capacity as a managing director of THL Partners, as well as the 
private equity counsel, the trade association, representing 
many of the largest private equity firms doing business in the 
United States today, including my firm, THL.
    I have been with THL for 2 years, which is, as you may 
know, Chairman Markey, is in the great city of Boston. We at 
THL focus on working with growth-oriented companies that can 
benefit from our managerial and strategic expertise to create 
not only value for our partners, but also competitive benefits 
for the consuming public. Prior to joining THL Partners, I held 
senior management positions at Viacom and Time Warner, and I 
worked closely with both the editorial and business units at 
those companies. So I, like many of my colleagues in the 
private equity business, come here with a unique and important 
perspective. My extensive background in broadcasting, cable and 
content have given me a durable respect and sensitivity to the 
special public interest obligations facing companies in the 
media and telecommunications sectors. And at the same time, my 
experience in private equity has shown me how powerful and 
transformative private equity investments can be for media and 
telecommunications companies. So I can tell you, without 
equivocation, that private equity investment is entirely 
consistent with the public interest considerations that are 
important to this subcommittee and to the FCC.
    We at THL, as well as the experienced leaders of our 
portfolio companies, recognize the uniqueness of telecom and 
media in today's economy and in tomorrow's democracy.
    Now, let me just say a few words about private equity in 
general. My written testimony provides more background on 
precisely how private equity works. For now, suffice it to say, 
that you probably all know more about private equity than you 
think. Toys-R-Us, Hertz, Baskin Robbins, Burger King, J. Crew, 
Hilton Hotels, these are only a limited number of examples of 
how private equity interacts with the American people each and 
every day, sometimes multiple times in one day. Our success is 
based on two key ingredients: patience and commitment. As many 
CEOs and academics will note, public ownership tends to put a 
premium on short-term results and gains, which can put a heavy 
burden for a company that needs to break from the intense glare 
of quarterly reports and analyst quotes. Imagine if Members of 
this House had to run for office every 3 months, instead of 
every 24 months. And I recognize that that analogy is not a 
neat one, but I think you get a sense of how that would be a 
distraction to everyone involved. True, not all private equity 
investments succeed, but independent research consistently 
demonstrates that private equity firms invest for long-term and 
seek to build stronger and more competitive companies.
    Let me say a few words about private equity and its role in 
telecom and media, which is why we are here today. Here again, 
private equity has played an important and patient role in many 
of the companies that subcommittee knows quite well. Companies 
like MCI, the iconic symbol of telecom competition, IntelSat, 
Voice Stream, which is now known as T-Mobile; Resna 
Communications; Alltel; and Sirius Satellite Radio. I could go 
on and on, but I think it is clear that private equity is not 
new to this sector. We have contributed much to the competitive 
and convergent nature of these industries, all the while 
mindful of the rules and obligations that come in serving the 
public interest. Moreover, private equity can help solve the 
ownership conundrum that I know the subcommittee is focused on. 
In cases involving companies like Alltel we have helped to 
contribute to the total number of owners, which helps mitigate 
against consolidation by strategic encumbrance. And in cases 
involving companies like Clear Channel, we are helping to 
contribute to the type of owners and in doing so seeking to 
address the minority ownership in today's media marketplace.
    Finally, let me say a few words about THL's work in this 
sector, and in particular its efforts to promote the long-term 
viability of free over-the-air television and radio. As this 
subcommittee knows quite well, broadcast services are 
different. Because it is free and because it is ubiquitous, 
broadcast media serves a vital role in our economy and our 
democratic society. But it is also true that the broadcast 
sector faces daunting competitive challenges from other digital 
platforms, many of which are subscription-based and can use the 
dual revenue streams that come from advertising and 
subscriptions to capture more and more of a fragmented media 
market. And because of these structural changes, some in the 
investor community have avoided the broadcast sector, assuming 
that its future is too cloudy. But we at THL perceive things 
differently. That is why we have worked with various broadcast 
groups such as Univision and Clear Channel to chart a strategic 
future in today's market.
    We believe there is a bright future in free over-the-air 
television and radio. We put our money where our mouth is. And 
in each of these instances we have made contributions to some 
broader policy and issues. For example, in the case of 
Univision, THL and its private equity partners are working with 
experienced broadcast management to enable Univision to 
maintain its position as the leading Spanish language broadcast 
network in the United States. And in the case of Clear Channel, 
private equity has enthusiastically supported Clear Channel's 
plan to deconsolidate its holdings so that it can renew its 
focus on radio in fewer markets with fewer stations.
    Again, I thank you for the opportunity to be with you today 
to present this testimony. I will be pleased to answer any 
questions at the appropriate time.
    [The prepared statement of Mr. Bressler follows.]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Mr. Markey. Thank you, Mr. Bressler, very much.
    Our next witness is Eli Noam, who is the Director of the 
Columbia Institute for Tele-Information, and he is a Professor 
of Finance and Economics at Columbia Business School, and he 
served for 3 years as Commissioner of the New York State Public 
Service Commission. We welcome you back to the subcommittee. 
When was the last time you testified?
    Mr. Noam. I don't remember. It has been a few years to this 
Committee, yes.
    Mr. Markey. To this subcommittee, yes.
    Mr. Noam. But I am very happy to be back, Mr. Chairman----
    Mr. Markey. Welcome.
    Mr. Noam [continuing]. And members of the subcommittee, and 
I thank you for convening this meeting. I should also mention 
that President Bush also appointed me to the IT Advisory 
Committee, so I have been kind of appointed in a bipartisan 
way.
    I would like to address some concrete issues, concrete 
examples. We can theorize about----
    Mr. Markey. Can you move that microphone in just a little 
bit closer?
    Mr. Noam. OK.
    Mr. Markey. OK, good.

 STATEMENT OF ELI M. NOAM, PH.D., DIRECTOR, COLUMBIA INSTITUTE 
   FOR TELE-INFORMATION, PROFESSOR OF FINANCE AND ECONOMICS, 
                    COLUMBIA BUSINESS SCHOOL

    Mr. Noam. We can theorize about the impact of private 
equity all day long. There are different academic studies and 
different analysis, but who is to know in the end? 
Unfortunately, I would like to report on two actual cases in 
Europe where there are two major national telecom companies 
that have been taken private--eircom in Ireland and TVC in 
Denmark--and the dynamics as well as the players are 
sufficiently similar, so we can actually learn something of 
what happened there. I actually served for 3 years as an 
international advisory board member for the Irish regulator. In 
Ireland, the national telecom company, eircom, has actually 
gone through a private equity not just once, but twice. And it 
has not been a good experience for Ireland, which has a first 
rate technology in software industry but a second rate telecom 
network. First, the private equity consortium including 
American funds called Valencia bought eircom, financed the 
acquisition by increasing the debt almost immediately from 25 
percent to 70 percent. In consequence eircom lost most ability 
to finance upgrades innovation and expansion. So in 2000 and 
2001, just before the LBO, eircom invested 700 euros per year, 
more than the appreciation and retained earnings. But after the 
Valencia takeover, investment dropped almost instantly from 700 
to 300 million, next year to 200 million, and in the following 
year again to 200 million. In other words, it disinvested. It 
is not a situation of adding and bringing in new funds. There 
was a situation of taking funds out. Ireland's network fell 
further behind to the rest of the euro, but at the same time it 
paid a special dividend to Valencia of 400 million euros.
    In 2006 eircom was taken private again, this time through 
an Australian fund, through a set of Shell corporations in the 
Cayman Islands. Debt grew to 80 percent, and the cost of debt 
grew to over eight percent. For broadband penetration among the 
15 original European countries, Ireland now ranks 14 out of 15. 
Only Greece is lower. The penetration of broadband is almost 
twice as high as it is in Ireland. Now, in Denmark, the 
national telecom company TDC was owned until 2004 by the 
American company SBC, AT&T now, and did pretty well actually as 
a public company. Its quality of network was high, its 
penetration was among the highest in Europe. It was taken 
private in 2006 by a consortium of big names in American 
private equity. Its debt went up from 27 percent in 2005, in 1 
year, to 94 percent of debt. Its credit rating was downgraded 
twice in 2 months. It had to pay for its bond at a high of 89 
percent. Even so, it issued that year a special dividend of a 
magnitude of 47 percent of the company's total assets, more 
than twice--and took out more than twice what the private 
equity investors put into the company. And meanwhile the 
cooperating holdover CEO and CFO got special bonuses. Just like 
in Ireland and Denmark, long-term investment slowed. For 
example, whereas penetration of broadband almost doubled in 2 
years, from 50 to 28 percent prior to being taken private, in 
the 2 years subsequent to being taken private, penetration rose 
by only 3.6 percent. In both cases the company came to the 
regulator for higher prices, so understand, please, what is 
happening here. These are not competitive markets. These are 
markets with very substantial incumbent market power, and 
therefore, the dynamics are really different. What we have here 
basically is a situation in which the company's being taken 
over by a PE, taking money out, disinvesting, and then coming 
back to the regulator and saying raise all prices so that we 
can reinvest. And that is based then on higher consumer prices. 
So the investment is being taken out and being brought back 
only on the back of higher consumer prices. Now, do the same 
dynamics also hold for America? I think definitely. The PE 
funds in Ireland and Denmark are pretty much exactly the same 
players as in America. They are typically Americans, or they 
are Australians or Europeans, or similar kind. The incentive 
and MOs are very similar. The legal and regulatory environment 
is not terribly different, and in fact, if we look at PE-owned 
telecom companies in the United States, Windstream or Madison 
River, their debt-to-EBIDTA ratios are quite high. In fact, for 
Madison River it is just about the highest of any telecom 
company I know of--almost five times as high as it is for 
Verizon and AT&T. Now, the problem to me is not whether owners 
want to take on more debt. That is their business. But here we 
are dealing with infrastructure that is critical to society and 
the economy and to democracy, culture, commerce. Why else are 
we interested and concerned in this Committee and concerned 
about broadband penetration? Why else did we build--going to 
other infrastructure--the interstate highway systems, the air 
traffic control systems?
    Mr. Markey. If you could wrap up, please.
    Mr. Noam. All right. Will this trend continue? Yes, it 
probably goes in cycles. There is a lot of opportunity, I 
think, here for these small independent companies. But let me 
just--and there are some positives, which I haven't gotten to. 
So to conclude then is to say I think we can deal with this if 
the issues and remedies mostly, not through direct regulations, 
but through disclosure forms and through self regulation, which 
I hope that the industry will adopt for itself.
    [The prepared statement of Mr. Noam follows:]

                         Statement of Eli Noam

    Mr. Chairman, Members of the Subcommittee, thank you for 
convening this hearing and engaging in a discussion of the role 
of public equity financial transactions in the communications 
industry. At a time when aggressive financial arrangements have 
destabilized the real estate industry and other markets, it is 
useful to inquire into the potential impact of other finance 
arrangements on the communications sector.
    Some of these issues were also discussed at a conference we 
held at the Columbia Institute for Tele-Information a few 
months ago, which provided some data that should be helpful for 
your deliberations. It is generally agreed that private equity 
shakes up entrenched management and that it strengthens 
strategic thinking on the corporate level but that it can also 
disrupt companies, investments, and employment. We can theorize 
about the impact of private equity all day long. But empirical 
evidence is perhaps most useful. One academic study, by my 
fellow panelist, Prof. Josh Lerner of Harvard, shows that 
companies which have gone through the public-private -public 
roundtrip perform better than those which did not and that 
their patenting levels do not decline after going public again. 
Another academic study, by Ludovic Phalippou of University of 
Amsterdam and Oliver Gottschalg of HEC Paris, finds that 
returns of private equity funds, after fees, are actually 3% 
lower than for the S&P 500 index. But both of these studies, 
though they disagree with each other, are not focused on the 
communications industry, the topic of these hearings.
    Fortunately, we can look at two actual cases. In Europe, 
two major national telecom companies have been taken private, 
eircom in Ireland and TDC in Denmark. I served for three years 
on an international advisory board for the Irish regulator 
COMREG, as did the former chief economist of the FCC, Prof. 
William Melody, who is now a professor in Denmark and who 
compiled some of these numbers
    In Ireland, the national company, eircom, has actually been 
through private equity acquisition not just once but twice. It 
has not been a good experience for Ireland, which has a first 
rate technology and software industry, but, by general opinion 
of its own experts, a second rate telecom network.
    First, a consortium called Valentia, which also included 
American financiers, bought eircom and financed the acquisition 
by raising eircom's debt from 25% to 70% within a year. In 
consequence of this high leverage, eircom lost the ability to 
have access to further funds to finance upgrade and expansion, 
and its cost of capital increased.
    In 2000 and 2001, before the Valencia LBO, eircom invested 
700 Euros per year, more than its depreciation and retained 
earnings. But after Valencia took control, takeover investment 
dropped from 700 to 300 million in 2002, and to 200 in 2003 and 
2004. The company disinvested. Ireland's network fell further 
behind the rest of Europe. But at the same time it paid a 
special dividend to Valentia of 400 million Euros. It then took 
the company public at a handsome profit.
    In 2006, eircom was taken private a second time by the fund 
Babcock and Brown of Australia, through a set of shell 
companies incorporated in the Cayman Islands. Debt grew to 3.8 
billion Euros, for a ratio over 80%, and average cost of debt 
grew to over 8%.
    In broadband penetration, among the original 15 EU 
countries, Ireland now ranks 14th. EU average penetration was 
almost twice as high as in Ireland.
    In Denmark, the national telecom company, TDC, was owned 
until 2004 by the American regional Bell company, SBC, and did 
very well as a public company. Its network quality was high, 
and its broadband penetration was among the highest in Europe. 
It was then taken private in 2006 by a consortium of big names 
in American private equity. Its debt went up in one year from 
27% in 2005 to 94% in 2006. Its credit rating was downgraded 
twice in two months. It had to pay for its bonds a high 8-9%.
    Even so, it issued that year a special dividend of a 
magnitude of 47% of the company's total assets, by Melody's 
analysis, and more than twice what the investors put into the 
company. Meanwhile, the cooperating holdover CEO and the CFO 
got large special bonuses.
    Just like in Ireland, long term investments slowed. For 
example, whereas TDC broadband penetration almost doubled from 
15% to 28% in two years to 2005, in the two years since going 
private, penetration rose by only 3.6%.
    The ratio of net debt-to-EBITDA for the two PE-owned 
European companies TDC and eircom grew to 5.1 and 6.9. This 
debt load is more than three times as high as that of other 
major European incumbent companies. In both cases did the 
companies come to the regulator for rate increases. So 
understand what is happening here. These are not competitive 
markets but price regulated markets. When people analyze the 
contribution of private equity, they have in mind competitive 
markets, but this is not case here. In telecom, PE owners seem 
to take capital out and then tell the regulator that they can 
upgrade the dominant national network only if the consumer 
prices are raised. It puts the regulator over a barrel. This is 
not a competitive market situation where PE raises efficiency. 
Instead, it is, in economists' terms, the advance distribution 
of capitalized monopoly rent.
    Thus, whatever one might say in favor as the general 
advantages of PE, these two specific cases do not support the 
claims of innovation and investment for the telecom industry.
    Do the same dynamics also hold for America? The funds in 
Ireland and Denmark were the same big PE names as in America, 
Australia, and Europe. Their incentives and MOs are the same. 
The legal-regulatory environment is not very different. We 
observe in America that the PE-owned telecom companies 
Windstream and Madison River have debt-to-EBITDA ratios of 3.03 
and 5.5, respectively. The latter ratio is probably the highest 
of telecom companies that I know of and almost five times as 
high as that of Verizon and AT&T. The PE-acquired company 
Hawaiian Telcom initially planned to raise debt to 82.5%, 
before the state utility commission, represented here, rolled 
it back to 76.3%.
    The problem is not how much debt owners want to take. 
That's their business. But here, we deal with infrastructure 
that is critical for society, economy, and, with the Internet, 
increasingly for culture, politics and commerce. Why else would 
this committee be concerned with national broadband penetration 
figures? Why else did earlier generations support canals, 
railroads, the interstate highway system, airports, and an air 
traffic control system? Because the social value of these 
infrastructure systems significantly exceeds their private 
value to the owners. Telecom companies have usually understood 
this and were not pure profit maximizers, for example in rural 
service. When they did not understand the broader definition of 
their function they often ended up on the carpet before this 
Committee. If companies' ability or willingness to invest in 
infrastructure and in competing networks is reduced everyone 
will be affected adversely. If we want fiber to the home or to 
the curb, if we want to have competing networks, we must be 
alert to this situation.
    Some people argue that all telecom firms are already 
subject to FCC oversight, regardless of ownership. True. But 
that protects only against breaches of rules, not against a 
decline in capital investment and upgrade. For these, the 
incentive should not be reduced.
    Will this private equity trend continue? Yes, though the 
good and affordable deals will become scarcer, and enthusiasm 
for these financial vehicles tend to be cyclical. Why telecom 
firms? Private equity firms like the steady and large cash 
flows, the assets that can support debt, and the large market 
shares of incumbents. There is opportunity especially among the 
small independent telecom companies, where consolidation would 
be accelerated and efficiency might be gained due to private 
equity. But this would depend on how the cost-savings of such 
rural consolidations were shared between the private equity 
company's return and the public's rates.
    I focused here on telecom. Let me to turn briefly to mass 
media. On the positive side, since we are always concerned with 
media power and concentration, the private equity deals often 
lead to a breakup of large media conglomerates to reduce debt 
that paid for the acquisition. Thus, the radio broadcast giant 
Clear Channel Communications, the poster boy for media 
concentration, will (or is) selling off almost half of its 
1,100 radio stations. And maybe the rest will be broken up and 
sold if the investor consortium cannot sell the debt. 
Similarly, private equity has been an instrument of de-
concentration for the Tribune Co. and McClatchy newspapers and 
for Time Warner's music and the New York Times's TV station 
spin-offs. Where media conglomerates were part of empire 
building, they are likely to be dismantled by unsentimental 
cost-cutters installed by the private equity owners.
    On the negative side, the same cost-cutting will also have 
impacts on newsrooms, film budgets, script selection, and R&D. 
Private equity, though nicely fast-paced, is also basically 
cautious as it seeks the cash flows to meet debt payments and 
position the company for subsequent resale. It is less likely 
to back risky film or R&D projects. Venture capital is more 
risk taking. The two should not be confused with each other as 
they often are.
    What then to do about private equity in the communications 
sector without a burdensome regulatory intervention that would 
throttle a funding mechanism which has positive aspects, too?
    First and foremost, for the communications sector, the 
answer has to be disclosure and transparency. In open societies 
large media holdings must be in the open. Direct regulation by 
government of media is undesirable. But disclosure is another 
matter. For essential infrastructure and media in society, 
transparency can be a substitute for a direct regulation that 
is based on the fear of potential problems rather than real 
tones. Transparency would include the following:
    1. Disclosure by regulated private equity-acquired telecom 
and cable companies above a certain size of the payments made 
to private equity funds and of their debt levels.
    2. Continuation of disclosure of formerly some of the SEC-
mandated corporate information by these firms to the FCC, if 
the firms have been taken private and out of SEC disclosure 
requirements.
    3. For firms with debt above a certain level, disclosure of 
long term network investment and upgrade plans.
    4. Disclosure of significant beneficial ownership. The 
actual managing owners and substantial beneficiary owners of 
regulated media firms should be part of the public record, as 
well as their nationality.
    5. A self-regulatory code for disclosure by the private 
equity industry. This has been the UK approach.
    The role of communications is to inform and to distribute 
information, and their own structure and owners cannot be 
secretive. Otherwise accountability declines, suspicions 
abound, and the credibility of all media will suffer. Creating 
such transparency, especially in concentrated infrastructure 
industries, will help public policy.
    Mr. Chairman, thank you for having these hearings.

            Why Private Equity Is a Problem for Public Media

                             February 2007

    When telecommunications and television networks were 
privatized in many countries in the `80s, there was much public 
debate. Today, a second wave of media privatization is sweeping 
the world, but this time without much public notice even among 
the activist media reform movement. It is the acquisition by 
private equity partnerships of stock-market-traded ``public'' 
media companies.
    In the past year or two, private equity firms such as Bain, 
Blackstone, Carlyle, KKR, Providence, or Texas Pacific--and 
their equivalents elsewhere-- have acquired major media and 
communications companies. These include Clear Channel, MGM, 
Univision, and PanAmSat in America; VNU/Nielsen in the 
Netherlands, ProSiebenSat in Germany, TDC in Denmark, eircom in 
Ireland, and SBS in Luxembourg. Other companies such as 
Vivendi, EMI, and parts of the Tribune Co. have been circled by 
private equity firms. Still other firms were taken fully 
private by their majority shareholders, such as Bertelsmann, 
Cox, and potentially Cablevision.
    Private equity has been in the ascendancy, buoyed by cheap 
debt, rising equity prices, and high liquidity. In 2006, almost 
a quarter of all M&As was financed in that way, with over 2,500 
deals worth $655 billion worldwide. Talent has flocked to PE 
firms, from ex-CEOs to presidents, prime ministers, and 
regulators.
    This trend has raised questions. Many PE deals are fuelled 
by a desire to flee the closer regulation and disclosure 
requirements of public companies. In the aggregate this reduces 
the transparency of the economy, even as it may make some 
companies more efficient.
    There are additional considerations for media firms.
    On the positive side, the PE deals often lead to a breakup 
of large media conglomerates to reduce debt that paid for the 
acquisition. Thus, Clear Channel, the poster boy for media 
concentration, is now in the process of selling off almost half 
of its 1,100 radio stations. Similarly, private equity has been 
an instrument of deconcentration for the Tribune Co and 
McClatchy newspaper divestitures, and for Time Warner music and 
New York Times' TV station spin-offs. Where media conglomerates 
were part of empire building, they are likely to be dismantled 
by unsentimental cost-cutters installed by the PE owners.
    On the negative side, the same cost-cutting has also 
impacts on news rooms, film budgets, script selection, and R&D. 
PE is basically conservative as it seeks the cash flows to meet 
debt payments and position the company for subsequent resale, 
just as venture capital is risk taking. PE is also short-term 
oriented, and unlikely to undertake major upgrades of 
communications infrastructure that might have long-term 
benefits for the economy.
    PE also changes the nature of media ownership. Public 
attention has centered on visible moguls such as Murdoch, 
Redstone, or Eisner. That personalized portrayal has a certain 
antiquated quality to it. In reality, most media companies have 
been majority owned by institutional investors--mutual and 
pension funds, endowments, etc.[ footnote: See Eli Noam, Media 
Ownership and Concentration in America, Oxford University 
Press, forthcoming] Just the top ten of these institutions, 
such as Fidelity, own in the aggregate over 20% of the 25 
largest U.S. media companies. But they rarely interfered with 
managers beyond a general pressure to keep the stock price up. 
Company management was accountable to all shareholders and 
scrutinized by the public and investment analysts and the 
press.
    But this changes under private equity. Now, a PE fund's 
management company controls the acquired media company fully 
and installs its management with tough performance mandates. 
Increasingly, the PE fund partners play a hands-on operational 
role beyond the merely financial one.
    In contrast to the public institutional funds with their 
numerous small investors, the private equity funds is limited 
by law and strategy to deep-pocket investors whose identity are 
not disclosed. The funds themselves keep a low profile. For 
example, Thomas H. Lee Partners is a $20 billion Boston PE firm 
that has acquired singly or in partnership the media companies 
Clear Channel, Univision, VNU/Nielsen, Houghton Mifflin, and 
Warner Music. Yet the firm does not appear to even maintain a 
website. In general, little information is available to the 
press. Securities analysts do not follow the stock. Small 
investors and activists have no forum. And governments cannot 
evaluate the soundness of companies that may be essential 
national infrastructure providers.
    All this raises questions about openness, transparency, and 
control. Where media firms have financial owners with 
supervisory and operational roles, their economic coverage must 
not be tainted by suspicion of self-interest of principals or 
of manipulation from other countries.
    What then to do about this without burdensome intervention 
in a mechanism that has positive aspects, too? The answer has 
to be to ensure the disclosure of ownership. For example, the 
actual managing owners and substantial beneficiary owners of 
media firms that hold government licenses or use favorable 
postal rates for press mailings should be part of the public 
record, as well as their nationality. In open societies large 
media holdings must be in the open. Direct regulation by 
government of media is undesirable. But disclosure is another 
matter. The role of media is to inform and shine light, and 
their own structure cannot be secretive. Otherwise 
accountability becomes impossible, suspicions abound, and the 
credibility of all media will suffer.
                              ----------                              

    Mr. Markey. Thank you.
    Mr. Noam. Thank you very much, Mr. Chairman.
    Mr. Markey. Thank you, Dr. Noam.
    And our final witness is Dr. Josh Lerner. He is the Jacob 
Schiff Professor of Investment Banking at the Harvard Business 
School. He has written extensively on the role of private 
equity firms and recently completed a study for the World 
Economic Forum on the impact of private equity on the global 
economy.
    Welcome, sir.

 STATEMENT OF JOSH LERNER, PH.D., JACOB H. SCHIFF PROFESSOR OF 
          INVESTMENT BANKING, HARVARD BUSINESS SCHOOL

    Mr. Lerner. Thank you for the invitation to testify.
    In past decades private equity has grown both in terms of 
the size and geographic reach. And what we have seen in markets 
as diverse as China, Germany, U.K., United States is a lot of 
questioning and concern raised about the impact of private 
equity on the economy. What we did in the project that you 
eluded to, Mr. Chairman, under the umbrella of the World 
Economic Forum, is really try to understand the global impact 
of private equity. Not at the level of anecdote, because 
certainly we can think of cases on one side of the--which are 
favorable or unfavorable,--but instead try to say, let us put 
together a team of scholars and do really systematic work in a 
very independent way. We structured it with a steering 
committee that included a broad array of perspectives and 
constituencies to ensure the independence of this effort.
    We did a number of studies about the impact of private 
equity. And I am not going to try to walk through all of them 
in the 5 minutes I have but just simply highlight a few 
conclusions that struck us as particularly surprising and 
important. First, is the relative infrequency of bankruptcy and 
financial restructuring as outcomes of private equity 
transactions. When you essentially look at the evidence around 
one, the rate of bankruptcy or major financial restructuring of 
a private equity deal is around 1.2 percent per year. If you 
compare that to U.S. corporate bond issuers of all types, the 
rate for them is 1.6 percent per year. So over the last four 
decades the rate of distress or restructuring of private equity 
deals is actually lower, not higher, over many booms and busts 
in these cycles.
    Secondly, holding periods, rather than having gotten 
shorter, and certainly from reading many popular business 
periodicals we might think that this is ubiquitous, have 
actually become longer, not shorter. Quick flips or 
transactions which are just simply held for a year or two have 
actually decreased.
    Third, we looked at long run investment. Essentially the 
question I am saying, is there disinvestment in a systematic 
way by private equity-backed firms? We looked here at just one 
measure, not because it was the only measure we wanted to look 
at, but because it was something we could look at in a rigorous 
and systematic way across a broad sample, which was investment 
and innovation. And what we found is that the level of 
innovation, if measured for instance by patenting, before and 
after buyouts remains quite constant. But when you actually 
look at the importance of those innovations measured in a 
variety of ways that economists have developed over the years, 
it seems that the patents developed by private equity groups, 
by private equity-backed firms, are actually more important 
after the buyouts. It seems they have higher impact largely 
because research in the more peripheral areas is trimmed in 
favor of focusing on the core areas that the firms specialized 
in.
    Finally, we looked at the question of employment, whether 
there had been some earlier efforts to look at employment by 
private equity firms. There were all sorts of issues and 
concerns we could talk about with them. Here we focused on 
employment in the United States, by transactions in the United 
States, so we didn't want to give private equity groups credit 
for creating jobs in China or India. We just simply said what 
happens in terms of employment by private equity-backed firms. 
What we essentially found was three things. First of all, that 
even prior to the buyout the private equity-backed firms were 
losing jobs. That essentially these were sick firms that were 
already in trouble. Secondly, that in the 2 to 3 years after 
the transaction the job losses continued, so that one saw this 
period of continued relative underperformance in terms of job 
creation relative to firms with the same characteristics. And 
finally, when you look at the job creation at new facilities, 
in other words not what is happening at the existing facilities 
but rather at the new facilities that are being created by 
these firms they almost--the private equity groups are actually 
creating more jobs. So one essentially has a situation where 
private equity-backed firms are both shutting jobs at the 
existing facilities, but adding jobs at new facilities that 
they are opening in a way that almost entirely offsets each 
other.
    Clearly there is considerably more work to be done in terms 
of this research and many of the issues that we have raised 
today, which we hope to pursue in the months and years to come.
    But I very much want to thank you for the invitation and 
for your attention here.
    [The prepared statement of Mr. Lerner follows:]

                        Statement of Josh Lerner

    Thank you for the invitation to testify today.
    In the past decades, the private equity industry has grown 
both in terms of size and geographic reach. In markets as 
diverse as China, Germany, South Korea, the United Kingdom, and 
the United States, this growth has triggered anxiety about the 
impact of private equity on employment, managerial time-
horizons, the overall health of companies and the economy more 
generally.
    This anxiety is not unreasonable. While the leveraged 
buyout transactions of the 1980s were scrutinized in a number 
of important academic analyses, these studies had two important 
limitations. First, the bulk of the older research focused on a 
relatively small number of transactions involving previously 
publicly traded firms based in the United States. But these 
represent only a very modest fraction of all buyouts. The 
second limitation of the older research relates to the fact 
that the industry has grown and evolved tremendously since the 
1980s.
    The World Economic Forum's research project on ``The Global 
Economic Impact of Private Equity,'' which I led, sought to 
address this problem. The goal was to complete a rigorous study 
of the impact of these investments around the world, prepared 
by a team of leading international scholars, including Ann-
Kristin Achleitner, Francesca Cornelli, Lily Fang, Roger Leeds, 
and Per Stromberg, as well as a number of co-authors, and 
guided by a steering committee that included leaders from the 
private equity industry, pension funds, organized labor, and 
the public sector.
    Our study involved a broad array of research on private 
equity's economic impact. In this testimony, I highlight six 
conclusions that we as authors found particularly interesting.
    The first study examined the nature and outcome of the 
21,397 private equity transactions world-wide between 1970 and 
2007. The key findings were:
     6% of buyout transactions end in bankruptcy or financial 
restructuring. This translates into an annual rate of 
bankruptcy or major financial distress of 1.2% percent per 
year. This rate is lower than the default rate for U.S. 
corporate bond issuers, which has averaged 1.6% per year.
     Holding periods for private equity investments have 
increased, rather than decreased, over the years. 58% of the 
private equity funds' investments are exited more than five 
years after the initial transaction. So-called ``quick flips'' 
(i.e. exits within two years of investment by private equity 
fund) account for 12% of deals and have also decreased in the 
last few years.
    The second study examined long-run investments by firms. It 
was motivated by the lively debate about the impact of private 
equity investors on the time horizons of the companies in their 
portfolios. The private status, according to some, enables 
managers to proceed with challenging restructurings without the 
pressure of catering to the market's demands for steadily 
growing quarterly profits, which can lead to firms focusing on 
short-run investments. Others have questioned whether private 
equity-backed firms take a longer-run perspective than their 
public peers, pointing to practices such as special dividends 
to equity investors.
    In this study, one form of long-run investment was 
examined: investments in innovation. Innovation offers an 
attractive testing ground for the issues delineated above due 
to various factors. These factors include the long-run nature 
of R&D expenditures, their importance to the ultimate health of 
firms and the extensive body of work in the economics 
literature that has documented that the characteristics of 
patents can be used to assess the nature of both publicly and 
privately held firms' technological innovations.
    The key finding was that:
     Patenting levels before and after buyouts are largely 
unchanged. But firms that undergo a buyout pursue more 
economically important innovations, as measured by patent 
citations, in the years after private equity investments. In a 
baseline analysis, the increase in the key proxy for economic 
importance is 25%. This results from firms focusing on and 
improving their research in their technologies where the firms 
have historically focused.
    A third study examined the impact of private equity on 
employment. This question has aroused considerable controversy. 
Critics have claimed huge job losses, while private equity 
associations and other groups have released several recent 
studies that claim positive effects of private equity on 
employment. While efforts to bring data to the issue are highly 
welcome, many of the prior studies have significant 
limitations, such as the reliance on surveys with incomplete 
responses, an inability to control for employment changes in 
comparable firms, the failure to distinguish cleanly between 
employment changes at firms backed by venture capital and firms 
backed by other forms of private equity, and an inability to 
determine in which nation jobs are being created and destroyed.
    We constructed and analyzed a dataset in order to overcome 
these limitations and, at the same time, encompass a much 
larger set of employers and private equity transactions from 
1980 to 2005. The study utilizes the Longitudinal Business 
Database (LBD) at the U.S. Bureau of the Census to follow 
employment at virtually all private equity-backed companies, 
before and after private equity transactions. We examine 
300,000 U.S. establishments (specific factories, offices, and 
retail outlets where business takes place) that are part of 
5,000 firms that received private equity investments, as well 
as 6 million matching establishments.
    Among the key results were:
     Employment grows more slowly at establishments that are 
bought out than at the control group in the year of the private 
equity transaction and in the two preceding years. The average 
cumulative employment difference in the two years before the 
transaction is about 4% in favor of controls.
     Employment declines more rapidly in bought-out 
establishments than in control establishments in the wake of 
private equity transactions. The average cumulative two-year 
employment difference is 7% in favor of controls. In the fourth 
and fifth years after the transaction, employment at private 
equity-backed firms mirrors that of the control group.
     But firms backed by private equity have 6% more 
greenfield job creation, that is, at new facilities in the 
United States, than the peer group. It appears that the job 
losses at bought-out establishments in the wake of private 
equity transactions are largely offset by substantially larger 
job gains in the form of greenfield job creation by these 
firms.
    The project has important implications for how to think 
about the role that private equity plays in the economy. To the 
authors, a few broader (albeit tentative) observations emerge 
from the works:
     The discussion of many aspects of private equity's impact 
on the economy has been characterized by confusion along many 
dimensions. As the employment study highlights, the evidence 
supports neither the apocalyptic claims of extensive job 
destruction nor arguments that private equity funds create huge 
amounts of domestic employment.
     The substantial periods that firms remain under private 
equity control and the robust long-run investments in 
innovation as measured by patents appear consistent with the 
view that the LBO organizational form is a long-run governance 
structure for many firms.
     The results regarding private equity's impact on 
employment--as well as those in the innovation study--fit the 
view that private equity groups act as catalysts for change in 
the economy.
    More work remains to be done. There is clearly a need for 
further research that addresses additional questions such as 
the implications of private equity on productivity, wages, and 
unionization, as well as that understanding patterns outside 
the U.S. We intend to pursue these questions in follow-on work. 
Thank you for your attention.
                              ----------                              

    Mr. Markey. Thank you, Dr. Lerner, very much.
    And that completes the opening statements from our 
witnesses. And the Chair will now recognize himself for a round 
of questions.
    Ms. Harman made reference to this, Mr. Caliboso, and that 
is the headline in the New York Times today about this pressure 
that is now being applied to the buyout industry. Given the 
debt which many of these firms carry, and your personal 
experience with Hawaiian Telephone, what are some of the things 
a state regulator should look at closely with private equity 
ownership in order to protect ratepayers?
    Mr. Caliboso. Just that as I mentioned, in this particular 
transaction, the proposal at that level was higher at the 
beginning. We looked at that and required additional capital 
infusion right at the beginning to bring the debt level down to 
a more reasonable level. Throughout the process we are 
continuing to monitor that level. In fact, I think we are 
waiting for a current report that will report their current 
debt structure and also provide for a debt repayment plan to 
bring down their debt to a more reasonable level. I can't 
remember exactly when we are going to get that, but I believe 
we are going to get that this month. So we are monitoring the 
debt level to try to keep it reasonable.
    Mr. Markey. So you are concerned, though, that----
    Mr. Caliboso. Yes.
    Mr. Markey [continuing]. Investors might look at ratepayers 
as the bailout mechanism for other problems which they might 
have in their firm?
    Mr. Caliboso. I don't think--well, we, like I said, we had 
initially a 4 year moratorium on rate increases. So when they 
came into this transaction, they knew that they couldn't just 
raise rates through the company immediately. So that is one 
issue. Eventually, the company would probably have to come in 
for a rate case like any company would have to come in for a 
rate case, but that is something that we oversee directly.
    Mr. Markey. Great. Professor Lerner, Congress has 
historically, since the 1934 Communications Act, attached non-
economic values to certain sectors of the economy, most notably 
broadcasting and media. So given the special place that these 
companies occupy in our society, what aspects of private equity 
investments in broadcast and media companies should concern us 
all?
    Mr. Lerner. Well, I think to a certain level the same kind 
of concerns that would be raised across any industries would be 
appropriate here. In other words, saying to what extent are--is 
private equity additive in terms of creating stronger 
companies, which are going to be viable and competitive, and to 
what extent is there instead going to be creation of real 
fundamental economic problems in terms of natural distress. I 
think it is fair to say that the concerns may be particularly 
intense in an infrastructural investment such as 
telecommunications. But in some ways I see this as more similar 
than different in the sense that if investors are contributing 
to innovation employment growth. In other indicators it is hard 
to say that we should use some sort of special sets of 
concerns. Those are really the same fundamental worries that 
will be across the economy.
    Mr. Markey. OK. Dr. Noam, could you talk about that same 
issue but in terms of transparency and the control of those 
assets?
    Mr. Noam. I think that the concerns in--that are addressed, 
for example, in studies like Professor Lerner's ones, which is 
an excellent study, but in a way it kind of deals with all 
companies, including the Dunkin Donuts of this world and so on. 
I think that in these industries there are special concerns. 
The concerns are the infrastructure concerns and the market 
power concerns. This is why regulators exist, why the FCC 
exists. There are historic reasons for that. When these markets 
become competitive then we don't have to worry about them, but 
they are not quite yet there. Now as to the transparency, I 
think I would go one step beyond the Chairman from Hawaii and 
say that I think that kind of the nature of the ownership 
should be disclosed. The investment plans of the company beyond 
the debt issues should also be out there in the public record. 
Disinfectant as the sunshine is, the best disinfectant I think 
works here. If you have public debate about various ways in 
which companies function in this environment, much progress 
would be made.
    Mr. Markey. OK. Mr. Bressler, do you want to comment on 
that in terms of whether or not there is sufficient 
transparency and whether or not there is sufficient public 
oversight of private equity ownership of these media firms?
    Mr. Bressler. Well, Mr. Chairman, thank you.
    You know, obviously we take our obligation--our public 
issues obligations on these free over-the-air broadcast 
licenses very seriously. And if you look at the subject of 
transparency, obviously I can only talk to the companies that 
are most familiar with that that I referred to, both in my 
written and oral testimony, we have public ventures for all 
those companies. And actually for some of our companies, like 
our proposed acquisition with Clear Channel, it will be public 
ownership in those companies. So in my experience having been a 
CFO of Time Warner, having been a CFO of Viacom, both public 
companies, and now being on the other side in terms of private 
equity, the transparency is identical. You know, we give out 
full--on a quarterly basis we file information for all of our 
public bondholders that are out there, even our companies that 
are fully private like Univision. And in Clear Channel we will 
have quarterly reporting, since we will have public 
shareholders also. And to the extent that the FCC, and having 
just gone through a year long plus process with the FCC and 
their review and their request for information,we would oblige 
any information requests that come out either today or in the 
future about that.
    Mr. Markey. All right. Thank you. My time has expired.
    The Chair recognizes the gentleman from Florida, Mr. 
Stearns.
    Mr. Stearns. Thank you, Mr. Chairman.
    In response to a letter from Chairman Dingell and Chairman 
Markey, FCC Chairman, as I mentioned in my opening statement, 
Martin wrote that private equity firms are subject to the same 
reporting requirements and regulations as any other entity and 
that there is no evidence that private investment has any 
harmful effects on the quality of service. So, Mr. Chairman, I 
ask unanimous consent to enter his letter into the record, if 
you'd be so kind?
    Mr. Markey. Without objection.
    [The information appears at the conclusion of the hearing.]
    Mr. Stearns. Thank you, Mr. Chairman.
    Professor Noam, in looking through your editorial recently 
in the Financial Times of February 2007, you indicated, in the 
last paragraph, you went on to say that direct regulation by 
government of media is undesirable. So you are saying that 
government--but disclosure is another matter. And so the 
question is based upon Chairman Martin's letter and what we 
have heard from Mr. Bressler and also that Dr. Lerner has also 
provided information talking about that actually private equity 
seems to cause less bankruptcy, don't we have this disclosure 
that you are concerned about? And if we have that then what is 
the problem?
    Mr. Noam. Well, I was impressed by the testimony we just 
heard, but it seems that there is a general view that one of 
the motivations for going private is, in fact, to get out of 
the more onerous public disclosure requirements that the public 
corporations have. Now, if just a few companies would do that, 
presumably we can live with that. But if the entire telecom, 
cable infrastructure companies and most of the broadcasters 
would be the same, I think that we would simply not know what 
is the--about the media environment in which we operate. I 
would find that troublesome, and I don't think that maintaining 
the disclosure requirements that companies had before, to the 
extent that they are regulated telecom companies or licensees 
of broadcast licenses, that that is a particularly onerous 
requirement for them to maintain that.
    Mr. Stearns. But if Mr.--the Honorable Caliboso, said that 
when the companies come to get their rates increase as a 
regular, he just says no, so then that puts the burden back on 
them to make it work. So if there is not the transparency and 
they go ahead and increase their rates and take on this 
disinvestment with more funding, then when they ask for more 
rates the regulators say no.
    But, Mr. Bressler, there is a perception, I guess, that is 
out there that basically these private equity firms are just 
sort of chop shops. They come in, cut costs, dismantle 
businesses, sell them off for scrap value, and I think that is 
probably the fear that a lot of people have that that will 
occur. So the question is, is that an accurate portrayal of 
what happens?
    Mr. Bressler. Well, I--yes. Clearly I don't believe that is 
an accurate portrayal. I mean just maybe one comment or one 
additional comment on transparency. At least, you know, the 
companies that I have been involved with, and I think all my 
colleagues in the private equity industry to be involved with, 
public disclosure and transparency is not a reason to go 
private. You know, there is the reason that these companies 
would like to go private, or the opportunity to go private, is 
because that may be some of the short-term earnings pressure 
they feel. Because of the holders who want to hold the stock 
for three months or four months or five months and they don't 
feel they can make the right long-term investment for the 
business. But in the 2\1/2\ plus years that I have been 
involved in private equity and the companies that we are 
involved in, in our firm, I have yet to hear anybody say they 
want to go private because of concern about disclosing 
information. I do think we are transparent. On the subject of 
the chop shop, as you referred to it, you know, we are long-
term investors. I think Professor Lerner alluded to the fact of 
the average hold. At THL our average hold is probably in a 5 to 
7 year----
    Mr. Stearns. Dr. Lerner, is that sort of true what he is 
saying? That the average hold is there? And I guess the 
question for you is do you think that they, this chop shop, is 
a sort of a misnomer? That they actually come and strip the 
value and then quickly dump them? And in some cases they might 
do this to create health entities.
    Mr. Lerner. I think the important thing to emphasize is 
that if you look at a typical company over the last 20 years 
across really all countries, the period that it has remained in 
private equity ownership from the time of the initial purchase 
to its sale is around 8 years. So it is very different from, 
you know, a sort of a quick flip, as it is often popularly 
portrayed. That is not to say that there is not trimming of 
underperforming divisions, or add-ons of additional divisions, 
or fine tuning of a company, but basically this is not a short-
term kind of investment as it is often portrayed.
    Mr. Stearns. Thank you. Mr. Chairman, my time is expired.
    Mr. Gonzalez. Thank you very much.
    And the Chair will now recognize myself for 8 minutes.
    You are probably wondering what you are doing here before 
this particular subcommittee, and why you may not be in another 
subcommittee, why he is in meetings and so on. And so I am 
going to quote Dr. Noam from his written statement, which I 
think he may have already gone over, but I want to emphasize 
the reason why I believe that the Chairman of this Committee is 
expressing his keen interests.
    Infrastructure is critical for society and economy. Media 
are critical for democracy, culture and commerce precisely 
because their social value exceeds their private value, and the 
companies have usually understood this and were not simply 
profit maximizers or were regulated in that direction, for 
example, in universal service. When they did not they ended up 
before this Committee. If ability or willingness to invest in 
infrastructure and in competing networks is reduced, everyone 
will be affected. So I think that is our special interest here, 
and I know what we are hearing here. Unfortunately, I think 
private equity is viewed in maybe not the most favorable light, 
and I am just going to toss out maybe some reasons why some 
people may feel that way, and that is private equity firms when 
they come in and buy a company really aren't part of that 
particular industry. They are really looked at as outsiders and 
not having that same institutionalized commitment and 
dedication to the purpose of that particular industry or 
entity. The other, of course, some of us, many of us, are not 
real happy about tax treatment that maybe private equity and 
managers and such may derive. And that has been addressed, but 
not successfully. We also presume that in the public sector you 
have a regulatory scheme that does bring certain scrutiny that 
is not there when it comes to private equity. That may or may 
not be true, and we will discuss that, Dr. Lerner. We also may 
remember the days of the late 80s and early 90s of the 
leveraged buyouts and say wasn't that private equity, but we 
simply called them leveraged buyouts back then. And we also 
have had bad experiences with corporate raiders, not to say 
that private equity aren't corporate raiders, but nevertheless, 
I think there are some people that may believe that they are a 
close cousin. The big question is does the private equity 
business model expose the telecommunications industry to 
greater risks? So I am going to now basically read from the 
story that everyone has alluded to by Michael J. de la Merced 
in the New York Times. And I know that Congresswoman Eshoo, as 
well as the Chairman of this subcommittee, already made some 
reference, and this is that the credit crisis spreads through 
the financial markets. It is discussing Blackstone. The firms 
said earnings tumbled 89 percent in the final three months of 
2007 and warned that the deep freeze in the credit markets, and 
by extension the private equity industry was unlikely to fall 
soon. ``They see the handwriting on the wall,'' said Martin 
Fridson, a leading expert on junk bonds. He said of buyout 
firms, ``they are staring into the jaws of hell.'' That is a 
pretty strong statement, and I am sure that you will want to 
address that, and I may ask Mr. Bressler to address that. But, 
Mr. Lerner, let me ask you. With this credit crisis, which I 
believe is true and is out there, isn't there greater exposure 
to a company that basically has been purchased by private 
equity as opposed to someone like AT&T or Verizon?
    Mr. Lerner. I think it is absolutely fair to say that 
private equity firms, on average, are more leveraged than 
traditional firms. And typically we think about that as being 
associated with increased risks. So I think it is a fair 
statement. At the same time I think it is important to 
emphasize that the--much of what the discussion I think in that 
article, and the discussion in the industry more generally, was 
focused on the origination of new deals and the difficulties 
the groups were facing in terms of doing new deals. When one 
thinks about the way in which the existing portfolio of 
transactions have been structured, in large part the debt, in 
terms of which the debt has been done, have been locked in. 
That is not to say that there can't be difficulties. And as you 
properly alluded to, in the early 1990s there were difficulties 
in terms of many of the buyout firms that were,many of the 
buyouts that were completed, they had overleveraged, and as a 
result he had to go through painful restructurings. But again, 
just to emphasize what I see as the top line is that, yes, 
there is more risk. Yes, there is real possibility of failure, 
but if you look over the absence flows that are from the 
beginning of the industry until today, you see that the 
probability of bankruptcy or major financial restructuring is 
quite modest relative to industry as a whole or corporate debt 
issue as a whole or even relative to our expectations about 
private equity.
    Mr. Gonzalez. Dr. Lerner, I guess that one of my concerns 
is simply when we start looking at telecommunications and the 
tremendous investment in infrastructure is really an investment 
that you make long-term. And you have already indicated that 
there really is not much difference between a private equity 
owner and let us say the typical corporate owner, public and so 
on. But wouldn't it be fair to say that if you are really in a 
tight credit crunch, which impacts the private equity business 
model much more so than the traditional AT&T or Verizon model, 
then who is going to bail out quickly or more quickly? Who is 
not going to make those long-term commitments in investments 
looking forward when the easier ready money is not there to 
retire the debt, which obviously was incurred in order to 
accommodate the purchase in the first place?
    Mr. Lerner. Well, I think it is a more complicated story in 
the sense that when we think about publicly traded companies, 
down cycles can have tremendous pressures on them as well. When 
you think about the nature of a private equity fund, we are 
talking about a fund which has an existence of essentially a 
decade or potentially extension for another 2 or 3 years 
thereafter. So there is an ability to ride out the storm as 
opposed to public companies which often--because they have a 
highly visible stock price. When that stock price drops they 
are going to be in a situation in many instances where they 
feel very intense pressure to do something right away, and 
often that can lead to decisions with which the benefit of 
hindsight look short-sighted. That being said, clearly if we go 
into a downturn which looks more like a depression, rather than 
a recession, there is going to be a lot of pain to go around, 
and ultimately the private equity industry will doubtless feel 
much of that pain as well. But I just simply don't think it is 
as clear as saying, well, because there is debt, there is more 
risk, and therefore there is a greater probability of 
restructuring bankruptcy or just simply foolish decisions being 
made.
    Mr. Gonzalez. All right, sir. I guess what I am reading 
here is that everybody is basically in the same position. And 
so we go into this credit crisis that there really is not going 
to be any difference between let us say the AT&T 
telecommunications investment as opposed to that company that 
has been purchased for a private equity. I guess what I want to 
know is, who is going to get wheeled into that emergency room 
sooner?
    Mr. Lerner. I think it is a hard question to answer 
absolutely. I think that when you look at the private equity 
model, it has got strengths and weaknesses. When you look at 
the corporate ownership model, it has strengths and weaknesses 
in terms of dealing with the down cycle. And I think you will 
end up with, you know, probably both facing challenges if we 
enter into a prolonged downturn.
    Mr. Gonzalez. Thank you very much, Dr. Lerner.
    My apologies to the other witnesses, but I really had a lot 
to discuss here with the doctor. And the Chair will recognize 
my colleague from the great State of Illinois, Mr. Shimkus.
    Mr. Shimkus. Mr. Chairman.
    Mr. Bressler, some of these will be redundant. But are 
there certain communications businesses that might never have 
gotten off the ground were it not for private equity 
investments?
    Mr. Bressler. Well, I think that is absolutely a fair 
point. That there are communication businesses, you know--what 
is interesting about the business is that we bought recently in 
both Univision and our proposed acquisition about Clear 
Channel, you know, these are businesses that not a lot of 
people showed up to buy, quite frankly. Which I think tells you 
something about the over-the-air broadcasting waves and Wall 
Street's view about the value of those. And from our standpoint 
we looked at these businesses and said, this is a great 
opportunity because of digital migration, because of localism. 
If you take a company like Univision and what we have been able 
to do since we had our ownership; that is a reminder to the 
Committee. It is the same management that is out there today in 
Univision that was there before, that will be there after we 
exit the company at some point in the future and that is there 
during our tenure. And I think what we enable a company like 
Univision to do is to do something like host the Spanish 
language debates between the Democrats and the Republicans, 
have a show on Sunday called Apunto. So I can't address 
directly the idea, because we do more larger, private buyouts, 
as opposed to some of the smaller things that enable new 
businesses to start up. What I do look at within a company like 
Univision and what we have enabled them to do as a new 
business, which they were not able to do before. And they are 
able to do that over a long-term period of time. And I would 
say that those are things that a public company in this 
context, in this environment, the commitment to spending $20 
million on digital that we are going to do this year, I would 
really question if Univision was still a public company whether 
that would happen right now, because of the pressures that are 
out there. And I do think that is the benefit we bring in 
private equity.
    Mr. Shimkus. Thank you. I was going to go onto the chop 
shop debate, but I think we have covered that. I think there is 
a different opinion that Dr. Lerner, both a great, smart panel, 
says the facts speak, that there are benefits, and I think, Dr. 
Noam, if I can summarize, that there are problems. Is that 
right with the mentality? Is that fair?
    Mr. Noam. Yes.
    Mr. Shimkus. I mean I don't--you had a whole testimony 
ready, and I don't want to summarize in a way that you--but 
that is really the debate here?
    Mr. Noam. In this particular industry, telecommunications, 
where there is infrastructure role and it is significant market 
power of incumbency, there are problems, or there are 
incentives to problems. And the risks that Mr. Gonzalez 
referred to, to me the problem is that there are not enough 
risks, because you know that the rate payers, the users, 
ultimately will bail you out. Nobody is going to let the 
telecom company go belly up.
    Mr. Shimkus. Unless you got a great regulator, Mr. 
Caliboso, here who says no to the rate increase. Let me go to 
another question here that deals with the economy of the 
People's Republic of China. It is the second largest in the 
world after the U.S. Global private equity firms are rapidly 
opening up offices. China's leaders recognize that they must 
build a vibrant private sector. That is the premise. You may 
agree or disagree. If we were to limit or put more restrictions 
on private equity investment in the U.S., would we be pushing 
investors away from the U.S. and hindering innovation? Let me 
just go, Mr. Bressler and Dr. Lerner. And if you don't want to 
respond it is not a requirement that you have to.
    Mr. Bressler. Well, thank you. No, we still--we are a one 
office firm. Basically we don't have any offices outside the 
United States, as the subcommittee knows factually. The 
predominance of our investment is here in the U.S. and North 
American growth.
    Mr. Shimkus. That is why you say--I don't have an issue, 
you know, a fish to fry in that. So then we will go to Dr.--to 
the professor.
    Mr. Noam. The premise of the question is correct. The 
question, however, is how far do you want to push this? 
Supposedly talking about health and environment and so on. You 
can also make the same argument that having worker protection 
of some sort for their health and the environment would push 
business away to China.
    Mr. Shimkus. Have global climate change debate. Thank you.
    Dr. Lerner?
    Mr. Lerner. Just one thought on top of Dr. Noam's comment, 
which is that I think the crucial thing to look at is the 
extent to which regulations are out of sync with those in other 
countries. It is clear that this in some sense is a very mobile 
industry in the sense the key asset is the human capital of the 
people who are there, as well as the routines within the firms 
who in fact are to a certain extent seeing a redeployment of 
resources away from the United States and to emerging markets 
today, where there seems to be a perception of greater growth. 
And one could at least worry that in a level of regulation that 
was out of line with that seen in other developed economies 
might accelerate that trend, rather than as a result.
    Mr. Shimkus. Thank you, Mr. Chairman.
    If you want--I will end with--if you want employees, you 
have to have employers.
    I yield back.
    Mr. Markey. Thank you very much.
    The Chair will recognize Mr. Green, who hails from the 
former Republic of Texas.
    Mr. Green. I wish we had some of those funds that were 
around the world though, Mr. Chairman. Our oil and gas revenues 
aren't what they used to be. Those of us from Texas realize 
that OPEC actually patterned their group after what the Texas 
Railroad Commission used to do, but we don't have near that 
production.
    I want to thank our witnesses for being here. And I think 
what we are seeing is the concern that Members of Congress have 
for something that we really need. The private equity effort, 
both in telcom, but in lots of other businesses. We need to be 
able to put that money together and be able to market.
    I guess my concern, overriding question, is some of us are 
concerned about, for example, if a private equity put together 
to buy AT&T or Verizon--and bear with me for a minute. If I am 
concerned that the United States Government may have access to 
our unfettered information, what would happen if it was a 
private equity firm that had significant ownership from a--
whether it be China, whether it be the Gulf States, and how 
would they still have to comply with U.S. laws to get that 
information, but being the owner of it? Is there any comment to 
that? Because that would be my concern. Instead of having a 
publicly traded, for example, like AT&T or Verizon that would 
have that. I know we are getting away from the Clear Channel 
example, but I worry less about media, because there is so much 
competition in it. Yes, any--Dr. Noam?
    Mr. Noam. Those kinds of problems that you are alluding to 
can be dealt with, I believe, through general regulations, 
whether it is the FCC or the State Commissions or some general 
law. But protection of privacy and of customers and so on, I 
don't think they are--the ownership is material. I would think 
that it is more material, since you are alluding to foreign 
ownership, where the content is a question, and here, at least, 
when we would want to know if foreign investors are heavily 
involved in media companies who they are. The identifications, 
since you are alluding to some issues, some regions of the 
world where there are--there the U.S. is at tension with.
    Mr. Green. Well, in a free society we do have, you know, as 
long as we have that transparency, I guess, and you can see.
    Mr. Noam. Yes.
    Mr. Bressler. The only thing I was going to add to that is 
one, I do think we have foreign ownership rules right now, 
right, that have been mandated. And obviously I think all of us 
in private equity is no different a buyer than anybody else 
that may be a company out there. And so with respect to 
broadcast properties, I believe that foreigners should bolster 
in place today and to the extent that they may change. We all 
have to abide by those rules. In terms of transparency, the 
management of the companies that we have and whether it is the 
current companies that we own at THL, or I believe as a general 
statement for the industry, those are the managements that will 
be there before we owned the companies, to a great extent that 
the management's not there, when we owned and they will then 
survive after the ownership ultimately changes and passes down 
the road. And I will tell you that we expect that management to 
abide by all the rules. Just as if we have a CFO we expect them 
to stay a public--to abide by Sarbanes-Oxley. If there is a 
general counsel and CO, we expect them to abide by the FCC. And 
if there are public interest obligations and disclosure 
obligations that are set up by the Congress of the United 
States, we expect our people to abide by those also. And so I 
think there is a set of rules that we are very comfortable 
adhering to as any other buyer would be and are always happy to 
have the discussion as to how those rules evolve and change.
    Mr. Green. Dr. Noam, I know you briefly alluded earlier in 
what we can remedy some of the problems in private equity 
ownership. Can you expand on that in the 48 seconds I have 
left?
    Mr. Noam. What we can do to remedy. My point was 
disclosure. If you know who owns it, if you know what their 
investments are, if you know what kind of payments they make to 
the private equity funds, I think then you can have a healthy 
public debate, and Congress can debate it, too. And then you 
can report on it, investors can look at it. I think that will 
take a lot of the problems.
    Mr. Green. And in closing I think after watching what 
happened with Dubai purchasing to manage the Port of New 
Jersey, New York--coming from Houston we have a government 
agency that runs our port, and frankly that same company leased 
out certain parts of the Port of Houston. We had no problem 
with that. But, you know, I saw the furor that erupted over a 
national company owning an asset. So we could see the same 
thing probably with what would happen with this.
    Thank you, Mr. Chairman, for the time.
    Mr. Markey. The gentleman's time is expired.
    The Chair recognizes the gentleman from New York, Mr. 
Fossella.
    Mr. Fossella. Thank you, Mr. Chairman. Thank you witnesses 
for coming today, and I appreciate your input.
    And we know that there is substantial evidence that private 
equity has played an important role across the spectrum--
industry, whether in communications or retail, auto 
manufacturing. We know that capital is the life of the 
economy's strength, and private equity is a critical source of 
capital where capital may otherwise be unavailable. But I guess 
it is depending on perspective. If you want to look for a demon 
or do you want to see the cross section of the markets. We know 
that the U.S. market is the deepest in the world, equity and 
capital at its greatest. So I would like to look at it from--
almost follow up Mr. Shimkus's approach. In the last year or so 
there have been highlights of how America's competitiveness, 
while still the greatest in the world, is facing competition 
from not just other markets like London and established markets 
such as that, but emerging markets. And pools of capital can 
flow instantaneously. Three major reports, McKinsey or 
Bloomberg's reports, Chamber of Commerce, and another have 
spoken to this. So I guess the fundamental question is why do 
public companies want to go private? You know, what is it 
about--are there disincentives? I mean Mr. Bressler talked 
about the pressure for quarterly earnings, the demand to meet 
expectations. Perhaps it is implementations of legislation that 
has been passed by Congress or perhaps litigation. I know many 
overseas refuse to list in the country because of the threat of 
litigation and class actions. So I would like to hone in on 
those two aspects of why companies decide to seek private 
equity groups and to what extent is the regulatory regime we 
have in place in this country and/or the litigation climate we 
have in this country incentives for public companies to go 
private.
    And I will start with Mr. Bressler.
    Mr. Bressler. Thank you. Well, clearly I am not an expert 
on SEC or regulatory law. But I will say for the companies that 
I have been involved in and why I believe they chose to go 
public is they are in extremely competitive industries. If you 
look at, you know, the free over-the-air broadcasters, they are 
competing with somebody as--I am sure you all have children. I 
have got four girls that are 22 to 11. They are competing for 
their time, whether it is iPods or DVDs or different forms of 
entertainment. And so they need to have strong healthy 
companies. They need to build those companies. And how do you 
get a strong, healthy company, which by the way, is a 
byproduct--I think to the Chairman's point, if you are going to 
do the non-financial thing you need to have a strong, healthy 
company to do those non-financial things and their impact on 
society. So I believe in the companies that we talked about 
with Univision and our proposed acquisition of Clear Channel, 
you know, the ability to continue to invest for the long term. 
The ability of the digital where we are putting $100 million 
into Univision and $20 million in 2008 to bring digital to all 
the TV stations in Univision, to build our HD radio 
capabilities at both Clear Channel and Univision and to all the 
television stations that are out there. Now, we don't know the 
exact impact like in radio that digital is going to have. We do 
know that it is going to increase by double the number of 
offerings to the consumers that are out there in the local 
market. So a very local product with double the offering to the 
consumers. We believe that is going to create value and be of 
benefit. But at the same time I think the owners of those 
companies being the public shareholders prior to us taking 
ownership didn't see, you know, wasn't enabling management to 
make those investments that they needed for the long term 
health of their businesses to be able to compete in this very 
intense market.
    Mr. Fossella. So pointedly is there any aspect to, again, 
the fundamental questions of litigation or the threat of 
litigation and class actions and/or the regulatory structure we 
currently have in place as it applies to public corporations, 
Dr. Lerner? You were nodding your head.
    Mr. Lerner. I will just point to one--there have been a 
number of studies around these questions, so I will just simply 
point to one study very briefly, which makes this point in a 
pretty dramatic fashion. It essentially looked at the companies 
which were just above and just below the cutoff point for 
Sarbanes-Oxley, essentially based on the tests around public 
market float. And what it highlighted is that if you look at 
the ones who were otherwise almost identical, but who were just 
above that cutoff, what they have found is not only did the 
direct expenditures, in terms of accounting, legal fees, go up 
quite dramatically as we would expect with requirements for 
Sarbanes compliance, but we also saw in the year after this was 
implemented--the office also found in the year after it was 
implemented there a quite pronounced negative stock return for 
these companies, which suggests investors were really looking 
at the kind of costs associated with complying with this 
regulation and translated into bad news for that company. So 
that is just simply one study. There are several out there, but 
they do suggest that in addition to whatever kind of positive 
features of going public are out there, there are also some 
negative features in public that do impose some real costs.
    Mr. Fossella. Thank you, gentlemen.
    Mr. Markey. The gentleman's time has expired.
    The Chair recognizes the gentleman from Michigan, Mr. 
Dingell.
    Mr. Dingell. Mr. Chairman, thank you.
    First of all, this is a very important hearing, and I 
commend you for going into this very important question. 
Second, I have a unanimous consent request that I be permitted 
to insert my opening statement into the record at the 
appropriate place.
    Mr. Markey. Without objection it will be inserted at the 
correct place in the record.
    [The prepared statement of Hon. John D. Dingell follows:]

                   Statement of Hon. John D. Dingell

    During the last several years, more private equity firms 
have been investing in and acquiring publicly held 
communications companies. Recent examples include the purchase 
of Clear Channel, Univision, and Alltel. Today's hearing will 
examine the implications of this growing trend for 
communications services that are an integral part of our daily 
lives. The question for this hearing is whether these 
transactions serve the public interest.
    Is private equity ownership of telecom and media companies 
a positive development, a negative development, or a bit of 
both?
    On the one hand, private equity ownership suggests a 
financial management style focused on cutting costs, increasing 
revenues, and ultimately reselling a more efficient enterprise. 
Private equity ownership allows for a more nimble management 
structure than is possible with a publicly-held company. It can 
also shield companies from Wall Street pressures to produce 
ever-higher earnings each quarter. Communications and media 
companies that must sacrifice short-term earnings in order to 
make long-term investments could benefit from the financial 
approach associated with private equity. From a purely economic 
standpoint, the advent of private equity ownership could be 
viewed as beneficial.
    On the other hand, communications properties, especially 
media outlets, have intrinsic values that are not easily 
reduced to pure dollars and cents. Congress has enshrined these 
non-economic values, such as localism and diversity, as 
cornerstones of our statutory and regulatory structures. Thus, 
cost-cutting measures that result in the paring down or removal 
of local news broadcasts would most certainly not serve the 
public interest. Nor would the public interest be served by 
private equity's failure to provide adequate service quality 
due to insufficient investment in a telecommunications network.
    Because there is typically little transparency about 
private equity firms' ownership and management structure, 
private equity ownership of communications properties also 
raises serious questions about ensuring compliance with the 
Federal Communication Commission's media and foreign ownership 
rules, as well as other regulatory requirements.
    Telecommunications and media firms must be able to survive 
and thrive in today's marketplace. Private equity ownership may 
provide an attractive alternative to strengthen a company's 
long-term financial security. Congress and the FCC must, 
however, remain vigilant to ensure that private equity firms 
manage communications properties in ways that serve the public 
interest and preserve core values such as localism and 
diversity that are at the heart of our communications 
regulations. I will be watching the FCC to be sure it is 
mindful of these matters as it considers transactions involving 
private equity ownership.
                              ----------                              

    Mr. Dingell. I have some questions, Mr. Chairman, which I 
think are very important and go to the center of your concerns 
and my concerns in this matter. I would like to direct them to 
Dr. Noam and to Dr. Lerner.
    We have a situation here, gentlemen, where we see that the 
Federal Government requires that corporations who do business 
and are listed on the exchanges and are publicly held file 
annual reports. We have a situation where the agencies, which 
are--rather companies--which are subject to the jurisdiction of 
the FCC first of all have to file certain annual reports in 
connection with the creation of the agency and second file 
periodic annual reports in connection with the activities again 
of the company. We don't see that situation with regard to 
companies which are held by these private equity firms. Am I 
correct in that, yes or no? It is a fairly simple question, 
gentlemen. Yes or no?
    Mr. Noam. Not correct, sir, on that. In terms of----
    Mr. Dingell. That is sort of a prelude to the other 
questions I want to ask. So now as a matter of public policy 
then the government has decided first of all that corporations 
should file certain annual reports to tell the public what is 
going on behind the doors of the corporation. Is that right?
    Mr. Noam. That is correct.
    Mr. Dingell. And we have--and in the case of 
telecommunications companies under the regulation of the FCC, 
they have to file again certain annual reports about their 
activities and what they are doing.
    Mr. Noam. That is correct.
    Mr. Dingell. That is a matter of public policy. Am I 
correct?
    Mr. Noam. That is correct, and on top of that----
    Mr. Dingell. And it----
    Mr. Markey. Could you turn on the microphone, please?
    Mr. Dingell. It is, I think, a matter of sound public 
policy that they should do this. Bottomed on years of 
experience going back to the New Deal days and going back to 
when we first set up the FCC and the SEC. Is that correct?
    Mr. Noam. That is correct, and I think that while there 
were sometimes problems in the excesses in the disclosure 
requirements----
    Mr. Dingell. Well----
    Mr. Noam [continuing]. The basic principle has been a good 
one.
    Mr. Dingell. We do have the problem of the excesses, but we 
also have the need to have people know what is going on. And we 
have had some rather bad experiences with companies which have 
not had to file these annual reports. Is that right? And the 
annual reports give a certain openness to the process and 
enable us to understand what is going on so that we can know 
exactly whether public policies are being carried out and 
whether there is an honest administration of the companies. Is 
that correct, gentlemen?
    Mr. Noam. That is correct.
    Mr. Dingell. And so when we take that situation and allow 
it to then be subverted by seeing to it that there are no--that 
the transparency is gone, that the reporting and the disclosure 
is gone the--first of all, we have no way of knowing whether 
these firms are functioning in accordance with the law. We have 
no way of knowing whether or not public policies with regard to 
all manner of activities that are required by other statutes or 
by the basic statutes of the FCC are being complied with. Is 
that correct?
    Mr. Noam. It would be correct, but in fairness, Mr. 
Bressler made the point that many disclosures are, in fact, 
taking place. But if they wouldn't take place it would be a 
real problem, yes.
    Mr. Dingell. Well, as we have found that folks have from 
time to time failed to file proper reports, and as a result bad 
things have occurred. And that is easier under a situation 
where they are exempt by reason of being in private ownership 
and not publicly held or exempt from the requirements of 
regulation and reporting that they might confront either under 
the laws governing the SEC or the FCC and their 
responsibilities. Is that correct?
    Mr. Bressler. Well, that would be correct, sir, but most of 
the companies, I believe, that we own--so I can only speak for 
those. There is public debt out there, and that is what I was 
referring to. I just wanted to be clear before. There is public 
debt out there. That public debt requires quarterly and annual 
reporting to those public bond holders. That is similar to what 
is required from the public reporting that is filed in 
financial statements to the SEC on a 10-Q and a 10-K. You know, 
having been both the CFO of two large public companies and now 
on the private equity side, we go through the same process at 
our private companies. And whether that process is Sarbanes-
Oxley or internal controls or transparency with respect to all 
aspects of financial reporting, it is identical. In my judgment 
if you have public bondholders, it is as if you were a public 
company. And that is what I was referring to earlier.
    Mr. Dingell. So this affects everybody, including 
competitors. It affects customers and investors. It affects the 
government regulators in knowing whether or not the laws are 
being properly complied with. And it tends to give, from time 
to time, advantages that might not be available to persons who 
had to file the reports. Is that right, yes or no? I mean, am I 
right or wrong in my assumption?
    Mr. Bressler. Well, again, just to simply emphasize the 
point, if you look at the transactions by large buyout groups, 
the major buyout groups, in the last few years, it has been 
extremely common for them to essentially not just have debt 
from banks, but also to have debt from public markets. And as a 
result there has been the same kind of SEC filings that would 
be generated as if it was a publicly traded company. So what 
might otherwise be a major source of concern is perhaps 
ameliorated by the fact that one does have these public 
disclosures taking place as long as there is the public debt.
    Mr. Dingell. Would I be fair in assuming, though, that 
first of all advantages are achieved by those who are able to 
function within this particular rubric? And that, perhaps, it 
might facilitate wrongdoing, since the reporting and the 
disclosure were put in place to assure that we had transparency 
and ease of regulation to be assured that behavior was proper? 
Am I correct or incorrect in that, gentlemen?
    Mr. Noam. It is--that is why there is room in my view for 
regulated companies that had previously been filing certain 
information if they are in private situations and do not have 
to file it and do not have these public bonds to disclose. Then 
in those situations, and the FCC or state utility commissions 
should require such similar type disclosures.
    Mr. Dingell. Thank you.
    Mr. Chairman, I have overused my time. Thank you for your 
courtesy.
    Mr. Markey. And the gentleman's time has expired.
    The Chair recognizes the gentleman from Mississippi, Mr. 
Pickering.
    Mr. Pickering. Thank you, Mr. Chairman, and thank you for 
this hearing.
    As I read through the hearing memos, it strikes me that as 
we do public policy on the House side, we are elected every two 
years, we are to reflect the passions of the present. The 
Senate has 6-year terms; the rule is stay with the minority. 
Consensus has to be achieved in there to look at the long term. 
Short term, long term. Founders wanted a balance. Would it be 
accurate to say that the private equity and Wall Street 
publicly traded companies kind of strike that same type of 
balance in the marketplace? Where private capital can give the 
advantage of a long-term strategic investment, where Wall 
Street is looking more at the short term and the immediate 
returns to shareholders and to maximize dividends? Would that 
be a fair assessment of the balancing of the marketplace? In 
addition to Wall Street probably favoring the entrenched, the 
incumbent, the established, and private equity looking at 
entrepreneurs, innovators, new entrants, competition? One 
encourages concentration and convergence and private equity 
giving us new choices, new options, new technologies. Would 
that be a fair assessment of the balancing of private equity 
and public, Mr. Bressler?
    Mr. Bressler. Sure. I think as an overview that is, you 
know, a fair assessment from their standpoint. Clearly, I liked 
your analogy in terms of the encumbrance and the center in the 
House, you know, but private equity, you know, we mentioned 
earlier about the average hold, and our average hold at THL was 
5 to 7 years. I think Professor Lerner actually said, based on 
his study, which is more widespread, it is probably closer to 
an 8-year period of time. You know, what I find most 
interesting if I think about the, you know, four items in terms 
of these broadcast licenses that we hear talking about, in 
particular for the radio and television industry, they need 
patience. Because we need strong, healthy companies, because 
again, you know, we are going against a very capital-intensive 
competitive situation. And I think, again, as I mentioned, all 
of us that live in the U.S. and have kids understand that. You 
need commitment to be there as we go through this 
transformation to digital. But finally, at the same point, you 
need to have management and management expenses there before to 
carry us through and to be there after. That is something that 
Wall Street doesn't recognize in the short term, which this is 
the law for private equity, particularly in the era we are in 
right now in these digital licenses.
    Mr. Pickering. As a follow-up, in the marketplace in public 
policy, we have always tried to treat new entrants differently 
than established companies, so that we can increase 
competition. In some way, your requirements of reporting and 
regulation would be treating you the same as public companies. 
With that disadvantage, what is happening to give capital to 
new entrants, new technologies, struggling companies, and the 
long term? Would that put you at a disadvantage and would it 
advantage--if we just want a world of incumbents and 
established and limited competition, it seems like we would try 
to make everybody do the same thing. And I don't think that 
this is our public policy objective. Would you agree with that?
    Mr. Bressler. Well, I am not--if the question is about 
transparency--and I think the gentleman before is also asking 
about transparency there too. You know, we are very supportive 
of transparency, so I don't believe.
    Mr. Pickering. Well, it is not an issue of transparency, 
but it is the regulatory burden of Sarbanes-Oxley--it does have 
a cost to it.
    Mr. Bressler. Right.
    Mr. Pickering. And it increases your cost of your capital. 
It increases--or it decreases your flexibility to respond to 
the marketplace, and it decreases your ability to compete 
against established incumbents. Would that be an accurate way 
to say it?
    Mr. Lerner. Could I take a shot at that question?
    Mr. Pickering. Yes, Dr. Lerner.
    Mr. Lerner. I think that, particularly when we look, 
private equity is a spectrum, right, from big, mature companies 
being bought out to new companies or start-up companies which 
are there. And I think, particularly when we look at that end 
of the spectrum of younger, newer entrant companies, the kind 
of costs associated with disclosing a strategy that might be a 
new strategy, that the huge amounts of regulatory requirements 
where a company working on very thin margins and so forth can 
potentially impose very real costs and very real burdens.
    Mr. Pickering. And would a big established company possibly 
use that information to squash competition?
    Mr. Lerner. Well, certainly there has been a long 
literature in economics highlighting the use of regulation and 
regulatory capture by incumbent firms against potential new 
entrants.
    Mr. Bressler. Well, you know, just to add one last thing. 
That at the same point we are supporting new technologies, 
disruptive technologies to some extent, that are out there that 
ultimately the consumer's going to decide what their choice is.
    Mr. Pickering. And you wouldn't want to tip off those new 
technologies, new applications, to say a very entrenched 
incumbent that would then try to keep you out of the 
marketplace?
    Mr. Bressler. Well, that is correct. That is correct. And 
at the same point, obviously, we have what I just have to 
reiterate what we have earlier with established companies 
about, you know, that have public debt about being transparent, 
so----
    Mr. Pickering. So we get the transparency, but we get the 
new entrant and new investments the way that we have it 
structured now?
    Mr. Bressler. That is correct.
    Mr. Pickering. Is that the benefit?
    Mr. Bressler. That is correct.
    Mr. Pickering. Thank you. Mr. Noam, Dr. Noam, do you want--
I mean quickly.
    Mr. Noam. Just, Mr. Pickering, to your point of the short 
term and the longer term, and maybe that is a good way of 
looking at it, maybe we can add a third term, which is the 
really longer term. It is true that maybe a public company has 
to look at the quarterlies, and your point is that it has a 
little bit more luxury under private equity, and that is a good 
point. But at the same time, the facts that I have described 
earlier about the telecom companies in Europe that were 
acquired with private equity clearly indicates that the longer 
term investment, the fiber-to-the-home kind of investment, 
those kinds of investments are not being undertaken by private 
equity owners. So that infrastructure investments that benefit 
beyond the direct owners of the company but has some spillover 
externalities that impact on the rest of society.
    Mr. Pickering. Mr. Chairman, could I--would you be able 
to--just a second--to have a follow-up?
    Mr. Markey. Be glad to.
    Mr. Pickering. I just want a clarification.
    Mr. Markey. Absolutely.
    Mr. Pickering. Did you say that private equity is investing 
in infrastructure or not investing in infrastructure?
    Mr. Noam. In Europe, of the two examples, in Belgium and 
Denmark, would indicate that the investments are not as high by 
private equity-owned telecom--national telecom companies.
    Mr. Pickering. Now, in the United States the experience, 
would that be similar to Europe or different than if you look 
at the satellite investments? If you look at Hughes, if you 
look at Alltel? If you look at those types of examples, would 
they be building more networks and multiple platforms more so 
than incumbents at this point?
    Mr. Noam. Quite possibly, but my concern was where there is 
market power of infrastructure companies that are more 
entrenched than those examples that you just mentioned. And 
those companies do exist.
    Mr. Pickering. Can they----
    Mr. Bressler. That we helped create the infrastructure. I'm 
sorry.
    Mr. Pickering. That is OK.
    Mr. Bressler. The only thing I was going to add is that we 
helped to create--I don't think it should be--we helped create 
the infrastructure in the United States. You know, with the 
number of examples that I gave in my written testimony both in 
helping kind of recreate MCI to the present example of bringing 
cable to the world communities. And so I think it is quite 
different. We did help create it here.
    Mr. Pickering. Thank you.
    Mr. Markey. The gentleman's time----
    Mr. Pickering. Thank you, Mr. Chairman.
    Mr. Markey. The gentleman's time has expired.
    We will go to a quick second round if that is possible. And 
I would like to follow up on Mr. Pickering's analogy in the 
balance that is in the Constitution between the House and the 
Senate, and the judiciary. So under his analogy the House is 
Wall Street, the Senate is the equity marketplace and then, you 
know, that cooling dish. And Dr. Noam's in the super long term, 
I guess which is the judiciary, and those are these longer term 
values that we also have to be protecting. And I guess what I 
would like to do is return to Mr. Pickering's line of inquiry, 
which is that publicly traded companies complained that Wall 
Street punished them when they announced some new 
infrastructure investment in the telecommunications sector. 
What are you doing, says Wall Street. How can you be taking 
revenue that we could be taking as profit and investing it in 
broadband deployment? You know, we are going to lower your 
stock valuation. And so that obviously hurts competitiveness in 
the United States. Mr.--Dr. Noam says that the experience in 
Europe is that when you take the company private they still 
don't invest. That you wind up with the same problem. And, I 
guess, it raises the question of whether or not we have to 
solve the problem through competition policy, rather than 
depending upon either Wall Street or the equity marketplace, 
the public or the private markets to do this, that you need 
actually to have a competition policy so that you get your 
result. What would you say to that, Mr. Bressler?
    Mr. Bressler. Well, I would say, you know it is in our 
interest--back to, Mr. Chairman, your first point. It is in our 
interest to invest in these companies and build into the long 
term. So when we go in we are investing, again a theme that we 
talked about a few times, a factual theme, for a 5- to 7- to 8-
year period of time to hold. At the end of that period of time, 
the outlet for our exit from those companies as we call it, is 
the public markets that is sold to somebody else. It is 
critically important that we have got a growing, thriving 
company. The only way you get that is to invest. And again, I 
think a very good example, a factual example, is what we are 
doing in something like Univision, where we are putting $100 
million into digital transmission, $20 million into 2008. Now, 
it is not a public company today. It has public bonds, but it 
is not a public company today. So I can't, you know, the judge 
of that would be in today's financial markets that we referred 
to a number of times today. The pressure I am sure would be 
enormous----
    Mr. Markey. But is that----
    Mr. Bressler [continuing]. Not to invest.
    Mr. Markey. But is that a good policy for us as a nation, 
in other words? What Dr. Noam was talking about is how Ireland 
has now fallen, I think you said, to 14 out of 15 in the 
rankings in terms of broadband deployment. And in the United 
States we are falling from 3 to 15 in the OECD rankings since 
2001. So for us, we are looking at these trends. And I guess 
what I would ask you, Mr. Bressler, is your company the rule or 
the exception? In other words, the very fact that you represent 
an investment philosophy that has a longer term view might not 
be shared by other equity companies who are also investing in 
similar telecommunications properties. And I guess the question 
is should we derive from your example a rule that applies when 
companies take--when equity companies take telecommunications 
companies private, or is this just, say, generous to you and 
you are not here representing what does happen in general when 
equity firms do take telecommunications companies private?
    Mr. Bressler. Well, I am going to defer a little bit to 
Professor Lerner, because he has studied much more of the 
industry than I have. You know, I would point out two things. 
One is I am not familiar with the--personally familiar with the 
Ireland or the other examples outside the U.S. I am really not 
equipped to comment on those. But I would also say we talked 
about the average hold is--the average hold is an 8-year period 
of time that Professor Lerner said earlier. So he can comment 
more in terms of whether that is the rule.
    Mr. Markey. Again, Dr. Lerner, if you could comment 
briefly, please.
    Mr. Lerner. I think one thing to emphasize going in, of 
course, is that when we look at--there have been a lot of 
private equity investments, and you can certainly find examples 
of very successful ones and very unsuccessful ones to point to. 
But I think the crucial point when we look beyond the case 
studies and look at the more general evidence, it would suggest 
that private--that all the studies I have seen suggest that 
private equity does not translate, in general, to a cutting 
back of long run investment in firms measured a variety of 
different ways from capital expenditure to investments and 
innovation in a variety of other ways. I think that if you look 
at the broader evidence, it is very hard to find support for an 
argument that this translates into rapid cutbacks of these 
measures.
    Mr. Markey. OK. Thank you, Dr. Lerner.
    The Chair recognizes, again, the gentleman from Florida, 
Mr. Stearns.
    Mr. Stearns. Thank you, Mr. Chairman.
    I just wanted to go back to the real purpose of this 
hearing and to try and establish again the difference between 
private equity firms and public and dealing with their 
transparency. I know that Mr. Noam, Dr. Noam, in his editorial 
said direct regulation by government of media is undesirable. 
Then he went on to say, but disclosure is another matter. So I 
just want to emphasize a point before the hearing closes, Dr.--
Mr. Bressler, is there any reason why privately owned 
communications companies would be less transparent than 
publicly traded ones? Aren't companies controlled by private 
equity subject to the same SEC rules and FCC reporting 
requirements?
    Mr. Bressler. Yes.
    Mr. Stearns. And, Dr. Lerner, is that true?
    Mr. Lerner. With the caveat that if you have a privately 
held company without debt. So, for instance, a venture backed 
company----
    Mr. Stearns. Right.
    Mr. Lerner [continuing]. Which is a start-up, then 
essentially you typically would not have to be making filings 
with the Securities and Exchange Commission until you went 
public. But, again, as we sort of talked about earlier, there 
is a variety of reasons from a policy point of view why you 
might regard that lack of transparency in those particular 
instances as actually being a good thing, rather than 
problematic.
    Mr. Stearns. But this is with the FCC?
    Mr. Lerner. No, this is simply--I was referring just with 
the SEC.
    Mr. Stearns. OK. The SEC or the FCC?
    Mr. Lerner. The Securities and Exchange Commission.
    Mr. Stearns. Yes, OK. But with the FCC, they are subject to 
the same SEC and FCC reporting requirements. Isn't that true?
    Mr. Lerner. To my understanding.
    Mr. Stearns. Yes. Now, this is a little bit out of the box, 
this question. We--this is mentioned earlier--this article that 
was in today's Wall Street Journal, ``Buyout industry staggers 
under weight of debt,'' and Martin S. Fridson, a leading expert 
on junk bonds said a buyout firm, they are staring into the 
jaws of hell. Now, Dr. Lerner, he also went on to say that 
companies taken private tend to suffer more distress than their 
peers. Is that your experience?
    Mr. Lerner. As I alluded to before, we looked at on the 
order of 21,000 private equity transactions between 1970 and 
2007. And when you look at the numbers, just the facts, it 
simply suggests that the rate of bankruptcy or major 
restructuring for private equity-backed firms is actually lower 
than it is for U.S. corporate bond issuers in general.
    Mr. Stearns. So what he said in this article is false in 
your opinion?
    Mr. Lerner. Well, I can simply report the data, and it 
doesn't seem----
    Mr. Stearns. No.
    Mr. Lerner [continuing]. Air it out.
    Mr. Stearns. Well, let me--I just said that he found that 
private tended to suffer more distress. You just indicated that 
statistics----
    Mr. Lerner. Yes.
    Mr. Stearns [continuing]. Show it is wrong.
    Mr. Lerner. It is wrong.
    Mr. Stearns. It is wrong. There we go. Now, Mr. Bressler, 
what do you have to say in reference to Mr. Fridson's analysis 
that taking them private tend to suffer more distress than 
their peers?
    Mr. Bressler. Well----
    Mr. Stearns. What is your experience?
    Mr. Bressler. Again, my experience, which is the only one 
that I can think to----
    Mr. Stearns. Well, the only one we are talking about.
    Mr. Bressler. That is right. Thank you. That is just not 
correct. It is just not correct.
    Mr. Stearns. So what we have here is a false statement by a 
leading expert on junk bonds. And so I just wanted to establish 
that fact.
    Thank you, Mr. Chairman.
    Mr. Markey. I thank you gentlemen.
    It is one of the great things about getting elected to 
Congress, that you can force the Harvard Business School 
Professor to give the answers you want. And since I represent 
Harvard--up there that is--it is great to see you do that, 
because whenever I am in my district to see the Harvard 
questions actually come in the form of answers. OK. So there is 
no required rule for you, and so in your question and answer 
here I think it has been highly illuminating.
    Anyway, the gentleman from Texas, Mr. Gonzalez.
    Mr. Gonzalez. Thank you very much, Mr. Chairman.
    Dr. Lerner, how far back does this collection of data in 
your response--you are basing it on the data collected. How 
many years back does that go?
    Mr. Lerner. It goes from the period of 1970, which 
essentially was close to the inception of the private equity 
industry, through the middle of 2007.
    Mr. Gonzalez. And so when we did have, let us say, the late 
80s or early 90s, even if you included that you would say there 
was no difference then between the leveraged buyout model as 
opposed to those others when you have, you want to call it a 
financial crisis of sorts?
    Mr. Lerner. Well, I think what I was saying is that when 
you look at it over that entire period----
    Mr. Gonzalez. OK. That is where I want--I will stop you 
there, because I am going to ascribe to the Harvard theory here 
if I can get you to--give you the answer I want you to give. 
But seriously, what we are looking at here, you know, if you 
look at snapshots, and snapshots are important here in this 
analysis only because of circumstances that today may mimic 
what was going on during another crisis that may have impacted 
this business model more so than the traditional business 
model. Do you believe that at this point in time if this credit 
crisis worsens that the potential for again adverse affects, 
consequences, are greater on private equity modeled firms than 
what we would say traditional, public?
    Mr. Lerner. Well, I think it is a very interesting 
question, and one which is difficult to answer. On the one hand 
you have a situation where the private equity firms have, you 
know, higher leverage, greater debt than comparable companies 
in this industry and many other industries. And typically we 
translate that into greater probability of financial distress.
    Mr. Gonzalez. OK. I should stop you there, because that is 
a great answer there. The second one. I know Mr. Shimkus 
indicated that if we don't have all these wonderful vehicles, 
and I agree that I think private equity is one of those, that 
we are going to have all these foreign investors coming in. 
Don't we already have foreign investors in the private equity 
model? I mean doesn't China have, I thought they did, but this 
may be old news--$3 billion or more in Blackstone?
    Mr. Lerner. I think it is true that you have a situation 
where the investors in the private equity groups, which we 
typically call limited partners, include both institutions in 
the United States, like public employee pension funds, and 
include foreign institutions from pension funds to sovereign 
well funds. On the other hand, I guess it is worth pointing out 
that they service limited partners, which means that their 
ability to affect and control the underlying investments, even 
necessarily to get--data on these underlying investments is 
often quite limited.
    Mr. Gonzalez. Thank you very much, Dr. Lerner.
    I yield back, Mr. Chairman.
    Mr. Markey. The gentleman's time has expired.
    And I know that you have to go, Mr. Bressler, and you have 
been good enough to stay here. And I am going to recognize Mr. 
Pickering, but could you just give us your 1-minute summation, 
Mr. Bressler, what you want us to remember? Because I know you 
have to run and make an appointment.
    Mr. Bressler. Sure. Thank you, Mr. Chairman.
    I would say, you know, a couple things in summary. One is 
that I think the private equity does a good job of governing 
itself, and I think it does a good job of governing itself 
because we are all in this for the long term. Whether it is the 
5- to 7- or the 8-year period of time, we all have the same 
report card by getting measured by our results at the end of 
that period of time when we sell our companies or they go 
public. So I think we have the discipline that is needed to 
invest in the companies in the future to drive the revenue to 
invest in the infrastructure that will create powerful 
companies at the end of our ownership period that is there. The 
second thing is, as I mentioned, our commitment I think is self 
evident. And I think the companies that we have bought over the 
last couple years are housed in capital structures that will 
allow us to continue to invest in those companies for the 
future. And we are very focused ourselves, and Mr. Stearns says 
you can only talk about yourself. When we had bought Univision 
and our proposed transaction with Clear Channel that was all 
about digital. That was all about localism. That was bringing 
choice to the consumer out there. Yes, we think there is an 
economic benefit there, but we recognize that responsibility 
first and foremost.
    Mr. Markey. Thank you, Mr. Bressler. We very much 
appreciate you being here, and we also appreciate your travel 
plans, and you have accommodated yourself to the hearing. Thank 
you.
    Now the Chair will recognize the final round of questions 
to Mr. Pickering from Mississippi.
    Mr. Pickering. Thank you, Mr. Chairman.
    And I just wanted to follow up on the Chairman's comments 
on competitiveness policy and how it affects investment flows. 
If we were to see a communications industry evolve over the 
next 3 years so that we basically have three national 
communications companies, so let us say we have an AT&T, a 
Verizon, cable, a major cable player converges with wireless to 
create a national network, and we have basically three 
companies, and they are all public. What would happen to 
investment flows in broadband and infrastructure under that 
type of concentration? Would Wall Street controlling the major 
three give them incentives not to invest in broadband, and 
would it be difficult for private equity to compete in that 
type of context, Dr. Lerner?
    Mr. Lerner. I think it is a fascinating question. It is 
hard to look in the crystal ball and see it.
    Mr. Pickering. Let us just say hypothetically that is what 
happens in three years.
    Mr. Lerner. Right. But I think that certainly we can point 
to certainly a number of cases where we have got, you know, 
very oligopolistic industry structures with just a few players, 
which have led to deterioration of investment in infrastructure 
and innovation. And, you know, sort of going back to the 
writings of Joseph Schumpeter, who argued that in some sense 
that threat of entry and threat of competition in some sense 
often serves as the greatest spur to innovation.
    Mr. Pickering. A lot of times we hear that if you just let 
us consolidate, concentrate, and don't regulate that we will 
free us up to invest more. Do your studies show that that is 
true or not true?
    Mr. Lerner. Well, there has been very large literature 
looking at the relationship between innovation and industry 
structure, and much of it suggests that there is somewhat of an 
inverted ``U'' relationship. Which is to say, if you have a 
situation where there is simply one giant firm, or you have an 
industry where there are a million little firms, you get less 
innovation than you do potentially in a situation where you are 
somewhere in that hump range where you have the sort of 
dynamism and competition associated with entry in the jostling 
of different competitors.
    Mr. Pickering. A possible example of that would be in 
wireless in 1993 we had a duopoly policy. We didn't have near 
the innovation or the investment. We then went to a seven tier 
market auction policy and some other competitive things that we 
did, and then it exploded. So would having four to seven in a 
market in communications be better than having two or three in 
a market as far as investment?
    Mr. Lerner. Well, I think it is--once again, this 
underscores the limits of academic research, which we vaguely 
run some analysis and get this sort of hump shape and declare 
victory. When it comes to actually making some useful 
recommendations that actually can guide you guys, we often 
don't do quite as well in terms of the process. But I would 
lean toward saying that probably more is better in this 
instance.
    Mr. Pickering. Mr. Chairman, if you would follow up, I am 
wondering if openness like we have in the Internet would spur 
more investment or if we went to closed models with exclusives 
on content and devices, what would happen to investment if that 
were to occur in a three major market context?
    Mr. Markey. I think that is a very important subject. I 
would actually say--I mean I would be basing it just generally 
upon the Harvard Business School professor's last comment that 
five competitors is probably better than two competitors in 
terms of getting the infrastructure and content investment. But 
I would need to do more research in order to make sure that 
that conclusion was correct. So I would be willing to base that 
guess upon my----
    Mr. Pickering. We wouldn't want a serious deterioration of 
our infrastructure and investment by having too much 
concentration.
    Mr. Markey. Yes. I think that is an important hearing to 
have.
    Do you have one final question, Mr. Stearns?
    Mr. Stearns. Thank you, Mr. Chairman.
    There is some concern about the crisis, the economic 
crisis, worsening. And I guess the question for Dr. Noam and 
Dr. Lerner is, does a private equity firm if a crisis worsens 
economically contribute economic distress in this country more 
so or less so than a publicly held company? And I will start 
with Dr. Noam.
    Mr. Noam. Let me just address some of the--an issue that 
was kind of hanging here. There is, in fact, we have some 
evidence to the question that was raised what the market 
structure would be, because in broadband there is a theoretical 
set of cable and telecom and fiber by telecom as opposed to 
DSL, plus satellite, plus electric utilities and so on, plus 
independent DSL providers. So we do have, not only in this 
country but around the world, and what we see is largely in 
most countries, particularly European countries and many of the 
Asian countries, a 1 to 1\1/2\ competitors. One strong one and 
a smaller one that is the half. In the United States, however, 
we have 2\1/2\, because of cable, and that has lead to a 
greater dynamism in the infrastructure. But I think that there 
is no evidence that I have seen or examples that I have seen 
that private equity type companies have been the source of this 
competitiveness in infrastructure provision, the private equity 
that we have discussed here, because in terms of squishing, 
everybody thinks of it as almost like an ink blot, and they 
pick their own examples. But in the infrastructure environment 
we are not talking about the MCIs. That is not the venture 
capital type private equity but rather the taking public 
companies private that I thought was at issue here, 
infrastructure companies with some market structure, with some 
market power, taking them private. And that is an issue that 
is--because private equity is such a large area. And so if we 
talk about everything we end up talking about nothing. But if 
we talk about this particular issue, namely market power, 
infrastructure companies, telecom, the kind of issues that this 
Committee and subcommittee are interested in then, you see that 
there is an issue that is beyond the advantages of challenges 
of competition of letting newcomers enter into this field. I 
think everybody is in favor of that. But where you don't have 
that you have a problem, which you still have to address.
    Mr. Markey. All right. The gentleman----
    Mr. Noam. I have not addressed your question. I do 
apologize.
    Mr. Markey. The gentleman's time has expired.
    Mr. Stearns. Can I get an answer to my question?
    Mr. Markey. OK.
    Mr. Noam. I am sorry with that.
    Mr. Stearns. Do you want me to repeat the question?
    Mr. Lerner. Yes, I think that would be helpful. My 
absentminded----
    Mr. Stearns. Basically with the crisis there is some talk 
about----
    Mr. Lerner. Right.
    Mr. Stearns [continuing]. The cost for a barrel of oil 
going up and----
    Mr. Lerner. Right.
    Mr. Stearns. And that the sub-prime crisis might be only 30 
percent. And so if the crisis continued and got worse, do you 
think that the private equity market contributes to the 
economic distress in the country more so or less so than the 
publicly traded companies?
    Mr. Lerner. I think there will be a lot of pain to go 
around for everybody.
    Mr. Stearns. No, but the question is----
    Mr. Lerner. Right.
    Mr. Stearns [continuing]. On those two. If you had to make 
a choice, is there any--does the private equity increase the 
distress in the economic, or are they more--their debt is much 
higher, which would cause more of a problem?
    Mr. Lerner. I think it is very--I don't have an answer for 
you.
    Mr. Stearns. Too speculative?
    Mr. Lerner. Right. I think that in some sense there clearly 
are real costs associated with the greater leverage and the 
risk that it introduces. But the freedom from the tyranny of 
the marketplace and the sort of situation where you are sitting 
watching your stock price going down for 6 months and making 
some panicked decision to drop an investment project to try to 
satisfy the market gods, that these push in different 
directions. And it is very hard to come up with a definitive 
answer one way or the other.
    Mr. Stearns. All right.
    Thank you, Mr. Chairman.
    Mr. Markey. The gentleman's time has expired.
    Now, what I would like to do is to ask each of you to give 
us your 1-minute summation of what it is that you want us to 
remember from our testimony.
    Mr. Caliboso, we appreciate your coming here. While none of 
us would have minded going from here to go to testify before 
your public service commission in Hawaii, we appreciate the 
sacrifice you made in leaving Hawaii and coming to testify here 
before us. And so we thank you for that, and we recognize you 
for one minute.
    Mr. Caliboso. Thank you, and you are always welcome to come 
to Hawaii as well.
    Just listening to everyone I just have about three points 
that I would like to make known.
    A case by case analysis will always be required in any 
proposed private equity transaction, whether it is private 
equity or not. The studies that were mentioned today, the 
trends that have been studied, are very interesting and are 
needed to inform the decisionmaking process in any case-by-case 
analysis. But you do still need to do a case by case analysis 
in each one.
    With respect to transparency, the state regulatory 
authority will always allow us to get the information that is 
required. Even though it might not be filed with the SEC or the 
FCC, we have broader authority to get that kind of information. 
In our case, Hawaiian Telecom does have publicly traded debts, 
so they do still file their SEC requirements.
    And with respect to this issue in general there is always a 
balance between regulatory requirements and allowing and 
encouraging investments, so that is the trick that we always 
have to take into consideration, balancing the regulatory 
requirements without deterring the financial investments as 
needed.
    Thank you.
    Mr. Markey. Thank you, and again thank you for coming here.
    At this point, without objection, the letter from Chairman 
Dingell and myself and Chairman Martin's response will be 
entered into the record without objection.
    Dr. Noam, your final 1 minute.
    [The information appears at the conclusion of the hearing.]
    Mr. Noam. Because private equity is such a vast area, I 
would as I said ask for the subcommittee to focus on the issues 
and how it affects the particular responsibilities that are 
under your jurisdiction that you particularly are involved in 
traditionally. In this case now, the telecommunications sector 
and the television sector and how the move away from the SEC 
supervision environment to a non-supervised environment by the 
SEC and how that affects the industry.
    And I think there are some issues there, and they are 
manageable issues, and they are issues that you can deal with 
and to the public benefit.
    Mr. Markey. Thank you, Dr. Noam.
    Dr. Lerner.
    Mr. Lerner. I will just simply make two points in addition 
to thanking the Chairman and the members for the invitation.
    First of all, I think we have had a candid discussion here, 
and we have highlighted that private equity is certainly not 
magic and that it is prone to the same kind of issues that the 
economy and equity investments generally are going to hold.
    But I think we have also highlighted the fact that there 
has been a lot of distortion, and in some cases it seems really 
misinformation, about the process that private equity goes 
through. And that in many respects some of the claims about 
private equity not being a long-term investment and having a 
kind of broader perspective are really misinformed.
    So thanks again.
    Mr. Markey. Thank you, Dr. Lerner.
    And we thank each of our witnesses. And we can make this 
promise that the subcommittee is going to be focusing upon this 
issue more and more as this year unfolds. Because I do believe 
that economic conditions are going to reveal certain 
inconsistencies in the telecommunications marketplace that 
otherwise would never have been revealed but for this economic 
downturn, and it is our responsibility to make sure that the 
public interest is not compromised.
    We thank each of you.
    With that this hearing is adjourned.
    [Whereupon, the subcommittee was adjourned at 11:37 a.m.]
    [Material submitted for inclusion in the record follows:]

                    Statement of Hon. Eliot L. Engel

    Chairman Markey, Ranking Member Stearns--
    Thank you for holding this hearing today regarding private 
equity funds investing in telecommunications companies.
    Private equity investments have benefits and drawbacks. On 
one hand, there are many equity funds that buy underperforming 
corporations in order to bring them back to profitability, thus 
keeping them from declaring bankruptcy. And while it is to be 
expected that the fund will eventually sell the companies for a 
profit, great wealth can also be created for the shareholders 
and employees.
    Private equity can also provide necessary funding for a 
young company that needs capital to grow. To be competitive, 
national telecom companies must invest massive amounts of money 
in infrastructure. Even after multiple rounds of venture 
capital funding, telecommunications companies can leverage a 
buyout and grow much faster than they would have without the 
additional cash injection.
    On the other hand, we have also seen some equity fund 
managers buy companies, fire hundreds or thousands of employees 
to create a positive cash flow (which goes to the fund 
managers), pay themselves a large dividend, and then sell the 
companies before they have a chance to get healthy and become 
competitive again.
    Let me be clear: the majority of private equity firms do 
not have such malicious intentions. However, since we are 
discussing private equity in the telecommunications 
marketplace, we must recognize that some companies do employ 
underhanded tactics. The airwaves belong to the public, and any 
attempt to degrade the ability of Americans to use the airwaves 
must be closely scrutinized.
    It is also important that we investigate the effect that 
private equity investment in telecommunications has on 
localism. For a long time, we have seen a trend away from 
locally owned media outlets and moving towards nationally owned 
syndicates. We owe it to our constituents to help ensure that 
when they need local news, sports, weather, and especially 
emergency information, they can get it.
    I want to again thank you, Chairman Markey, for holding 
this hearing today. As we all know, private equity investments 
in telecom companies are a fairly recent occurrence, and 
therefore we don't have as much data as I would like on it. 
However, I'm sure we can all agree that we will be paying 
attention to companies like Alltel, Univision, and 
ClearChannel, which all have a significant private equity 
investment in them. As I said before, private equity can have a 
very positive influence on a company. And we should make sure 
that the funds investing in those companies I mentioned 
continue to exert a positive influence.
    I yield back the balance of my time.
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                      Statement of Hon. Gene Green

    Mr. Chairman, thank you for holding this hearing on the 
growing trend of private equity investment and ownership in 
communications and media companies.
    In many cases it is still too early to determine the long-
term effects that will come out of private equity ownership of 
many of these companies, but it is important that this 
subcommittee is providing oversight on the issue to develop a 
record and a dialogue, and I look forward to hearing from our 
panel today.
    The main concern I have with private equity investment in 
communications companies is the transparency in the makeup and 
ownership structure of these firms.
    I think it is critical for us to know to what extent there 
is foreign investment and ownership in U.S. communications 
companies, but because of their structure it is often hard to 
know.
    One way to make this more transparent could be to require 
disclosure of foreign investment as a condition on every 
private equity transaction the FCC reviews.
    Ownership of critical American infrastructure, and our 
communications infrastructure is critical infrastructure, 
should be as transparent as possible, and I am concerned 
current private equity disclosure requirements do not provide 
us enough information about the level of foreign investment in 
communications companies.
    The moves by private equity firms over the last year or so 
to acquire Univision, Clear Channel, and Alltel have certainly 
brought more attention to this issue, but private equity does 
have some history of success in the communications industry.
    Private equity's backing of companies like Voicestream, 
which is now T-Mobile, and its acquisition of Alltel, has 
helped these companies make needed investments and maintained 
competition and choice for consumers in the wireless 
marketplace.
    The ability of private equity to look at the long-term 
growth of companies, rather than quarterly profits, puts them 
in a unique position to make the costly capital investments 
that are necessary in the telecommunications industry but that 
are often not popular with shareholders of publicly traded 
companies.
    To this point, the FCC has taken steps to protect public 
interest obligations and to limit some of the risks 
traditionally associated with private equity firms, but it is 
important we continue to monitor this.
    Especially as the current financial crisis and the recent 
crunch in the credit markets play out, private equity may be 
forced to take steps they had not initially planned on when 
investing in communications companies, and it could ultimately 
be the American public that suffers.
    Given the large increase of private equity investments and 
buy outs over the past several years, the record is yet to be 
written on what effects it will have on the communications 
industry, but it is good this committee is providing oversight 
so that we can address any potential problems that might result 
from this trend.
    Mr. Chairman, I look forward to hearing the testimony from 
today's panel, and again I thank you for holding today's 
hearing.
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