by Joseph P. Tartaro | Executive Editor
Money talks, and big money talks very loudly.
In the immediate wake of the mass murders at Sandy Hook Elementary School in Newtown, CT, on Dec. 14, Cerberus Capital Management, an international private equity firm, announced that it planned to sell the Freedom Group, perhaps the largest gun and ammunition manufacturing conglomerate in the United States.
How that decision was reached makes a fascinating and instructive story that involves really big money investments, especially by state employee pension funds. On the other hand, there are reports that Cerberus had been considering divesting itself of the Freedom Group for perhaps the past year.
What actually happened shows how large investors, especially large public employee pension funds, can impact the financial marketplace, often affecting the highs and lows of the stock market.
The Connecticut school shooting took place on Dec. 14.
On Dec. 17, Cerberus executives got a phone call from an official at the California teachers’ pension fund, which has $750 million invested with the private equity firm, raising questions about Cerberus’s ownership of the Freedom Group, which among other brands includes Bushmaster, the manufacturer of the rifle reported used in the Connecticut school shootings.
On Dec. 18, Cerberus released a statement saying that it was putting the Freedom Group up for sale.
“It is apparent that the Sandy Hook tragedy was a watershed event that has raised the national debate on gun control to an unprecedented level,” Cerberus said in a statement.
“As a firm, we are investors, not statesmen or policy makers,” the Cerberus statement said. “It is not our role to take positions, or attempt to shape or influence the gun control policy debate. That is the job of our federal and state legislators.” According to The New York Times, “while concern from Cerberus’s investors— as well as a swirl of media attention—had an impact on the decision to sell, the leadership of the private equity firm debated through the weekend how to respond to the tragedy and its potential fallout, according to a person familiar with the firm’s discussions. On Monday evening, a small group of Cerberus’s top executives sat around a conference room table and weighed a range of options to respond to the tragedy, including making a large donation to the Newtown community or promoting mental health research and education.” Obviously, Cerberus had decided it wanted to remove itself from the public debate about firearms policy and highly publicized mass violence. Public pension funds like the California one — officially, the California State Teachers’ Retirement System (CALSTRS) — have hundreds of billions of dollars in private equity and hedge fund investments.
Reportedly, CALSTRS has some $750 million invested with Cerberus, about $600 million of which is in the Freedom Group.
Pension funds and other institutional investors have a tremendous influence in multi-million and billion dollar enterprises, either through direct public stock and bond holdings, or through private investment groups such as Cerberus. However, their influence is vast although usually exerted behind the scenes and rarely prompting snap business decisions.
Sometimes those major stock and bond purchases by such institutional investors cause major upheavals in publicly owned stock prices, giving the market serious hiccups. That was the reactions to such publicly held firearms manufacturing companies as Sturm, Ruger and Smith & Wesson immediately after the Sandy Hook massacre.
Their stock prices fell the week immediately after the shooting, but have since regained a more customary level.
The Times noted that ultimately, Cerberus decided to make a clean break and sell the gun company. “We believe that this decision allows us to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate that is more properly pursued by those with the formal charter and public responsibility to do so,” the firm said in its statement.
Not surprisingly, CALSTRS executives and other public officials applauded Cerberus’s action. Thomas P.
DiNapoli, the New York state comptroller, said he supported Cerberus’s decision to sell the Freedom Group and ordered a review of his state’s pension fund investments in firearms manufacturers.
The $150 billion New York State Common Retirement Fund has $50 million invested with Cerberus.
Various other reports on the sale indicated that funds like CALSTRS also have sizable investments in the stocks of such companies as Ruger and Smith & Wesson.
While Cerberus may not be conducting a fire sale, they did move swiftly. On Dec.
19, Cerberus announced that it had picked investment bank Lazard, one of the world’s leading financial advisory and asset management firms, to run an auction for Freedom Group Inc. Cerberus reportedly would like to enlist another global bank to work with Lazard and has reached out to several in recent days but is not yet in talks with any.
Still Cerberus is looking to start an auction for the sale of the Freedom Group as soon as possible after the SHOT Show, though the sale process could take months, according to some sources.
Freedom Group claims to be “the world’s leading innovator, designer, manufacturer and marketer of firearms, ammunition and related products for the hunting, shooting sports, law enforcement and military markets.” As one of the largest manufacturers in the world of firearms and ammunition, Freedom Groups has acquired some of the most globally recognized brands including Remington®, Bushmaster® Firearms, DPMS/Panther Arms™, Marlin®, H&R®, The Parker Gun™, Mountain Khakis®, Advanced Armament Corp. ®, Dakota Arms®, Para™ USA, Tapco, and Barnes® Bullets.
Its products are sold in over 80 countries, and it has over 3,000 employees at 14 facilities around the nation.
Also on Dec. 19, Ricardo Duran, a spokesman for CALSTRS, said it would remain an investor with the Cerberus, The Times reported.
