PRIVATE LIES.(The Talk of the Town)

In the late nineteen-nineties, every bright young entrepreneur with a startup was dying to take his company public. In a time of generous stock options and irrationally optimistic markets, I.P.O.s seemed to offer a reliable road to riches. But lately the opposite approach--taking a company private--has become popular. Since the beginning of 2005, nearly a hundred top-level executives at public companies have participated in management buyouts, or M.B.O.s, joining private-equity investors to buy their companies from shareholders. In just the past month, a team led by the C.E.O. of the food-service provider Aramark undertook to buy the company at a cost of $8.3 billion, while at H.C.A.--the hospital chain founded by the father and brother of Senate Majority Leader Bill Frist--private equity firms and the Frist family announced a deal to buy that company, for $31.6 billion.

The executives behind these buyouts say that they're the best solution for everyone involved. Investors get a nice bump in the price of their shares--H.C.A. shareholders, for instance, are getting twenty per cent more than the market price--and executives are freed from the demands of cautious investors and zealous regulators. The company as a whole benefits because management can stop worrying about Wall Street's short-term expectations and concentrate, in the words of Aramark's C.E.O., on "building long-term solutions that deliver the most value for our clients and customers."

What the executives in these deals don't say is that such buyouts create huge conflicts of interest. The C.E.O. of a public company is legally obligated to look after shareholders' interests, which in the case of selling the company means getting the highest price possible. But when that same C.E.O. is trying to buy the company, he wants to pay the lowest price possible. Companies try to get around this by having independent members of the board of directors negotiate the deal. In practice, however, directors have generally been appointed by the company's C.E.O. and have spent a good deal of time working with him; they're hardly likely to drive a hard bargain. When the consortium led by Aramark's C.E.O. first bid for the company, for instance, it offered thirty-two dollars a share. After shareholders complained, it upped the bid by $1.80, which the directors accepted. Now, that's some real haggling. A study of buyouts over the past two years suggests that when management is the buyer it pays, on average, thirty per cent less than an outside bidder.

Even more troubling, management buyouts give executives at public companies an incentive not to maximize the value of their companies before the sale. In 1987, for instance, after the textile giant Burlington Industries was taken private by a buyout group that included top Burlington executives, it quickly sold off the company's "nonproductive assets," including ten ...