Blackstone Goes On The Defensive (BX)

Blackstone Group (NYSE:BX) has gone on the defensive after the close today with a press release refuting the front page article in The New York Times.  Blackstone said the article is filled with inaccuracies, myths, and misrepresentations that give a false impression of Blackstone’s tax situation and that of its partners.

Some would say that this strategy is smart, but there is a right way ofdoing things and a wrong way of doing things.  You’ll have to decidefor yourself if they are doing it right or wrong.  I was once (onlyonce) told that if you can’t say something nice, don’t say it at all.So you are your own, hint, hint.  Here is the rest of the commentary fromthe press release (condensed):

Blackstone is not in any way taking advantage of tax loopholes, butrather is using a standard tax method used widely by private and publiccompanies when business assets are sold…. The Times said thatBlackstone partners will effectively avoid paying taxes on the sale ofinterests when in fact the Blackstone partners will pay taxes on everydollar they receive from the IPO at a normal capital gains rate. TheTimes further alleged that the partners at Blackstone would receivebenefits from the government in excess of the taxes being paid on thesale of interests, which is completely inaccurate. The partners willnot obtain any tax credits or payments from the government, as wasalleged by the Times….The Blackstone owners sold interests in theirbusiness to an entity owned by the public. As in any sale of businessassets, the buyer is entitled to tax benefits based on the purchaseprice. Normally, a buyer and seller take tax benefits into account indetermining the purchase price. The buyer generally pays more if thebuyer obtains tax benefits, such as a step-up in basis, than if thebuyer does not obtain such tax benefits. This was structured with theunderwriters and fully disclosed to the public as part of the IPO….The only difference in Blackstone’s case is the parties agreed that thepublic buying the business interests would pay the additional purchaseprice over time rather than immediately. This same approach has beenused in public and private transactions over the years, and is not aninappropriate use of the tax code…. The article failed to mentionthat Blackstone partners will pay taxes on all of the future payments,which constitute taxable income. The article’s analysis used anunusually low discount rate to attempt to mischaracterize the benefitsand omitted any mention that the partners pay taxes on thosepayments…. Blackstone partners are expected to pay more than $900million in tax payments as a result of the IPO, as opposed to thearticle’s statement that Blackstone partners will pay no taxes on thesale…. Lastly, The Times further mischaracterizes the IPO by sayingthe partners sold the good will from their "left pocket to their right"when in fact the Blackstone partners sold business interests to thepublic.

It is hard to understand why such powerful and successful people arehaving SUCH a hard a time keeping their names out of the media.  Thereis a way of soothing things and there is a way of throwing fuel on thefire.  There is a way to act as though you have been wronged and howyour feelings are hurt that someone would malign you.  Throwing outyour millions and millions in the defense is probably not the strongestappeal for public support.

Jon C. Ogg
July 13, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.