Home » Economy » How Blackstone CEO Stephen Schwarzman's $330M mistake improved the company's investment process
How Blackstone CEO Stephen Schwarzman's $330M mistake improved the company's investment process
Economy will lose $5T during coronavirus pandemic: Blackstone’s Schwarzman
Blackstone CEO and Chairman Stephen Schwarzman on the impact of the coronavirus on the U.S. economy, donating to New York, how China has handled the outbreak and the ongoing oil price war.
Blackstone Group CEO Stephen Schwarzman has made countless successful business deals, but one that he remembers most vividly was a failure — an expensive one, at that.
Continue Reading Below
Today, Blackstone Group is one of the largest private equity firms in the world, but in 1989, it was still a young company.
That year, a steel manufacturer, Edgcomb Corp., was up for sale. A new Blackstone partner who had a good relationship with Edgcomb’s executives was able to give Blackstone an “exclusive first look at buying it,” according to an essay Schwarzman wrote for Forbes last fall.
Edgcomb appeared to be doing well with good potential for growth. The company was asking for $330 million and Schwarzman thought it would be a good deal.
Another partner disagreed and told Schwarzman he thought Edgcomb was only making money from inventory profits. He predicted that once that reversed, Edgcomb "would get into enormous financial difficulty," Schwarzman told FOX Business.
Schwarzman decided to go for the deal anyway, but unfortunately, the second partner ended up being right.
BLACKSTONE'S STEPHEN SCHWARZMAN PRACTICES PHILANTHROPY FOR THE LONG HAUL
Schwarzman, who is now 73, told FOX Business it only took two or three months before he knew the deal had been a mistake.
“The price of steel had peaked and was starting to go down and the company started reporting results that were not what they had predicted,” Schwarzman said. “The company really started underperforming and then started losing money and then lost increasingly large amounts of money, and I became aware we wouldn’t be able to make our principal and interest payments. And then we were in a world of complete crisis.”
In the middle of that crisis, an investor called Schwarzman to his office in Nyack, New York, according to his Forbes essay.
"He proceeded to scream at me and told me I was one of the dumbest people he ever met," Schwarzman told FOX Business. "It seemed to me that that lashing – tongue lashing — went on almost forever."
Schwarzman said that as the investor yelled, he felt his face getting hot, like he was going to start crying.
"It was actually very difficult to disagree with him from my perspective because he's right, I failed," Schwarzman said. "It was my decision, it was my fault. It was my lack of experience. It was my inability to recognize what kind of system had to be set up appropriately to protect capital."
"I was so ashamed of the outcome," he added.