Yup.
In plain language, folks: A leveraged buyout is when you borrow money to buy a company, buy the company, then put that debt on the newly-purchased company's books. If/When your newly-bought company fails, it takes your debt with it, and you get to walk away. This is what did in Toys 'R' Us.
Leveraged buyout is some class A rich people bullshit.
"I'd like to buy this company"
"How are you going to pay for it?"
"WIth the company I want to buy"
"Fine"
What the gibbering fuck is that all about?
Don’t forget the part where you sell off the newly purchased company’s assets and pay massive kickbacks to the executives involved, making it increasingly unlikely that the new company can make debt payments.
So then, you ask the employees to take haircuts so at least they’ve still got jobs.
All of the big retailers that have high revenue but can’t pay their bills are victims of this. It’s destroyed millions and millions of jobs, transferred enormous sums of money into like 1000 people’s pockets, and it’s done with essentially no consequences.
So much venture capital behavior is about trying to take what they can and then get out before the ship sinks. Except the ship isn’t a company anymore, or even an industry. They treat the world like it’s about to burn down, and when it does, they’ll be—I don’t know where. Mars? Muskville, Mars?
And we've repeatedly been asked to thank these brave innovators of vulture capitalism for their service, most notably in 2012 when the media got together and agreed to portray Mitt Romney as some sort of heroic rescuer of distraught companies, rather than their merciless angel of death.
In other words, the company borrows money to buy itself, but there's a brief moment in there where you have to pass a billion dollar credit check, for no other reason than to prevent a normal person from benefitting from the "have toys r us buy itself for me" trick
And the reason those companies are now more likely to fail is because they are now saddled with all that debt, it's near impossible to be actually be profitable ever again.
IIRC this would be an appropriate structure if you were buying your retiring boss's small business, for example. In theory, it's not that different than using the house you're buying as collateral to buy a house, AKA how a home loan works.
And, of course, in the meantime you organise for the company to pay you vast sums in consultancy fees, salary, bonuses, and any other tax-advantageous names you can think of for the privilege of your management expertise, none of which needs to be repaid just because said expertise bankrupts them
I don't know how badly this has affected the US, but in the UK we've lost so much of our high street to this vampirism. Beloved chains just vanished for no reason - most people probably think they failed organically but they were actually killed. It's horrifying.
Just this morning I witnessed an absolutely unprecedented event. A high end 3d program that got bought out years ago no longer fit into the portfolio of the company that bought it.
So they're now giving it away. No strings attached.
I had a subscription. They canceled it 'cause it's free now!
The terrain and plant generator Vue (formerly Vue D'esprit). Used to make the natural environments in a zillion AAA movies. It's harsh to use and janky, but can do stuff nothing else does. If you've got the ram.
www.bentley.com/software/e-o...
It's exactly what happened to Anchor-Hocking, Libbey, Oneida, and 100s of other heritage brands that supported small to medium-sized towns across the country with decent paying jobs. Some brands are still around, but only after filing bankruptcy, restructuring, and moving LOTS of jobs offshore.
Every time this comes up, I have to shout out Brian Alexander's book Glass House, about the fall of my hometown after corporate raiders ate it alive.
www.npr.org/2017/02/06/5...
I'm retired now, but I worked for a company which, like Toys R Us, had been bought up by KKR. I knew it could happen to us at any time, but most employees were blissfully unaware.
The assets on the books of the bought out corp are industry standard sufficient as security for the loan. If they don’t do the business, another bank will.
That’s the justification. The real unwritten reason is the banks then make more money on the acquired asset’s failure driving “market change”
That market segment didn’t produce enough revenues for them, so if the writeoff for the lbo failing is less than revenues from new business, it’s a “rational” business choice
Can they put themselves first in line for any repayments from the dissolution? So they get paid off before anyone who didn't get paid for goods and services?
What’s that Arrested Development meme? “Maybe, this time, it will work out for us?” Banks are Charlie Brown and corporate raiders are Lucy with the football.
It's been 30 years since I was taking Finance classes about this, but it maybe the debt isn't to a specific bank, but that bonds are issued. These are unsecured debt packages that are then sold on the open market.
Think tactically. Those creditors usually own stock in a competing company. So you’re putting their competition out of business, which means when the hocked company goes under, they see an uptick in profits for their company. Plus they get the physical assets that they can sell off.
Also a victim of a leveraged buy out. You forgot about the bonus plans the buyer gives himself. After exhausting the semi annual bonus period, our new owner still wanted more. So to keep it legal, he gave everyone in the company a 1/2% bonus while stacking big bucks to himself.
For the folks saying that LBOs should be banned (vs regulated), let's just consider that virtually all home mortgages are LBOs.
Whether you have personal liability or not is a matter of state law but structurally it is the same deal. Y'all get that, right?
I view the fact that these are treated the same as a huge bug. A mortgage for someone's residence is a situation in which the asset has intrinsic value to the loan applicant, and in which the asset is a physical commodity that can be reclaimed by the creditor in the case of a loan default
