gergroy said:
richardhutnik said:
Ok, I will say I can see a case of where a conglomerate, that was assembled and running poorly, would benefit from being broken up, and the different parts sold off. If a company has negative synergy with its assets, it makes sense to break them up.
However, what I wanted to ask about this this form of leverage buy-out: Investors borrow a bunch of money and buy up a company, and pledge the assets of the company they purchased as collatoral for the loan. They get their cut of doing this. At this point, the company is now saddled with a lot of debt, and has new owners. So, my question is, what makes this scenario good?
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Because, in order for the investors to make money on such a move, they have to improve the company and make it profitable. Its just like the stock market, buy them low, sell them high. Companies targeted in such a move usually have problems that the person buying them out thinks they can solve. So they get the capital together to buy the company, fix the problems if they can, the company becomes more profitable, and then they sell their stake in the company after the price of their shares have risen. it's pretty straight forward.
So then the question is, why do you think it is bad?
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I am not talking about a case where someone takes their own money, buys a company out, and transforms it. What I am talking about is where is where a company comes in, borrows to the hilt to buy the assets of a company, and then saddles the company with the debt they used. The person didn't use their own money, but the money of others. The company ends up with a lot of debt it didn't have before, and is worse off. Only difference would end up being the management knowledge of the new ownership.
Thing that happens is that the private equity firm puts together a deal, walks off with profits, and leaves the company with a lot of debt. THESE situations I am asking are why they are good:
http://www.nytimes.com/2009/10/05/business/economy/05simmons.html?_r=1
Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company — the seventh time it has been sold in a little more than two decades — all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.
For many of the company’s investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company’s downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees — more than one-quarter of the work force — laid off last year.
But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.
And this is good how for the company in question?