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So in case you're wondering how a bunch of radio stations got $20B in debt (yes, that's twenty billion US dollars) - the answer as always is a leveraged buyout.

• smaili 9y ago
  I’m a bit confused...are you implying Bain Capital wanted these companies to go out of business? And if so, why? What’s the point of investing into something that you want to force go under?
  • guyzero 9y ago
    No, Bain Capital wanted their fees and after the buyout servicing the deb wasn't their problem. I'm not the best person to explain LBOs really.
    • toomuchtodo 9y ago
      [removed] Please see exelius's sibling comment, as it's a better and more in depth explanation.
      • ambicapter 9y ago
        Why do all these CEO's (who I'm told are the smartest) and creditors keep on falling for this? I'm guessing they are getting paid off as well?
        • deleted 9y ago
          [deleted]
        • JustSomeNobody 9y ago
          They would have to be, right? Otherwise I just don't see the point.
        • Bartweiss 9y ago
          The creditors make sense - they're getting high rates of return to compensate for that risk. LBOs are net positive for creditors, even though a lot of them blow up. But I can't explain what CEOs and shareholders are up to; surely they know when an LBO is over-leveraged and likely to bankrupt them. Can anyone explain why these offers keep getting accepted?
          • mywittyname 9y ago
            > why these offers keep getting accepted? You only hear about the failures, not the successes. So the likely explanation is somewhere between, "because it works" and "because they don't have much choice."
            • Bartweiss 9y ago
              I guess my confusion is what the successes even look like. Are these all companies that would fold if they didn't take the buyouts? Because otherwise I can't work out what the potential upside is.
              • mywittyname 9y ago
                Sometimes, though distressed investments are not their primary focus. Also, they often buy and hold. So it's not like they go about gutting every company they acquire.
    • exelius 9y ago
      Here’s how an LBO generally works: 1. PE company secures a loan in the company’s name (usually contingent on a turnaround plan executed by the PE with a history of turning companies around) 2. Company turns around and loans the money for purchase to PE firm 3. PE firm buys the company 4. PE firm runs the company, normally collecting management fees (paid out of the pool of cash used to buy the company) 5. PE firm cashes out by IPOing the company (usually at the same or higher price paid during LBO process). 6. PE firm uses the proceeds from the IPO (which the PE keeps because they are the sole shareholders; NOT the company itself) to pay back the loan. The PE usually breaks even on the transaction itself once transaction fees are taken into account; but they make a killing on the management fees (which can be hundreds of millions a year). Normally, the company is left in roughly the same situation as before the buyout, just with a lot more debt on the balance sheet.
      • Bartweiss 9y ago
        So the part I've never understood is why companies accept these offer. Are we talking about hostile takeovers? Or just already-failing companies that accept the turnaround plan because they're short on options? It looks like investors and the PE firm have obvious ways to profit here, but I can't work out what the company gets out of this.
        • Jesus_Jones 9y ago
          That's really my question too. I can guess that if you are say the ceo with a golden parachute agreement if your company is bought out, then you want to 'sell' into this, cause you win, and you leave. But it's terrible for shareholders (eventual ones at least) and for employees, and I don't know if I've ever used this phrase, but it's terrible for the world, for my country.
        • irrational 9y ago
          And, who are the, apparent, idiots who invest in these companies during the IPO?
          • exelius 9y ago
  • ggg9990 9y ago
    What Bain Capital wants is to be able to make the short-term operating metrics look good enough to IPO the company and sell it at an inflated price to some buy side dumbasses who are left holding the bag when it goes bankrupt (mutual funds, pension funds, etc).
    • afandian 9y ago
      Why doesn't this poison the image of organisations that have been through Bain Capital then? Who would buy shares associated with this behaviour?
      • ggg9990 9y ago
        Dumbasses
      • irrational 9y ago
        That's what I wonder too. I would run the other way if I saw that Bain was involved. Since it appears that people are not doing that... I have to assume that, like most things in life, there is a lot here that I don't understand so my gut reaction is flawed.
      • mywittyname 9y ago
        Bain actually has a long history of successfully turning companies around via LBOs. So it's not that they are acting maliciously, but they are minimizing their risk and exposure in the event of a failure. And they way they do so is to push the exposure onto the downstream investors.
        • prklmn 9y ago
          Saying they turn companies around is being generous. They typically don’t buy companies that are in the dumps, they buy companies that are humming along and might have room for improvement, cut expenses by firing employees, raise debt, and try to put the company in a good enough position to meet debt obligations. I wouldn’t credit them with turning too many companies around. If anything they are “turned around” from the debt laden messes that Bain creates into something the company looked somewhat similar to before the buyout.
  • deleted 9y ago
    [deleted]
  • cptskippy 9y ago
    Bain Capital's goal isn't to put the companies out of business, they are trying to extract as much money from and then sell off the businesses. They don't care about long term. You could argue that they're setting up the companies for failure but that's not their intent. They do however have complete disregard for anything but making a profit. One thing they like to do is sell off holdings and pocket the money. This hurts the company long term as it can't use those assets as collateral. An example of this is selling off store front property and then renting it back from the new owner.
    • msie 9y ago
      Is the goal or intent not important anymore if the outcome is always disastrous for the company?
      • cptskippy 9y ago
        The goal is as much profit in the short term as possible. The intent is to extract profits. The impact, damage, consequences, whatever are not factored into the equation. They aren't trying to bankrupt companies, they are aware that what they're doing is harmful, and they don't care if their short term actions do bankrupt the companies in the long run. It's like a kid throwing rocks at cars. They aren't trying to cause an accident or injury anyone but their actions can only lead to bad things. That problem is not necessarily what Bain does, it's that they don't care about how it impacts others. That's pretty much the problem with society today. They're like vampires extracting the wealth from these companies and leaving them by the side of the road. At the end of the day the profit at the expense of everyone else.
  • kevin_b_er 9y ago
    Bain didn't invest. The played a financial game and made a bunch of money out of it. Who cares what happens to these companies from Bain's point of view afterward. They extracted money out of company doing actual business and employing a lot of people for their rich owners. The rich got richer and not-rich people will lose their jobs. This is how our corrupted "finance industry" works.
  • sct202 9y ago
    I think it's good to think about their original intentions versus what happened, because for the PE firms the best case is to make a stronger company that can publicly IPO for billions of dollars. If they can't make that happen they run it into the ground and try to get out with what they can.
    • msie 9y ago
      Then Bain Capital must be lying to themselves if they think they can help the company. I think they skip the middle step of trying to help the company and just sell off assets.
• legitster 9y ago
  I think a trend we will continue to see is growing failures of the private equity market.
• michaelt 9y ago
  I can understand Bain's motivation - but why would a creditor choose to grant credit when the risk of bankruptcy is so high? I mean, even if the creditors were promised an unbelievable interest rate of 20%, they still lose out if the company goes bust in the next 5 years.
  • toomuchtodo 9y ago
    When you require larger returns, you're willing to accept higher levels of risk (think of all of the pension funds with obligations where they calibrated their returns at 8% but are falling far short of that [1]). The debt for these sorts of transactions is referred to as "junk bonds" or high yield debt [2]. Sidenote: It's very important to understand risk when comparing returns, as returns must be risk adjusted to be properly compared. For example, 5% returns on bonds and 5% returns on equities are not the same based on the underlying risk of the asset class. [1] https://www.bloomberg.com/news/articles/2017-08-02/5-is-the-new-8-for-reliable-returns-for-pension-funds https://www.bloomberg.com/news/articles/2017-08-02/5-is-the-... [2] https://en.wikipedia.org/wiki/High-yield_debt https://en.wikipedia.org/wiki/High-yield_debt
    • Jesus_Jones 9y ago
      it's still hard to understand the motivation, because these husks of companies with large debts (like toys r us) keep ending up defaulting on their loans. so at the least, the people that make those big loans lost. I pay moderate attention to my 401k, but I notice (at least when I look :-)) when I have a giant loss. How can these bond or loan companies afford to lose so much and stay in business?
      • toomuchtodo 9y ago
        > How can these bond or loan companies afford to lose so much and stay in business? Scale. The same way VCs only count on one or two wins to pay for the rest of the losses.
      • Spooky23 9y ago
        Not all of the stakeholders lose. The suppliers, employees and vendors of the company lose. But the entities that write these loans make their money in different ways and may not actually lose as much as you think, or at all!
• apo 9y ago
  According to this article, one reason LBOs are attractive derives from the US tax code: A leveraged buyout (LBO) is a financial transaction in which a company is purchased with a combination of equity and debt, such that the company's cash flow is the collateral used to secure and repay the borrowed money. The use of debt, which has a lower cost of capital than equity, serves to reduce the overall cost of financing the acquisition. The cost of debt is lower because interest payments reduce corporate income tax liability, whereas dividend payments do not. This reduced cost of financing allows greater gains to accrue to the equity, and, as a result, the debt serves as a lever to increase the returns to the equity. https://en.wikipedia.org/wiki/Leveraged_buyout https://en.wikipedia.org/wiki/Leveraged_buyout
  • whatok 9y ago
    There have been significant changes to the tax advantages corporate debt had with the recent tax changes. Not all of these types of deals make sense in the future.
• Spooky23 9y ago
  How do the PR guys blame Amazon for this? The ToysRUs thing was such an obvious con. My son really digs certain Lego things and I stop by the store frequently. It was pretty obvious that it was being run into the ground... they would load up on inventory based on generous trade terms. The inventory in my local ToysRUs in November was aging and popular items like Lego and hot wheels were out of stock or merchandised to hide holes in the shelves.
  • prklmn 9y ago
    Hopefully someone will buy at least the name out of bankruptcy and rejuvenate the company. There is definitely value to be had, we haven’t seen the last of ToysRUs.
• rambojazz 9y ago
  Could you please ELI5 "leveraged buyout" and what is happening here? I'm not very financially savvy but I'd like to understand what kind of dynamic is it that was able to bankrupt two companies worth so much. Thanks.
  • dna_polymerase 9y ago
    Not ELI5 but worth the read: http://observer.com/2017/04/iheart-radio-leveraged-buyout-doomed/ http://observer.com/2017/04/iheart-radio-leveraged-buyout-do...
    • rahimnathwani 9y ago
      This is a poorly-written article with typos (e.g. '$10 million of new worth') confusing explanations. For example, it says "In order to then balance the financial statement, there must be a debit of $20 million to equalize the new credit of $20 million ($30 million of loan less the $10 million of new worth that has been eliminated). To do this, a “plug” asset usually under the heading of goodwill (here for $20 million) is added to the asset side of the financial statement." Most people reading this would conclude that 'goodwill' is some accounting thing that is required due to the use of debt, or because the company doesn't received the money from the lender. But goodwill has nothing to do with debt. Whenever one company purchases another, paying more than the book value (accounting value) of the target (which is almost always the case), goodwill arises on the acquiring company's balance sheet.
      • dna_polymerase 9y ago
        Nice pointing out typos of the authors of this piece while being unable to grasp even simple concepts of the English grammar yourself ('doesn't received'). That said, the goodwill thing is clarified in the next sentence. Also, the text doesn't make the connection between goodwill and debt. In fact it is nice that you try to explain what 'most people' will think after reading this while in fact the only thing your post proofs is you poor understanding of intermediate level texts in english language. I don't know why you try to discredit the text here.
• bain 9y ago
  Good origin story on Bain/Romney by Matt Taibbi in Rolling Stone: https://www.rollingstone.com/politics/news/greed-and-debt-the-true-story-of-mitt-romney-and-bain-capital-20120829 https://www.rollingstone.com/politics/news/greed-and-debt-th...
• lazaruzatgmail 9y ago
  "Wait, maybe the name "Bain Capital" rings a bell?" does mitt romney ring a bell.... bain is his