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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 w

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.
    - rahimnathwani 9y ago
      I don't sweat typos in my HN comments. They're not newspaper articles. I can assure you I'm able to grasp simple concepts of English grammar, but thanks for the feedback anyway! The connection between goodwill and debt isn't clarified in the next sentence. I stand by my point that a reader unfamiliar with goodwill would, after reading the article, understand it to be the result of debt. My comment about the article was motivated by the fact that I found it poorly written by the standards of newspaper journalism. No other reason.
- whatok 9y ago
  No one pays for companies based on a multiple of their "net worth". No one is going to pay 3x of that "net worth" value and if they did, they probably wouldn't have to pay 10% interest in debt. Starting with such assumptions makes it very hard to place any faith in the rest of the example.
  - dna_polymerase 9y ago
    Of course they do. Just look at the stock market and the valuations in relation to Book Value.
_rpd 9y ago
Bain looked at the target company and thought "I can reconfigure this company so that it would be worth a lot more than the stock market currently says it is." Bain has successfully done this before, so they convince investors to loan them a bunch of money, and they buy the company with the loan (this is the 'leveraged' part), taking it off the stockmarket. The plan is to reconfigure the company and then put it back on the stockmarket at a higher price. But, in these cases, when they got down to the hard work of re-configuring the target companies, they found out that they had done their sums wrong and that the interest on the loan was eating up all the money that was supposed to be used to make the target companies better and more valuable. Oops. So then they ran the companies into the ground and filed for bankruptcy so that they don't have to pay back the loan. This makes the investors mad, and Bain might not be able to play the leveraged buyout game any more, but they collected hundreds of millions of dollars in 'management fees' so they don't really care. And, hey, maybe some investors will still give them money because they certainly know what not to do next time.

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.
  - rahimnathwani 9y ago
    I don't sweat typos in my HN comments. They're not newspaper articles. I can assure you I'm able to grasp simple concepts of English grammar, but thanks for the feedback anyway! The connection between goodwill and debt isn't clarified in the next sentence. I stand by my point that a reader unfamiliar with goodwill would, after reading the article, understand it to be the result of debt. My comment about the article was motivated by the fact that I found it poorly written by the standards of newspaper journalism. No other reason.
whatok 9y ago
No one pays for companies based on a multiple of their "net worth". No one is going to pay 3x of that "net worth" value and if they did, they probably wouldn't have to pay 10% interest in debt. Starting with such assumptions makes it very hard to place any faith in the rest of the example.
- dna_polymerase 9y ago
  Of course they do. Just look at the stock market and the valuations in relation to Book Value.

_rpd 9y ago

Bain looked at the target company and thought "I can reconfigure this company so that it would be worth a lot more than the stock market currently says it is." Bain has successfully done this before, so they convince investors to loan them a bunch of money, and they buy the company with the loan (this is the 'leveraged' part), taking it off the stockmarket. The plan is to reconfigure the company and then put it back on the stockmarket at a higher price. But, in these cases, when they got down to the hard work of re-configuring the target companies, they found out that they had done their sums wrong and that the interest on the loan was eating up all the money that was supposed to be used to make the target companies better and more valuable. Oops. So then they ran the companies into the ground and filed for bankruptcy so that they don't have to pay back the loan. This makes the investors mad, and Bain might not be able to play the leveraged buyout game any more, but they collected hundreds of millions of dollars in 'management fees' so they don't really care. And, hey, maybe some investors will still give them money because they certainly know what not to do next time.