13 ms·

Well yeah, it's pretty straightforward. Company A borrows $4 billion; it's leveraged against the company they're going to buy; they buy Company B, paying out th

Well yeah, it's pretty straightforward. Company A borrows $4 billion; it's leveraged against the company they're going to buy; they buy Company B, paying out the shareholders, and B merges into A and keeps the debt. I'm having a struggle with whether this seems moral or not. B is saddled with a big debt, and employees of company B may suffer as a result of this (anything from losing bonuses or profit sharing opportunities, to losing headcount, or having the very future of the company put into question). The new owners also have to live with this situation, while the old owners skip merrily away with their profits gleaned from the future work that will be done to pay down the loan. This seems negative, but has to be balanced with the fact that the shareholders of company B are the owners of the company, and it is their decision to do as they wish; if they're offered a certain sum for their shares, it's their choice to take it. It's unfortunate that this comes with blindness to the future impact of that action, but this may be a necessary or at least presently contingent artifact of capitalism.

adventured 9y ago
The morality of it depends on what you believe owners owe employees. There's clearly no objective basis there, it's down to a given person's moral beliefs. In my observation, you'll get a very different response to that from one business owner to the next. Some owners/operators take it as an intense matter of morality to safeguard their employees, others could care less and believe they owe their employees between nothing and very little. If you look at the top dozen economies in terms of prosperity or economic growth, you'll find a lot of different cultural approaches to that owner/operator-worker relationship, and they all have managed to generate rather spectacular results. France, US, Germany, South Korea, Japan, China, Sweden, Switzerland, Australia, Denmark - all have between slightly and very different approaches. It also takes you down a road of other similar questions. Joe loads up on his credit cards and puts his family at risk. Should that be illegal? Is it immoral? (arguably it's immoral) Social contracts are a fascinating thing and they're essentially all-pervasive across everything people do. We go out and drive on the roads with a sort of social contract, that properly we're not going to act like maniacs and endanger each other.
- beojan 9y ago
  The difference here is that it's the acquired company that owes the debt, as opposed to the acquiring company owing a debt with the acquired company as collateral.
  - asmithmd1 9y ago
    Here is how it worked: Bain Capital decides to acquire Toys-R-Us so they set-up NewToyCo and invest $5B in it. NewToyCo buys Toys-R-Us with that $5B and installs new managers at Toys-R-Us. Since the invested cash was investment and not a loan, NewToyCo owns Toys-R-Us free and clear The new managers of Toys-R-Us get a $5B loan from banks secured by the assets of Toys-R-Us and pay a one time $5B dividend to shareholders of NewToyCo. If everything goes well and Toys-R-Us can service the loan, Bain owns Toys-R-Us for free and sells it or takes it public. If things don't work out, they collected huge management consulting fees for s few years. Bain ran this exact same play on KB Toys with the same (bankruptcy) result.
    - ars 9y ago
      So it's basically the opposite of going public? You use that $5B to pay all the original owners (shareholders), and now have debt instead.
  - kaycebasques 9y ago
    This is bizarre. I did not know that leveraged buyouts could work like this.
    - mseebach 9y ago
      It's just like a mortgage. Even though it's you buying the house, it's in a way the house that ends up owning the mortgage (in many jurisdictions, you can walk away from the house and mortgage, and the bank had no leverage against your person, they can only repossess the house).
      - 9y ago

adventured 9y ago

The morality of it depends on what you believe owners owe employees. There's clearly no objective basis there, it's down to a given person's moral beliefs. In my observation, you'll get a very different response to that from one business owner to the next. Some owners/operators take it as an intense matter of morality to safeguard their employees, others could care less and believe they owe their employees between nothing and very little. If you look at the top dozen economies in terms of prosperity or economic growth, you'll find a lot of different cultural approaches to that owner/operator-worker relationship, and they all have managed to generate rather spectacular results. France, US, Germany, South Korea, Japan, China, Sweden, Switzerland, Australia, Denmark - all have between slightly and very different approaches. It also takes you down a road of other similar questions. Joe loads up on his credit cards and puts his family at risk. Should that be illegal? Is it immoral? (arguably it's immoral) Social contracts are a fascinating thing and they're essentially all-pervasive across everything people do. We go out and drive on the roads with a sort of social contract, that properly we're not going to act like maniacs and endanger each other.

beojan 9y ago
The difference here is that it's the acquired company that owes the debt, as opposed to the acquiring company owing a debt with the acquired company as collateral.
- asmithmd1 9y ago
  Here is how it worked: Bain Capital decides to acquire Toys-R-Us so they set-up NewToyCo and invest $5B in it. NewToyCo buys Toys-R-Us with that $5B and installs new managers at Toys-R-Us. Since the invested cash was investment and not a loan, NewToyCo owns Toys-R-Us free and clear The new managers of Toys-R-Us get a $5B loan from banks secured by the assets of Toys-R-Us and pay a one time $5B dividend to shareholders of NewToyCo. If everything goes well and Toys-R-Us can service the loan, Bain owns Toys-R-Us for free and sells it or takes it public. If things don't work out, they collected huge management consulting fees for s few years. Bain ran this exact same play on KB Toys with the same (bankruptcy) result.
  - ars 9y ago
    So it's basically the opposite of going public? You use that $5B to pay all the original owners (shareholders), and now have debt instead.
- kaycebasques 9y ago
  This is bizarre. I did not know that leveraged buyouts could work like this.
  - mseebach 9y ago
    It's just like a mortgage. Even though it's you buying the house, it's in a way the house that ends up owning the mortgage (in many jurisdictions, you can walk away from the house and mortgage, and the bank had no leverage against your person, they can only repossess the house).
    - 9y ago