7 ms·
Lots of companies with lots of value are dead or irreversibly dying (that is, saving them would cost more than the entire value of the saved company). There's
by bcoates 8y ago
Lots of companies with lots of value are dead or irreversibly dying (that is, saving them would cost more than the entire value of the saved company).
There's nothing wrong or strange about firms specializing in extracting what can be salvaged out of the these. It's not more short-term or long-term specific than any other decision owners make about companies -- carving out viable business units that can be spun off and sold is a fundamentally long-term proposition (for the buyer and society). It's not all Michael Douglas defrauding overfunded pensions.
- staticautomatic 8y agoNo, but a non-zero proportion of them contribute to the death of the company (for example by saddling struggling companies with debt in LBO deals).
- refurb 8y agoThat is often because the turnaround failed, not because it was planned.
- staticautomatic 8y agoI assume you're trying to make the point that they are well-intentioned when they decide to saddle the company with debt because it's part of a turnaround effort. Empirically, that is not categorically true.
- airstrike 8y agoI assume you don't know what you're talking about, because taking on debt isn't inherently ill-intentioned.
- staticautomatic 8y agoYou've also missed the point. I'm not saying it's categorically I'll-intentioned, but it certainly is not categorically well-intentioned either.
- airstrike 8y agoIt is most certainly well-intentioned. Managers take on debt with the intention of creating, not destroying value.
- staticautomatic 8y agoIf you read about some of the more spectacular company collapses involving debt in LBO deals you will find that is not even close to being universally true.
- airstrike 8y agoInvestors in those LBOs aren't better off with the collapse of those companies. Even sophisticated investors sometimes make terrible judgement calls. Failure was not their objective. The notion that that investors don't want their investments to spectacularly fail should really be self-evident.
- airstrike 8y agoTaking on debt isn't necessarily value-destructive, otherwise companies would prefer to run debt-free. As any corporate finance book will teach you, increasing leverage simply means returns to equity holders are more volatile. It's like adding debt to a lemonade stand that generates $1 a day everyday for the chance of instead generating $5 or ($5) everyday. People (managers, investors..) have varying appetites for risk, but at the end of the day, these are all consenting adults and they can do as they please within the limits of the law.
- staticautomatic 8y agoI understand how debt works and I never said it was necessarily value-destructive. I gave it as one example of something in LBO deals that can be.
- Spooky23 8y ago> As any corporate finance book will teach you, increasing leverage simply means returns to equity holders are more volatile English translation: Leverage reduces equity value.
- skookumchuck 8y ago> Leverage reduces equity value Not at all: Equity = Assets - Liabilities Borrowing money adds an equal amount to Assets and Liabilities. The difference remains the same.
- Bud 8y agoWait, was the concept of interest abolished while I wasn't looking?
- skookumchuck 8y agoAccrued interested is added to the Liability as time goes on, but it is not there on Day 0. Furthermore, businesses borrow money in order to use it to increase assets, not just sit in a pile.
- mseebach 8y agoFirst, "non-zero" is an extremely high bar, especially for mere "contribution". Knowing that there is non-zero contribution tells us nothing about whether it's a problem we should care about. Second, there is massive survivorship bias (well, actually the literal opposite, I suppose) going on here. There is a massive bias towards hearing about the deals that go bad. There is little effort to chronicle the times this worked out well, and a LBO saved a sick company.