4 ms·

Your theory is good, but is it what happens in practice? In the headlines, you will find examples of "corporate raiders" who bought the company to "extract valu

Your theory is good, but is it what happens in practice? In the headlines, you will find examples of "corporate raiders" who bought the company to "extract value" which means doing pretty much what a leech does. Also most of these examples showcase that the company would have been better off without the private equity buyers. Could there be good buyers, sure.

devchix 6y ago
"extract value" -- what does this mean? Sell off the furniture? Fire 50% of the employees? I have image of Richard Gere saying "I buy companies that are in financial difficulties, I break it up into pieces, and I sell that off." Like stealing cars and selling them for parts, right?
- Allower 6y ago
  So kind of like white blood cells destroying a cell that has become cancerous or diseased in order to protect the organism overall, I see.
- topkai22 6y ago
  Yeah, that's pretty much the canonical model. Huge in the 80s for a variety of reasons, still extremely common today. There are other models for PE and going private- sometimes companies don't use nearly so much leverage and are effecitvely bought as part of portfolio, sometimes you see very rich individuals take their companies that they used to own private again, sometimes they do use tons of leverage but buy and run the companies mostly as is, just growing the company in place and paying down debt from cashflow. PE's and LBOs aren't necessarily bad things at all and the economy as a whole is better for having them exist. The problem is that the risk/reward profile tends to exaberate inequality. The PE/LBO firm is already rich individuals who may make our lose millions on a bet on the company. The control their own risk and decide. The workers and communities who also have a stake in the company? They have very limited upside and the downside is that they lose their jobs and anchor institutions in their communities, and they have very little control over whether or not to accept the risk.
- pjc50 6y ago
  Stealing cars is small-time. The big deal is to steal the car factory. Or, in the case of MG Rover, sell the land the factory is built on to a holding company and pay yourself a bonus. (The collapse of MG Rover is complicated and the directors very narrowly avoided prosecution)
nogabebop23 6y ago
it get's worse: often the same PE that's doing the leveraged buy-out is also financing it, at preferential terms and itnerest rates. see: Sears.

devchix 6y ago

"extract value" -- what does this mean? Sell off the furniture? Fire 50% of the employees? I have image of Richard Gere saying "I buy companies that are in financial difficulties, I break it up into pieces, and I sell that off." Like stealing cars and selling them for parts, right?

Allower 6y ago
So kind of like white blood cells destroying a cell that has become cancerous or diseased in order to protect the organism overall, I see.
topkai22 6y ago
Yeah, that's pretty much the canonical model. Huge in the 80s for a variety of reasons, still extremely common today. There are other models for PE and going private- sometimes companies don't use nearly so much leverage and are effecitvely bought as part of portfolio, sometimes you see very rich individuals take their companies that they used to own private again, sometimes they do use tons of leverage but buy and run the companies mostly as is, just growing the company in place and paying down debt from cashflow. PE's and LBOs aren't necessarily bad things at all and the economy as a whole is better for having them exist. The problem is that the risk/reward profile tends to exaberate inequality. The PE/LBO firm is already rich individuals who may make our lose millions on a bet on the company. The control their own risk and decide. The workers and communities who also have a stake in the company? They have very limited upside and the downside is that they lose their jobs and anchor institutions in their communities, and they have very little control over whether or not to accept the risk.
pjc50 6y ago
Stealing cars is small-time. The big deal is to steal the car factory. Or, in the case of MG Rover, sell the land the factory is built on to a holding company and pay yourself a bonus. (The collapse of MG Rover is complicated and the directors very narrowly avoided prosecution)

nogabebop23 6y ago

it get's worse: often the same PE that's doing the leveraged buy-out is also financing it, at preferential terms and itnerest rates. see: Sears.