4 ms·

Thank you, I understand better now with the numbers worked out. Although in this example, outcome is dependent on circumstance and LBOs are not covers for malf

Thank you, I understand better now with the numbers worked out. Although in this example, outcome is dependent on circumstance and LBOs are not covers for malfeasance the way they're frequently talked about.

topkai22 6y ago
I think the reason LBOs are so hated is difference in utility between the capitalists and the community. The capitalists (PE, management, and lenders) are putting a boatload of money at risk to make an even larger boatload of money, and are empowered to take that risk. If the bet doesn't work out? They'll lose money (but probably have lots left over) and maybe their jobs if goes bad. The community (workers, local suppliers, and governments) are seeing their jobs, livelihoods, and institutions put at risk, and they likely are seeing no reward for success. They are not empowered to decline the increase in risk, even though they certainly have a stake in the future of the company.
- pstuart 6y ago
  > I think the reason LBOs are so hated It feels like economic strip mining to me. p.s. thank you for the clear explanations
  - topkai22 6y ago
    It isn't always- there are certainly times where a PE company recognizes that a fundamental good company is doing stupid things with its assets. One of the reasons why LBOs and "corporate raiding" was such a cultural meme in the 80s is that there really were a ton of companies that weren't allocating capital well, and sometimes were run for management's benefit to the expense of the shareholders. A totally made up example might be a furniture manufacturer that also happened to own a some water parks and a bunch of real estate, because the CEO liked water parks. A corporate raider/PE firm might do the math and conclude the water park segment was dragging down the rest of company and the real estate would fetch a ton if the company actually sold it. So they take over the company with debt, pay off a chunk of the debt by spinning off the water park segment, sell off a bunch more real estate to people who want to use it, and then the core furniture manufacturer actually ends up with more free cash flow because they aren't supporting the dead weight businesses. That's the idealistic case, and it does happen. But then there are the counter examples we all know...
- whatok 6y ago
  I think it's more because the examples people are familiar with are cherrypicked "heads I win, tails you lose" examples that have recently been recognizable American brands. Someone linked a list of LBOs elsewhere in here and TXU was at the top of the list. A lot of people lost a lot of money on that deal but you didn't see the kind of press Toys R Us got. I'm guessing a tiny percentage of people here even know what TXU is. Toys was a brand everyone recognized and PE got paid on that even though they went under.

topkai22 6y ago

I think the reason LBOs are so hated is difference in utility between the capitalists and the community. The capitalists (PE, management, and lenders) are putting a boatload of money at risk to make an even larger boatload of money, and are empowered to take that risk. If the bet doesn't work out? They'll lose money (but probably have lots left over) and maybe their jobs if goes bad. The community (workers, local suppliers, and governments) are seeing their jobs, livelihoods, and institutions put at risk, and they likely are seeing no reward for success. They are not empowered to decline the increase in risk, even though they certainly have a stake in the future of the company.

pstuart 6y ago
> I think the reason LBOs are so hated It feels like economic strip mining to me. p.s. thank you for the clear explanations
- topkai22 6y ago
  It isn't always- there are certainly times where a PE company recognizes that a fundamental good company is doing stupid things with its assets. One of the reasons why LBOs and "corporate raiding" was such a cultural meme in the 80s is that there really were a ton of companies that weren't allocating capital well, and sometimes were run for management's benefit to the expense of the shareholders. A totally made up example might be a furniture manufacturer that also happened to own a some water parks and a bunch of real estate, because the CEO liked water parks. A corporate raider/PE firm might do the math and conclude the water park segment was dragging down the rest of company and the real estate would fetch a ton if the company actually sold it. So they take over the company with debt, pay off a chunk of the debt by spinning off the water park segment, sell off a bunch more real estate to people who want to use it, and then the core furniture manufacturer actually ends up with more free cash flow because they aren't supporting the dead weight businesses. That's the idealistic case, and it does happen. But then there are the counter examples we all know...
whatok 6y ago
I think it's more because the examples people are familiar with are cherrypicked "heads I win, tails you lose" examples that have recently been recognizable American brands. Someone linked a list of LBOs elsewhere in here and TXU was at the top of the list. A lot of people lost a lot of money on that deal but you didn't see the kind of press Toys R Us got. I'm guessing a tiny percentage of people here even know what TXU is. Toys was a brand everyone recognized and PE got paid on that even though they went under.