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"The company lent Bain the money needed to acquire itself" How does this work exactly? Why would the company lend an acquirer money?

freeone3000 6y ago
They had a controlling interest in the company. Guitar Center voted to give Bain Capital money by one person wearing two hats.
- lotsofpulp 6y ago
  Where did guitar center get this money to give Bain?
  - freeone3000 6y ago
    They took out loans against their equity.
bena 6y ago
It's a little more complicated than that. Bain Capital and other vulture capitalists aren't the ones being lent the money. They find a public company that's not doing great. Maybe they're just stagnant or they had a down year. Either way, you find someone who wants to sell a publicly traded company. Then they put up a small amount and have the company itself take out a loan to buy back its stock. So now the company is paying interest on the debt it took on to buy itself and also paying "management consulting fees" to places like Bain Capital. In short: Toys R Us should have never had to close its doors. https://theweek.com/articles/761124/how-vulture-capitalists-ate-toys-r https://theweek.com/articles/761124/how-vulture-capitalists-...
- lotsofpulp 6y ago
  Who is lending money to a business so the business can pay its owner?
  - jeffbee 6y ago
    Large companies can just sell debt on the open market. When Bain's subsidiary "merged" with Guitar Center, Guitar Center sold $1.78 billion in debt and Bain paid $1.9bn for the company. Guitar Center got murdered on the interest rates of between 6 and 10% on these debts, which were rated as junk even at the time. The details are in the various SEC filings, you can read them online. """In connection with the execution and delivery of the merger agreement, Parent and Merger Sub entered into a debt financing commitment letter with J.P. Morgan Securities Inc. and JPMorgan Chase Bank, N.A. to provide up to $1.815 billion in debt financing, consisting of (1) a senior secured asset-based revolving facility with a maximum availability of $375 million, (2) a senior secured loan term facility in an aggregate principal amount of $800 million, (3) a senior unsecured bridge loan facility in an aggregate principal amount of up to $300 million and (4) a senior subordinated unsecured bridge loan facility in an aggregate principal amount of up to $340 million. """ As to the question of why company management would agree to do this, it's because they personal get paid a huge amount of money to execute the merger. Guitar Center's old CEO got paid $25 million by immediately paying out all his future stock grants on the date of the merger. """Each stock option to purchase our common stock outstanding immediately prior to the merger, whether or not then exercisable or vested, will become fully vested and will be deemed to be exercised and canceled at the effective time of the merger, and each holder of such stock option will be entitled to receive a cash payment..."""
- sideshowb 6y ago
  How does a stock buyback work in this case - do they just buy up 51%? If so do the remaining 49% of shareholders get value 'extracted' on their behalf too or do they also get screwed?
cstejerean 6y ago
You can imagine it as buying the company and then immediately using your new control of the company to take on debt to repay yourself for the purchase price. In practice it’s a little different as you arrange the debt financing before buying the company, but conceptually it works the same way. As the new owner of the company you can saddle it with debt (as long as lenders are willing to lend you the money).
dasudasu 6y ago
They approach a bank, or issue some bonds, and it goes something like: "Lend us 1 billion to acquire this company. We'll pay the interest from the operating income. It will also be secured against the assets of the company." So from the point of view of a bank or bond-holder, it's not such a bad deal if the company survives. It's not a bad deal either for the past owner who does cash out. Then, after the acquisition, they put the debt on that company's books because they were technically costs incurred from that company, and there is nobody to stop them anyway.

freeone3000 6y ago

They had a controlling interest in the company. Guitar Center voted to give Bain Capital money by one person wearing two hats.

lotsofpulp 6y ago
Where did guitar center get this money to give Bain?
- freeone3000 6y ago
  They took out loans against their equity.

bena 6y ago

It's a little more complicated than that. Bain Capital and other vulture capitalists aren't the ones being lent the money. They find a public company that's not doing great. Maybe they're just stagnant or they had a down year. Either way, you find someone who wants to sell a publicly traded company. Then they put up a small amount and have the company itself take out a loan to buy back its stock. So now the company is paying interest on the debt it took on to buy itself and also paying "management consulting fees" to places like Bain Capital. In short: Toys R Us should have never had to close its doors. https://theweek.com/articles/761124/how-vulture-capitalists-ate-toys-r https://theweek.com/articles/761124/how-vulture-capitalists-...

lotsofpulp 6y ago
Who is lending money to a business so the business can pay its owner?
- jeffbee 6y ago
  Large companies can just sell debt on the open market. When Bain's subsidiary "merged" with Guitar Center, Guitar Center sold $1.78 billion in debt and Bain paid $1.9bn for the company. Guitar Center got murdered on the interest rates of between 6 and 10% on these debts, which were rated as junk even at the time. The details are in the various SEC filings, you can read them online. """In connection with the execution and delivery of the merger agreement, Parent and Merger Sub entered into a debt financing commitment letter with J.P. Morgan Securities Inc. and JPMorgan Chase Bank, N.A. to provide up to $1.815 billion in debt financing, consisting of (1) a senior secured asset-based revolving facility with a maximum availability of $375 million, (2) a senior secured loan term facility in an aggregate principal amount of $800 million, (3) a senior unsecured bridge loan facility in an aggregate principal amount of up to $300 million and (4) a senior subordinated unsecured bridge loan facility in an aggregate principal amount of up to $340 million. """ As to the question of why company management would agree to do this, it's because they personal get paid a huge amount of money to execute the merger. Guitar Center's old CEO got paid $25 million by immediately paying out all his future stock grants on the date of the merger. """Each stock option to purchase our common stock outstanding immediately prior to the merger, whether or not then exercisable or vested, will become fully vested and will be deemed to be exercised and canceled at the effective time of the merger, and each holder of such stock option will be entitled to receive a cash payment..."""
sideshowb 6y ago
How does a stock buyback work in this case - do they just buy up 51%? If so do the remaining 49% of shareholders get value 'extracted' on their behalf too or do they also get screwed?

cstejerean 6y ago

You can imagine it as buying the company and then immediately using your new control of the company to take on debt to repay yourself for the purchase price. In practice it’s a little different as you arrange the debt financing before buying the company, but conceptually it works the same way. As the new owner of the company you can saddle it with debt (as long as lenders are willing to lend you the money).

dasudasu 6y ago

They approach a bank, or issue some bonds, and it goes something like: "Lend us 1 billion to acquire this company. We'll pay the interest from the operating income. It will also be secured against the assets of the company." So from the point of view of a bank or bond-holder, it's not such a bad deal if the company survives. It's not a bad deal either for the past owner who does cash out. Then, after the acquisition, they put the debt on that company's books because they were technically costs incurred from that company, and there is nobody to stop them anyway.