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I'm constantly shocked that "leveraged buyouts" are a thing. It seems like taking a business and loading it up with debt is a recipe for failure that would intr

I'm constantly shocked that "leveraged buyouts" are a thing. It seems like taking a business and loading it up with debt is a recipe for failure that would introduce a lot of risk for the lender, but banks and other capital holders continue issuing the debt.

duxup 4y ago
Yeah the idea that Twitter is now worth more with substantially more debt doesn’t make sense to me.
- mcguire 4y ago
  Before or after bankruptcy?
rglover 4y ago
Because they expect that debt to be inflated away as the currency its denominated in goes to zero (and they know they'll get replenished with cash when they need it via the Fed [1][2]). [1] https://www.federalreserve.gov/econres/notes/feds-notes/understanding-bank-deposit-growth-during-the-covid-19-pandemic-20220603.html https://www.federalreserve.gov/econres/notes/feds-notes/unde... [2] https://www.youtube.com/watch?v=n1xgQeCiu6k https://www.youtube.com/watch?v=n1xgQeCiu6k
akira2501 4y ago
They have a place and can be used effectively to solve actual problems. Old line businesses with too many units and complicated business arrangements can actually benefit from being torn apart and rebuilt effectively. The problem is, when the Fed gives out exceptionally cheap interest, it makes it incredibly easy to apply this strategy even when the underlying business would not benefit from it. We simply left the tap on _way_ too long.
smcl 4y ago
I cannot fathom it either. First I heard that it was a thing was when the Glazers borrowed money to buy Manchester United then saddled them with half of the debt. They had no debt prior to being purchased. I don't know how common it is, but it feels like you're telegraphing that you're going to use the organization you bought as a piggy bank or a plaything. Like, see this shit (from https://en.wikipedia.org/wiki/Glazer_ownership_of_Manchester_United https://en.wikipedia.org/wiki/Glazer_ownership_of_Manchester...) From 2016, the Glazers paid themselves annual dividends from the club, at over £20 million every year from 2016 to 2020. In that same period, the club's debt repayments "all but ceased", described The Daily Telegraph, while interest payments continued. While paying dividends was common in business, Manchester United were the sole Premier League club to "pay regular dividends of any kind", reported The Daily Telegraph in May 2021 I don't even like Man Utd, but that's shady as hell
mcguire 4y ago
It's not intended for the business to continue operating after a leveraged buyout. Leveraged buyouts are typically used where the company has assets that aren't "productive" or is made up of more-or-less independent units that are worth more separate than together. In these cases, cutting expenses by firing people is usually the first step, since the business' revenue stream can usually continue on autopilot for a while. I expect Twitter to report record-breaking profits next quarter and Twitter's share price to go up accordingly. Maybe even enough to fill in some of Musk's hole.
- nrmitchi 4y ago
  Why do you expect no-longer-a-public-company Twitter to report anything next quarter, or to have a “share price” that you have access to?
- rahkiin 4y ago
  There is no share price: all of twitter is private. Maybe if the company is taxated?
  - mcguire 4y ago
    You are absolutely correct. Well, there goes that part. Eesh.
- dh2022 4y ago
  There will be no more quarterly reports and no more share price. Twitter will delist from NASDAQ on Nov 8 or whereabouts
bcbrown 4y ago
I'm guessing you hear a lot more about the failures/impending failures in LBO financing than you do the successes/non-defaults. You could calculate the implied probability of default from the POV of the lender by comparing the financing terms to "assumed risk free" treasuries, and then compare that with the historical data to see how accurate they are at pricing that risk. If you'd rather not do that work, I'm sure there's plenty of papers in the academic literature examining that exact question.
JumpCrisscross 4y ago
> constantly shocked that "leveraged buyouts" are a thing LBOs were a cure to the poison of the post-war conglomerate [1]. Those were run as personal fiefdoms by aloof executives and their cronies. The traditional check was M&A. Conglomerates having no clean competitors, this–in practice–meant a buyer putting up cash and borrowing the rest, buying the company, taking out a loan in the company's name, using that to pay themselves and then paying back the personal loan. The only purpose the buyer's credit served was to gatekeep. LBOs compress that process, letting anyone challenge management if they can convince investors/lenders to back their vision. [1] https://en.wikipedia.org/wiki/Conglomerate_(company) https://en.wikipedia.org/wiki/Conglomerate_(company)

duxup 4y ago

Yeah the idea that Twitter is now worth more with substantially more debt doesn’t make sense to me.

mcguire 4y ago
Before or after bankruptcy?

rglover 4y ago

Because they expect that debt to be inflated away as the currency its denominated in goes to zero (and they know they'll get replenished with cash when they need it via the Fed [1][2]). [1] https://www.federalreserve.gov/econres/notes/feds-notes/understanding-bank-deposit-growth-during-the-covid-19-pandemic-20220603.html https://www.federalreserve.gov/econres/notes/feds-notes/unde... [2] https://www.youtube.com/watch?v=n1xgQeCiu6k https://www.youtube.com/watch?v=n1xgQeCiu6k

akira2501 4y ago

They have a place and can be used effectively to solve actual problems. Old line businesses with too many units and complicated business arrangements can actually benefit from being torn apart and rebuilt effectively. The problem is, when the Fed gives out exceptionally cheap interest, it makes it incredibly easy to apply this strategy even when the underlying business would not benefit from it. We simply left the tap on _way_ too long.

smcl 4y ago

I cannot fathom it either. First I heard that it was a thing was when the Glazers borrowed money to buy Manchester United then saddled them with half of the debt. They had no debt prior to being purchased. I don't know how common it is, but it feels like you're telegraphing that you're going to use the organization you bought as a piggy bank or a plaything. Like, see this shit (from https://en.wikipedia.org/wiki/Glazer_ownership_of_Manchester_United https://en.wikipedia.org/wiki/Glazer_ownership_of_Manchester...) From 2016, the Glazers paid themselves annual dividends from the club, at over £20 million every year from 2016 to 2020. In that same period, the club's debt repayments "all but ceased", described The Daily Telegraph, while interest payments continued. While paying dividends was common in business, Manchester United were the sole Premier League club to "pay regular dividends of any kind", reported The Daily Telegraph in May 2021 I don't even like Man Utd, but that's shady as hell

mcguire 4y ago

It's not intended for the business to continue operating after a leveraged buyout. Leveraged buyouts are typically used where the company has assets that aren't "productive" or is made up of more-or-less independent units that are worth more separate than together. In these cases, cutting expenses by firing people is usually the first step, since the business' revenue stream can usually continue on autopilot for a while. I expect Twitter to report record-breaking profits next quarter and Twitter's share price to go up accordingly. Maybe even enough to fill in some of Musk's hole.

nrmitchi 4y ago
Why do you expect no-longer-a-public-company Twitter to report anything next quarter, or to have a “share price” that you have access to?
rahkiin 4y ago
There is no share price: all of twitter is private. Maybe if the company is taxated?
- mcguire 4y ago
  You are absolutely correct. Well, there goes that part. Eesh.
dh2022 4y ago
There will be no more quarterly reports and no more share price. Twitter will delist from NASDAQ on Nov 8 or whereabouts

bcbrown 4y ago

I'm guessing you hear a lot more about the failures/impending failures in LBO financing than you do the successes/non-defaults. You could calculate the implied probability of default from the POV of the lender by comparing the financing terms to "assumed risk free" treasuries, and then compare that with the historical data to see how accurate they are at pricing that risk. If you'd rather not do that work, I'm sure there's plenty of papers in the academic literature examining that exact question.

JumpCrisscross 4y ago

> constantly shocked that "leveraged buyouts" are a thing LBOs were a cure to the poison of the post-war conglomerate [1]. Those were run as personal fiefdoms by aloof executives and their cronies. The traditional check was M&A. Conglomerates having no clean competitors, this–in practice–meant a buyer putting up cash and borrowing the rest, buying the company, taking out a loan in the company's name, using that to pay themselves and then paying back the personal loan. The only purpose the buyer's credit served was to gatekeep. LBOs compress that process, letting anyone challenge management if they can convince investors/lenders to back their vision. [1] https://en.wikipedia.org/wiki/Conglomerate_(company) https://en.wikipedia.org/wiki/Conglomerate_(company)