7 ms·

“Bust Out 1” seems basically OK to me. Everyone hates stock buybacks, but they’re economically very similar to dividends, and seem like a reasonable way for a f

“Bust Out 1” seems basically OK to me. Everyone hates stock buybacks, but they’re economically very similar to dividends, and seem like a reasonable way for a fading company to return cash to shareholders. Could BBB have survived if they spent $4B on a new initiative instead of returning it to shareholders? I doubt it. “Bust Out 3” seems pretty sleazy, selling stock in a failed company to retail investors. But hey, that’s what they said about Hertz, so maybe there’s some universe where this could have worked out OK? I agree “Bust Out 2” was just a scam. Ryan Cohen is a grifter.

xhrpost 3y ago
> return cash to shareholders I think the highlight here is that the buybacks were funded by debt. They're not "returning" anything.
- darth_avocado 3y ago
  Actually it’s not okay. You’re basically making money for investors who are “in on it” at the moment at the expense of future investors and other large investors who are just in the stock as a result of big fund diversification. My retirement money could be funding the sleazy stock sales from the insiders while they sell out the company.
- NotYourLawyer 3y ago
  When interest rates are low, a rational corporation will want to be funded in large part by debt.
  - actionablefiber 3y ago
    Borrowing money to buy back stock is the opposite of funding: it's de-funding. It's the acquisition of liabilities with no offsetting acquisition of assets or future cash flows.
    - nradov 3y ago
      So what? It's just a change in capital structure. Most corporations are funded by a mix of equity and debt. On average, taking on some debt boosts shareholder returns despite the increased risk of bankruptcy.
      - vibrio 3y ago
        Yes, boost shareholder return, but on what timescale?
        nradov 3y ago
        All timescales.
        actionablefiber 3y ago
        Long-term Bed Bath shareholders lost everything. Evidently their returns were not boosted by the buybacks.
        nradov 3y ago
        On average having some level of debt boosts shareholder returns. It does increase the risk of bankruptcy, but usually it's a net win. Smart shareholders are diversified so that the bankruptcy of any single company in their portfolio has minimal impact.
        vibrio 3y ago
        More interesting that debt to equity ratio, is what is done with the capital that is raised by either mechanism. Is it possible for investment into operations, marketing or strategic expansion or reduction to improve shareholder returns? Does CEO compensation that is well into the hundred million dollar range for performance that isn’t remarkable typically boost shareholder returns? These are questions that I think are more interesting to people running and governing companies. Even to CFOs which all know in their sleep the first year MBA financial engineering tricks of CAPM, WACC, and leverage to determine optimal capital structure. The attitude conveyed in your last sentence should be a large red flog to a competent and attentive Board or share holder. First, it is of no concern to the management how much I am or am not diversified- management’s job is to optimally run a company, not my portfolio. Second, leveraging up a compsny in low interest rate times is likely largely increases systemic risk to the share holders which, according to Markowitz’s modern portfolio theory, is not reduced by diversification versus idiosyncratic risk, which is.
  - flangola7 3y ago
    Taking on debt you don't need is a fundamental failure of personal responsibility
    - WJW 3y ago
      For an individual, perhaps. Even there some exceptions can be found though: taking on a mortgage to buy a house can be the right decision even though you could keep on renting and don't technically need to take on the debt. For a business it gets much muddier: do they "need" to take on debt if it makes them more competitive in the market? A company with a well optimized capital structure containing both debt and equity can be much more profitable than a company without, and can use those extra profits to out-compete companies that are less efficient.
      - JackFr 3y ago
        As long as corporate finance has existed, the fundamental question, indeed the only question is what is the optimal capital structure for the firm.
  - xhrpost 3y ago
    > be funded in large part by debt. All that debt went to stock buybacks so how is the company in this case being "funded" by the debt?
- JackFr 3y ago
  It’s changing the capital structure from equity based to debt based. Effectively it’s a change in ownership from stock holders to bond holders. Indeed it’s a sensible move if you are in a non-growth industry with stable and predictable cashflows - this is often how utility companies were financed. It’s arguable that that was the intent of Bust Out 1.
fred_is_fred 3y ago
If you acknowledge that the company was doomed anyway in 2014 (which I don't think mgmt believed) then the proper solution would have been to find a buyer rather than 5 years of buybacks. And personally I don't think it was a foregone conclusion that the end would come 9 years later.
- dragonwriter 3y ago
  Borrowing money and turning it over to shareholders via buybacks and the destroying the debt with bankruptcy is obviously better serving the shareholder's interests. Not sure what standard for “proper” you are using, or how you expect it to be a norm in a basically-capitalist economy.
  - TedDoesntTalk 3y ago
    > standard for “proper” The board is fiscally responsible to the company and its future, not shareholders. It should not have approved a buyback program funded with debt because it is not in the best interest of the company. It was in the best interest of current shareholders.
    - Panzer04 3y ago
      I don't see the distinction. What sbest for shareholders may well not be best for the employees of the company... but that's just how it is. Companies are run to benefit the capital that funded them, employees are just an expense.
      - TedDoesntTalk 3y ago
        Read up on “fiduciary responsibility”. It has nothing to do with “employees of the company” or “to the benefit of the capital that funded them.” Fiduciary responsibility is every board member’s responsibility and is legally binding (documents are signed stating as such when one becomes a board member). There are probably law suits pending against board members because they broke this responsibility.
colinsane 3y ago
> Everyone hates stock buybacks, but they’re economically very similar to dividends, and seem like a reasonable way for a fading company to return cash to shareholders. consider the passive investor who just Buys and Holds. three alternate timelines: 1) company pays dividends for 5 years and goes bust with a balance sheet of zero. 2) company sells off its assets over 5 years and dissolves. 3) company does share buybacks for five years and goes bust. in 1) and 2) the passive investor receives the same value as any other shareholder. in 3) the passive investor receives $0 and the value accrues exclusively to those shareholders who sold before the end. the combination or buyback + predictable bankruptcy makes sense only if you’re a shareholder close to the company seeking to maximize your own distribution. putting “right” and “wrong” aside, this pattern should at least make you more wary of being a passive investor, generally.
- empath-nirvana 3y ago
  Nobody owes passive investors money. It is an investment strategy that many people take, and like any strategy it can be exploited. If you buy stock and don't look at how the company you own is doing, then you deserve to lose your money. Nobody lied here. Everything was done right out in the open.
  - colinsane 3y ago
    in whichever branch of the multiverse has alternate me by some bizarre chance hosting you at a dinner party, remember to not take off your shoes. alternate me will meet you in your own ethical framework and confiscate them for himself when you're not paying attention.
    - empath-nirvana 3y ago
      If you include: "Oh, btw, if you take off your shoes, I'm keeping them" on the party invite, and follow up with quarterly updates that you're going to be taking everyone's shoes, it would be my own fault for going, wouldn't it?
- mactrey 3y ago

xhrpost 3y ago

> return cash to shareholders I think the highlight here is that the buybacks were funded by debt. They're not "returning" anything.

darth_avocado 3y ago
Actually it’s not okay. You’re basically making money for investors who are “in on it” at the moment at the expense of future investors and other large investors who are just in the stock as a result of big fund diversification. My retirement money could be funding the sleazy stock sales from the insiders while they sell out the company.
NotYourLawyer 3y ago
When interest rates are low, a rational corporation will want to be funded in large part by debt.
- actionablefiber 3y ago
  Borrowing money to buy back stock is the opposite of funding: it's de-funding. It's the acquisition of liabilities with no offsetting acquisition of assets or future cash flows.
  - nradov 3y ago
    So what? It's just a change in capital structure. Most corporations are funded by a mix of equity and debt. On average, taking on some debt boosts shareholder returns despite the increased risk of bankruptcy.
    - vibrio 3y ago
      Yes, boost shareholder return, but on what timescale?
      - nradov 3y ago
        All timescales.
        actionablefiber 3y ago
        Long-term Bed Bath shareholders lost everything. Evidently their returns were not boosted by the buybacks.
        nradov 3y ago
        On average having some level of debt boosts shareholder returns. It does increase the risk of bankruptcy, but usually it's a net win. Smart shareholders are diversified so that the bankruptcy of any single company in their portfolio has minimal impact.
        vibrio 3y ago
        More interesting that debt to equity ratio, is what is done with the capital that is raised by either mechanism. Is it possible for investment into operations, marketing or strategic expansion or reduction to improve shareholder returns? Does CEO compensation that is well into the hundred million dollar range for performance that isn’t remarkable typically boost shareholder returns? These are questions that I think are more interesting to people running and governing companies. Even to CFOs which all know in their sleep the first year MBA financial engineering tricks of CAPM, WACC, and leverage to determine optimal capital structure. The attitude conveyed in your last sentence should be a large red flog to a competent and attentive Board or share holder. First, it is of no concern to the management how much I am or am not diversified- management’s job is to optimally run a company, not my portfolio. Second, leveraging up a compsny in low interest rate times is likely largely increases systemic risk to the share holders which, according to Markowitz’s modern portfolio theory, is not reduced by diversification versus idiosyncratic risk, which is.
- flangola7 3y ago
  Taking on debt you don't need is a fundamental failure of personal responsibility
  - WJW 3y ago
    For an individual, perhaps. Even there some exceptions can be found though: taking on a mortgage to buy a house can be the right decision even though you could keep on renting and don't technically need to take on the debt. For a business it gets much muddier: do they "need" to take on debt if it makes them more competitive in the market? A company with a well optimized capital structure containing both debt and equity can be much more profitable than a company without, and can use those extra profits to out-compete companies that are less efficient.
    - JackFr 3y ago
      As long as corporate finance has existed, the fundamental question, indeed the only question is what is the optimal capital structure for the firm.
- xhrpost 3y ago
  > be funded in large part by debt. All that debt went to stock buybacks so how is the company in this case being "funded" by the debt?
JackFr 3y ago
It’s changing the capital structure from equity based to debt based. Effectively it’s a change in ownership from stock holders to bond holders. Indeed it’s a sensible move if you are in a non-growth industry with stable and predictable cashflows - this is often how utility companies were financed. It’s arguable that that was the intent of Bust Out 1.

fred_is_fred 3y ago

If you acknowledge that the company was doomed anyway in 2014 (which I don't think mgmt believed) then the proper solution would have been to find a buyer rather than 5 years of buybacks. And personally I don't think it was a foregone conclusion that the end would come 9 years later.

dragonwriter 3y ago
Borrowing money and turning it over to shareholders via buybacks and the destroying the debt with bankruptcy is obviously better serving the shareholder's interests. Not sure what standard for “proper” you are using, or how you expect it to be a norm in a basically-capitalist economy.
- TedDoesntTalk 3y ago
  > standard for “proper” The board is fiscally responsible to the company and its future, not shareholders. It should not have approved a buyback program funded with debt because it is not in the best interest of the company. It was in the best interest of current shareholders.
  - Panzer04 3y ago
    I don't see the distinction. What sbest for shareholders may well not be best for the employees of the company... but that's just how it is. Companies are run to benefit the capital that funded them, employees are just an expense.
    - TedDoesntTalk 3y ago
      Read up on “fiduciary responsibility”. It has nothing to do with “employees of the company” or “to the benefit of the capital that funded them.” Fiduciary responsibility is every board member’s responsibility and is legally binding (documents are signed stating as such when one becomes a board member). There are probably law suits pending against board members because they broke this responsibility.

colinsane 3y ago

> Everyone hates stock buybacks, but they’re economically very similar to dividends, and seem like a reasonable way for a fading company to return cash to shareholders. consider the passive investor who just Buys and Holds. three alternate timelines: 1) company pays dividends for 5 years and goes bust with a balance sheet of zero. 2) company sells off its assets over 5 years and dissolves. 3) company does share buybacks for five years and goes bust. in 1) and 2) the passive investor receives the same value as any other shareholder. in 3) the passive investor receives $0 and the value accrues exclusively to those shareholders who sold before the end. the combination or buyback + predictable bankruptcy makes sense only if you’re a shareholder close to the company seeking to maximize your own distribution. putting “right” and “wrong” aside, this pattern should at least make you more wary of being a passive investor, generally.

empath-nirvana 3y ago
Nobody owes passive investors money. It is an investment strategy that many people take, and like any strategy it can be exploited. If you buy stock and don't look at how the company you own is doing, then you deserve to lose your money. Nobody lied here. Everything was done right out in the open.
- colinsane 3y ago
  in whichever branch of the multiverse has alternate me by some bizarre chance hosting you at a dinner party, remember to not take off your shoes. alternate me will meet you in your own ethical framework and confiscate them for himself when you're not paying attention.
  - empath-nirvana 3y ago
    If you include: "Oh, btw, if you take off your shoes, I'm keeping them" on the party invite, and follow up with quarterly updates that you're going to be taking everyone's shoes, it would be my own fault for going, wouldn't it?
mactrey 3y ago