4 ms·

We really need a ban on leveraged buyouts where the leverage becomes the responsibility of the purchased entity. You shouldn't be able to borrow money to buy a

by jerf 8mo ago

We really need a ban on leveraged buyouts where the leverage becomes the responsibility of the purchased entity. You shouldn't be able to borrow money to buy a company, then transfer the debt used to buy the company on to the company itself. Any theoretical arguments about why this is OK or a good idea should fall silent against the repeated observations of what happens in practice and the observable incentive structure created.

Projectiboga 8mo ago
Yes that interest shouldn't be tax deductable. The limit on share buybacks being expensible needs to return at least for these leveraged buyouts. And debt aquired for leveraged buyouts and debt used for share repurchase needs to be moved far down the bankruptcy priority tree.
koolba 8mo ago
> You shouldn't be able to borrow money to buy a company, then transfer the debt used to buy the company on to the company itself. Why not and how would you stop? It’s no different than a company issuing bonds to buy back its own equity. I agree that it’s contributing to the enshitification of many end consumer industries, but I’m not sure what such a “ban” would look like it practice.
- KPGv2 8mo ago
  It really does feel like the onus is on the original lender (who owns the debt) to police how it gets transferred.
- HWR_14 8mo ago
  > It’s no different than a company issuing bonds to buy back its own equity. Which was illegal until 1982 and could be made illegal again.
  - JackFr 8mo ago
    A firm can be capitalized by debt or equity. They can have a public offering to and sell share to retire debt. They can issue bonds and use the money to buy back shares. There shouldn't be a moral component to this. That being said, it seems criminal to take an enormous management fee while sending a company into bankruptcy.
- jerf 8mo ago
  Many things far more complicated than this have been made illegal. And yes, people will try to wiggle around it. That's what regulatory agencies are for. Yeah, they don't 100% work. Believe me, you're unlikely to out-cynic me. It should still be illegal.
- calmbonsai 8mo ago
  In practice, a "ban" consists of personal loan guarantees of a certain percentage thereby limiting the frequency and magnitude of this sort of financing. Essentially, that means some amount of corporate risk is leveraged upon the principal investors. This is common practice in the EU for so-called "club deals".
KPGv2 8mo ago
Who is the lender in this deal? Why would they agree to this transfer of debt? Like...if I buy a house with 20% down and then create an LLC and want to transfer the house to the LLC, the bank is not going to approve. Because there's no assets in the LLC to come after in the case of the mortgage being underwater.
mapt 8mo ago
This is a private transaction, for the profit of the banks providing the money to perform the buyout. The banks are betting that the company/brand, once stripped of any valuable assets and being stretched to painful profitability at the cost of its reputation, will last long enough, with enough assets left at bankruptcy, that their high-interest, high-priority debt will be more than repaid. If the private equity buys a firm in a leveraged buyout, sells off all its assets in a week, and shuts down immediately, it's the banks that get stiffed; The banks aren't idiots. If you for some reason prioritize long-term survival & good/service provision of the ailing business, you need to take a bite out of the banks funding private equity takeovers that hit chapter 11 ("reorganization bankruptcy") or deprioritize their debt in chapter 7 ("liquidation bankruptcy") to disincentivize them providing funds. There are certain shenanigans with private equity related to valuation and compensation ("My company is worth $1000, so I'm awarding myself 50% shares as part of a tax exempt retirement plan") that should be not just outlawed, but which should cause the IRS to send a CPA to go back and slap them in the face with a wet trout for having the fucking gall. The cycle of enshittification that private equity often participates in, is less a problem with the fact of private equity, and more a problem with the giant piles of money in the finance industry growing much larger and taller than the economy they are theoretically structurally resting on. A problem with financialization and wealth inequality itself, with the system designed for upwards wealth redistribution, trying to transfer the last 10% of the world's money (which the poor are using as their medium of exchange) into the same dragon's hoard that has the rest.
bombcar 8mo ago
Leveraged buyouts (vulture capital) is almost always an example of ... well, vultures. The company is already walking dead; they're just feasting on the corpse. Left alone they'd peter out faster.
- flyinghamster 8mo ago
  Except that Jo-Ann Fabrics was most definitely not walking dead when it was LBO'ed. I'd call this one vampire capitalism rather than vulture.
- bigbuppo 8mo ago
  TFA explains that's not actually the case, not just an assertion, but actual studies that backed it up.
- palmotea 8mo ago
  > The company is already walking dead; they're just feasting on the corpse. Left alone they'd peter out faster. Is that actually true, or just a story used to justify the bad actions? There are a lot of meme-stories like the latter, floating to justify all kinds of money-making behavior. People with money have the resources to plant them.
  - bombcar 8mo ago
    It's true in at least some of the famous cases (perhaps not this one; perhaps not Nabisco) - but you have to do deep digging into the financials to see it, a moribund company and a salvageable one often look quite similar from the outside. One way to tell is if the company does not emerge from bankruptcy but instead liquidates - it was probably already dead.
  - whattheheckheck 8mo ago
    Like the entire libertarian party propaganda of the 50s
    - red-iron-pine 8mo ago

by jerf 8mo ago

Projectiboga 8mo ago

Yes that interest shouldn't be tax deductable. The limit on share buybacks being expensible needs to return at least for these leveraged buyouts. And debt aquired for leveraged buyouts and debt used for share repurchase needs to be moved far down the bankruptcy priority tree.

koolba 8mo ago

> You shouldn't be able to borrow money to buy a company, then transfer the debt used to buy the company on to the company itself. Why not and how would you stop? It’s no different than a company issuing bonds to buy back its own equity. I agree that it’s contributing to the enshitification of many end consumer industries, but I’m not sure what such a “ban” would look like it practice.

KPGv2 8mo ago
It really does feel like the onus is on the original lender (who owns the debt) to police how it gets transferred.
HWR_14 8mo ago
> It’s no different than a company issuing bonds to buy back its own equity. Which was illegal until 1982 and could be made illegal again.
- JackFr 8mo ago
  A firm can be capitalized by debt or equity. They can have a public offering to and sell share to retire debt. They can issue bonds and use the money to buy back shares. There shouldn't be a moral component to this. That being said, it seems criminal to take an enormous management fee while sending a company into bankruptcy.
jerf 8mo ago
Many things far more complicated than this have been made illegal. And yes, people will try to wiggle around it. That's what regulatory agencies are for. Yeah, they don't 100% work. Believe me, you're unlikely to out-cynic me. It should still be illegal.
calmbonsai 8mo ago
In practice, a "ban" consists of personal loan guarantees of a certain percentage thereby limiting the frequency and magnitude of this sort of financing. Essentially, that means some amount of corporate risk is leveraged upon the principal investors. This is common practice in the EU for so-called "club deals".

KPGv2 8mo ago

Who is the lender in this deal? Why would they agree to this transfer of debt? Like...if I buy a house with 20% down and then create an LLC and want to transfer the house to the LLC, the bank is not going to approve. Because there's no assets in the LLC to come after in the case of the mortgage being underwater.

mapt 8mo ago

This is a private transaction, for the profit of the banks providing the money to perform the buyout. The banks are betting that the company/brand, once stripped of any valuable assets and being stretched to painful profitability at the cost of its reputation, will last long enough, with enough assets left at bankruptcy, that their high-interest, high-priority debt will be more than repaid. If the private equity buys a firm in a leveraged buyout, sells off all its assets in a week, and shuts down immediately, it's the banks that get stiffed; The banks aren't idiots. If you for some reason prioritize long-term survival & good/service provision of the ailing business, you need to take a bite out of the banks funding private equity takeovers that hit chapter 11 ("reorganization bankruptcy") or deprioritize their debt in chapter 7 ("liquidation bankruptcy") to disincentivize them providing funds. There are certain shenanigans with private equity related to valuation and compensation ("My company is worth $1000, so I'm awarding myself 50% shares as part of a tax exempt retirement plan") that should be not just outlawed, but which should cause the IRS to send a CPA to go back and slap them in the face with a wet trout for having the fucking gall. The cycle of enshittification that private equity often participates in, is less a problem with the fact of private equity, and more a problem with the giant piles of money in the finance industry growing much larger and taller than the economy they are theoretically structurally resting on. A problem with financialization and wealth inequality itself, with the system designed for upwards wealth redistribution, trying to transfer the last 10% of the world's money (which the poor are using as their medium of exchange) into the same dragon's hoard that has the rest.

bombcar 8mo ago

Leveraged buyouts (vulture capital) is almost always an example of ... well, vultures. The company is already walking dead; they're just feasting on the corpse. Left alone they'd peter out faster.

flyinghamster 8mo ago
Except that Jo-Ann Fabrics was most definitely not walking dead when it was LBO'ed. I'd call this one vampire capitalism rather than vulture.
bigbuppo 8mo ago
TFA explains that's not actually the case, not just an assertion, but actual studies that backed it up.
palmotea 8mo ago
> The company is already walking dead; they're just feasting on the corpse. Left alone they'd peter out faster. Is that actually true, or just a story used to justify the bad actions? There are a lot of meme-stories like the latter, floating to justify all kinds of money-making behavior. People with money have the resources to plant them.
- bombcar 8mo ago
  It's true in at least some of the famous cases (perhaps not this one; perhaps not Nabisco) - but you have to do deep digging into the financials to see it, a moribund company and a salvageable one often look quite similar from the outside. One way to tell is if the company does not emerge from bankruptcy but instead liquidates - it was probably already dead.
- whattheheckheck 8mo ago
  Like the entire libertarian party propaganda of the 50s
  - red-iron-pine 8mo ago