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>>> should-be-illegal process of putting debt on the acquired company's balance sheet This is a basically a leveraged buyout (LBO). All private equity works th
by fasteo 5mo ago
>>> should-be-illegal process of putting debt on the acquired company's balance sheet
This is a basically a leveraged buyout (LBO). All private equity works this way. Yes, it should be illegal, or at least heavily limited.
I highly recommend this book: "Plunder: Private Equity’s Plan to Pillage America"
- triceratops 5mo agoIs it still "private equity" if a public company takes a loan to buy another public company?
- nyeah 5mo agoIt's still an LBO, in effect borrowing against the target to get control of it.
- xnx 5mo agoIs that bad? No one is forcing the lenders to make that bet, and the lenders can lose money if the acquired company can't pay back the loan.
- toraway 5mo agoIt may not be bad for the buyers, lenders, or the previous owners who all profit. But even then it could still be bad for regular people/society at large if it incentivizes anti-consumer practices by financial necessity when an otherwise healthy business suddenly has billions of dollars of debt it has to pay off ASAP. In which case it sort of looks like a simple transfer of wealth from existing customers to the organizers of the leveraged buyout with no broader societal value provided like new jobs created, R&D, etc.
- imtringued 5mo agoYou have a company "funded" with its own equity and now you turned it into a company exclusively made out of outside capital and an obligation to realize the terms of said outside capital. Before, you could have had bad years in-between the good years, now you're only permitted to have good years and by good years I mean years that honor the financing terms. When you understand this, you realize that functionally speaking, nothing has changed really, other than that the cost of financing has gone up significantly, since the company can't rely on its own equity anymore. Now the company can no longer earn what it currently earns, it needs to earn that plus some. Hence the deal was nothing but a burden to the acquired company. The previous owners realized the value of their shares and don't have anything to complain about. The new owner acquired control over the company they wanted. So who is left to carry the burden? The employees and the customers.
- xnx 5mo agoWhy did the previous owners sell?
- nyeah 5mo agoIn theory, the high share price driven by the LBO offer.
- xnx 5mo agoSeems reasonable for two consenting parties to mutually agree to a deal.
- nyeah 5mo agoIt can be, sure. But a two-way deal might also affect third parties. Example: what if Adleman hires Rivest to put laxative in Shamir's soup? Two consenting parties have made a deal. Shamir freely chooses to eat his soup, despite knowing that he has only imperfect information. So that scenario works out as desired. But intrusive government regulation might come into play. Maybe the state prohibits poisoning soup. That harms the free market, and it's wrong. But, perversely, Shamir might benefit (at Adleman and Rivest's expense).
- andruby 5mo agoOP is just saying that PE uses the same playbook, not that this move is "private equity".
- taeric 5mo agoI mean, it is functionally the same as home loans? Would you be proposing a carve out that buying a house or car is ok this way, but nothing else?
- shmatt 5mo agoHome owns are owned by people, not the home itself. If someone fails to pay a loan, their own credit score will be impacted For these PE loans, its the new company that takes on the debt, not the buyer. Essentially any broke person can "afford" any trillion dollar company this way
- triceratops 5mo agoThere are other categories of real estate loans where the debt is against the property itself. The lender evaluates the property's income and expenses when underwriting the loan.
- seemaze 5mo agoThat sounds like buying a business that owns real estate as an asset.
- true_religion 5mo agoHome loans are secured by the asset (the home). It's comparable to stock, but it's a less liquid asset. Any broke person can afford a trillion dollar loan, if they can convince the bank that their house is worth 1.8 trillion dollars. But is that really possible? Loan companies do due diligence so if GameStop is $A and eBay is worth $A + $B, then so long as $A/$B remains the same, the acquiring company owns two assets worth the full price of the loan. It doesn't seem to be a scam to me. Am I missing something?
- TSiege 5mo agoThe difference is that when you buy a home the debt is in your name and you are required to pay it off. In a leveraged buy out wouldn't be to person taking out the loan, the debt is owned by the target of the purchase. If it were like a home loan and this deal goes south GameStop would go bankrupt and have to sell it's own assets to cover the losses. But in reality the debt from the deal would be owned by Ebay and if GameStop can't pay the loan back it'd force Ebay into bankruptcy and sell Ebay's assets. It's essentially a riskless move by GameStop and PE in general. Heads GameStop wins tails Ebay loses
- elzbardico 5mo agoThis book got a unfortunate title. Private Equity can be a completely legitimate activity. What it needs is some regulation on some underhanded financial tatics it uses, such as LBO.
- Barbing 5mo agoHilton is a good example, right? But vast majority of the time it’s bad?
- akiselev 5mo agoThe vast majority of the time, you don't hear about it at all. Leveraged buyouts and the monopolistic strategies like buying out all the private doctors or veterinarians in a region get all the negative press but they're a tiny fraction of private equity. The big money is in really boring industries like mining/oil/resource extraction, power plants, infrastructure, construction, and other industries that are predictable and in high demand everywhere. PE firms often get the best deals because they thrive on those kinds of connections and can offer up large amounts of capital on favorable terms in exchange for first dibs. The "rich get richer" is their primary strategy and it works without minmaxing exploitation because that's a bottom feeder strategy, not one that can guarantee steady returns on tens of billions of dollars.
- CamelCaseName 5mo agoI read that book, and my recommendation is to skip the third act, which is painfully repetitive. In fact, coming from a finance background, I didn't find the book in general to be particularly insightful, and much more ragebait / policy oriented (which makes sense given the author was a DOJ Antitrust prosecutor)
- safeimp 5mo agoIs there an alternative you might suggest?
- proteal 5mo agoBarbarians at the Gate is the classic LBO book. It gives a nice mix of story and financial mechanics.
- jonny_eh 5mo ago> coming from a finance background, I didn't find the book in general to be particularly insightful Because you already knew that stuff, or because it's wrong?
- firebot 5mo agoIt's absolutely an LBO. The leverage is maximizing debt to equity. That debt is then transferred to the new entity. It's how they destroy companies while making billions in private profit. They over leverage them. Accrue debts. Sell of equity. Wash, rinse, repeat until bankrupt.
- solumunus 5mo agoRyan is committed to not taking a salary, unless this changes the only way he stands to gain is by doing the opposite of this and undressing the share price long term.
- iamveen 5mo agoOn the bright side, if the plebs start making money through LBOs, they might finally find the will to regulate.
- seizethecheese 5mo agoI was curious about this, so I searched for the most authoritative study on private equity. Here’s what I got: https://journals.aom.org/doi/10.5465/AMBPP.2021.14309abstract https://journals.aom.org/doi/10.5465/AMBPP.2021.14309abstrac... This says that private equity effect on employment is neutral and efficiency is positive. So what gives?
- xnx 5mo ago> So what gives? People just want someone to blame.
- pseudosavant 5mo agoI've been through an LBO before, my first thought when I saw this news was: so eBay is going to have to pay interest on a $50B loan now? eBay had $2B of net income in the last year. That might get them half-way to paying their annual interest payment if this deal closes. Get ready for the inevitable layoffs to cover that interest payment.
- __Joker 5mo agoJust curious. If there is iffy interest coverage for the debt and assets might be a stretch to cover (principal + interest), why will someone sponsor the debt here ? Also, rates seems to be high, at least compared to recent history, to be favorable for this kind of LBO.