3 ms·

>One major question is - is the cost savings of hiring a worker in Texas with less experience at a 30% savings worth it if you're losing a few years of knowledg

>One major question is - is the cost savings of hiring a worker in Texas with less experience at a 30% savings worth it if you're losing a few years of knowledge of internal workings and products? Maybe not. But even though the new employee might not be as productive there is a very real increase in EBITDA from a decrease in expenses. Greater EBITDA leads to greater valuation. Then all you have to do is show consistent mid single digit percentage revenue growth a few years in a row and convince the public markets/equity analysts the whole thing won't fall apart anytime soon and you can cash out in an IPO. For most PE firms it seems that it's really about hacking the financials. If comparable firms are selling at 15 times EBITDA, and your EBITDA grows from $200M to $250M over several years due to reorg savings and consistent revenue growth, you can rationalize that the company is worth $3.75B ($250M*15) now instead of $3B ($200M x 15). Very interesting stuff. If anyone reading this works at a PE firm and is willing to let a finance geek pick their brain please give me a shout at my e-mail in my profile.

newppc 12y ago
That is very interesting stuff - any books you recommend on the subject?
- Nicholas_C 12y ago
  I would suggest "Investment Banking" by Rosenbaum and Pearl. Very informative book that gives a great overview of valuation techniques used in investment banking and private equity as well as discusses the deal process using examples. It requires some accounting knowledge.
x0x0 12y ago
I'm not saying there are no inefficiently run companies in the world, but these PE buyouts all seem to follow the same plan. Buy a company, pay yourself a fat fee. Force the company to borrow a ton of money and pay yourselves back. Start cutting costs. Some is fat, but much of it (like Mark Hurd slashing R&D at HP) is cutting R&D or sales in ways that don't hurt for long enough for the PE firm to cash out. It's a hell of a business model, particularly when it seems like these PE firms often financial engineer themselves into a position where they succeed financially whether the acquired company succeeds or fails. It seems to often work out well for the PE firm, and much less well for the company, customers, and employees.
- walterbell 12y ago
  http://www.newyorker.com/magazine/2012/01/30/private-inequity http://www.newyorker.com/magazine/2012/01/30/private-inequit... "Having already piled companies high with debt in order to buy them, many private-equity funds had their companies borrow even more, and then used that money to pay themselves huge “special dividends.” ..As if this weren’t galling enough, taxpayers are left on the hook. Interest payments on all that debt are tax-deductible; when pensions are dumped, a federal agency called the Pension Benefit Guaranty Corporation picks up the tab; and the money that the dealmakers earn is taxed at a much lower rate than normal income would be, thanks to the so-called “carried interest” loophole."

newppc 12y ago

That is very interesting stuff - any books you recommend on the subject?

Nicholas_C 12y ago
I would suggest "Investment Banking" by Rosenbaum and Pearl. Very informative book that gives a great overview of valuation techniques used in investment banking and private equity as well as discusses the deal process using examples. It requires some accounting knowledge.

x0x0 12y ago

I'm not saying there are no inefficiently run companies in the world, but these PE buyouts all seem to follow the same plan. Buy a company, pay yourself a fat fee. Force the company to borrow a ton of money and pay yourselves back. Start cutting costs. Some is fat, but much of it (like Mark Hurd slashing R&D at HP) is cutting R&D or sales in ways that don't hurt for long enough for the PE firm to cash out. It's a hell of a business model, particularly when it seems like these PE firms often financial engineer themselves into a position where they succeed financially whether the acquired company succeeds or fails. It seems to often work out well for the PE firm, and much less well for the company, customers, and employees.

walterbell 12y ago
http://www.newyorker.com/magazine/2012/01/30/private-inequity http://www.newyorker.com/magazine/2012/01/30/private-inequit... "Having already piled companies high with debt in order to buy them, many private-equity funds had their companies borrow even more, and then used that money to pay themselves huge “special dividends.” ..As if this weren’t galling enough, taxpayers are left on the hook. Interest payments on all that debt are tax-deductible; when pensions are dumped, a federal agency called the Pension Benefit Guaranty Corporation picks up the tab; and the money that the dealmakers earn is taxed at a much lower rate than normal income would be, thanks to the so-called “carried interest” loophole."