BrainTrust Query: Has the risk been taken out of corporate buyouts?
In the first of a series, Tuesday’s front-page article in The Wall Street Journal described how the new corporate buyouts funded by hedge funds and investment bankers no longer involve much risk for the investor. The retail industry is no stranger to corporate buyouts. And although you have to ask yourself, “Where were the Board of Directors if another group of people feel the company is ready for a turnaround?” – there are legitimate situations where a firm needs help from outsiders to make the tough decisions that will allow it to survive.
The problem with today’s buyouts is that the buyers want their money back right away. Instead of sticking with the company and waiting for the turnaround to fund their payment, the investment bankers are loading the firm up with debt and paying themselves special dividends. This creates an ongoing interest payment for the firm and can make an already bad situation worse.
In order to make the debt payments, the firm begins cutting back on employees and reducing benefits to retirees. If things get really bad, the firm goes into bankruptcy. Of course, the investment bankers who have already taken out their money are there to provide bankruptcy services.
If things go well, the investment bankers take the firm public again in few years and retain a large holding in the newly floated securities.
Discussion Question: Does it make sense that firms conducting buyouts are able to saddle the acquired firm with debt just so the acquirer can get their
Yes, we’ve known that this goes on, but the Wall Street Journal article gives us a clearer idea of the magnitude of this new way of doing business.
I am all for “risk and reward” and I believe those willing to put up their resources to create companies or restore them should benefit. I don’t believe individuals should be
able to profit merely because they have a lot of cash and clever lawyers on their staff.
It seems that by buying out a company, loading it with debt, taking back your money, and receiving further profit – whether the company succeeds or fails
– you’re doing nothing but keeping a lot of pencil pushers employed.