Basically, the company had to pay for its own buyout when private equity firms KKL, Vornado, and Bain bought the company for $6.6 billion, mostly with loans.
Because the company then had to pay off those extreme loans, they were forced to sell off their assets and property, which they leased back from the very private equity firms that now owned them.
The same thing happened more recently with Red Lobster and JoAnn Fabrics.
I watch the YouTube channel “Company Man” that does a bunch of interesting business stories. 95% of the “Decline of (brand)” or “Rise and Fall of (brand)” videos are because of leveraged buyouts.
A group of idiots borrow billions of dollars, throw the unrecoverable debt onto the books, slowly killing the company, and then it’s dead.
Who loans this money? How does that work? I understand the rest of it about being a bastard who collects millions in salary and bonuses while driving a company into the ground. I just don’t understand where the money comes from, or why.
It may be U.S. plutocrat strategy to weaken political enemies by killing their companies.
Consider Microsoft destroying Nokia and their Linux phones to benefit fellow American companies Apple and Google.
Consider the Destruction of OkCupid as an attack against its liberal-skewed user base.
Consider Microsoft destroying Nokia and their Linux phones to benefit fellow American companies Apple and Google.
I’ve considered it, but I do think it was a huge blunder that was planned differently. They invested a bunch of money in Windows Mobile, had a partnership with Nokia and then bought their mobile business… And then they just gave up, handling their competitors in other markets (Apple being a competitor to Windows and Google at the time being already a competitor to Office) a win. I suspect they actually had faith in Windows Mobile and wanted to fuck up Nokia and buy their phone business so they could sell Windows Phones.
The best book I’ve read about private equity is called Songs of Profit, Songs of Loss by Daniel Souleles. It’s an ethnography of private equity.
Private equity is the logical extreme of the idea of shareholder value. Companies are bought, stripped for parts, and mined for resources. The money comes from wealthy people and institutional investors like university endowments, pension funds, etc, and some years it is a very high-return investment. Other years, not so much, see the relationship by the University of California and Blackstone as an example in recent years.
Oh it is real simple. Imagine you have a really nice truck that is all jacked up with a lift, big tires, light bar, supercharger, etc.
I want to buy it and you want $10k for it since it is an older model and most of it’s worth is from the accessories. The problem is I don’t have $10k. I only have $2k.
This is where the magic happens. I find some someone who will buy all your accessories for $8k. I make a deal, let me strip your truck and I will pay you $10k for it.
You agree and I come over, take off all the accessories and then sell them for $8k and then buy your truck for $10k.
The truck is pretty worthless at this point without wheels or anything, but I can sell it for about $3k. Well, I ruined the truck and made a thousand bucks. This is a silly example of how they get the money.
This kind of buyout should be made illegal.
“Millennials are ruining the [_] industry! How dare they-”
Oh right, it was capitalist greed all along. Excuse me while I shed a tear for your precious local Applebee’s as you keep voting for the people who enable these acquisition monopolies, lmao
I think Kmart and Sears are in this list, too, along with Bed, Bath, and Beyond and even some hospitals. There’s nothing private equity forms won’t do to make a buck at the expense of a once thriving company or even people’s healthcare.
Often private equity is invested in their competitors. One of the problems of rich people having ungodly sums is they like to “invest” in competitors and sell them for parts so they can raise prices.
Also Red Lobster.
I generally feel like leveraged buyouts for numbers into the billions are just inside jobs for those selling.
Stay with me for a sec.
So the seller makes a closed door deal with the “buyer” to funnel money back to them personally after the sale is done. So in this case, say, they commit 3.6bn to the “buyers” and pocket 3bn for themselves. Almost the entire purchase is leveraged, with the expectation that it will become unsustainable and go bankrupt shortly after the purchase.
The buyers don’t really give a shit, they’ll write it off, collect whatever they can from insurance, etc. They didn’t really want to company anyways, so they let it fold.
The money they took home from the deal with the seller is entirely theirs, the company bears the weight of the debt and the consequences of defaulting on the debt, so the execs that made the move are basically free and clear.
Everyone wins, except, you know, the poors who work at the purchased company, the banks, who don’t give a shit, and insurance people, which… Nobody gives a fuck about them…
At the end of the day, the execs of the purchasing company get rich, the sellers get rich, and that’s the fucking point.
If the sellers instead just closed up shop, they would get maybe a fraction of the money they would from selling it, mainly in selling off assets… It would be a pittance compared to this scheme.
All they need to do is find someone they can buy out the morals of, to complete the deal. This is surprisingly easy in the corpo world.
Ok, but who is providing the loans for the buy out. When they default on the debt someone or some thing is not getting paid. If that were the case eventually no company would loan money for a leveraged but out right?
The banks, and/or the insurance companies.
In the case of the banks, the money isn’t real and never existed in the first place.
The fiat money system is pretty fucked when you understand it.
At worst they take the “loss” and at best, they get bailed out by public dollars.
Pick whatever fits your ideals.
Bear with me for a bit, because i don’t understand these schemes.
If the sellers instead just closed up shop, they would get maybe a fraction of the money they would from selling it, mainly in selling off assets… It would be a pittance compared to this scheme.
How would the sellers get more money from this scheme? Isn’t liquidating company assets are basically what the buyers (the private equity firms) did anyway?
collect whatever they can from insurance
How does the insurance companies keep falling for these? This has happened several times, and insurance companies aren’t known for being charitable.
It keeps working because the insurance/bank systems are evaluating things on the merit of the lender and their business plan. Anyone can make a decent business plan that will pass muster if you fiddle with it long enough. And the individual company/organisation that is defaulting on these are a dime-a-dozen. Since the failure of the loan goes down with the ship (and company), even if the borrower’s ask for more money tomorrow, as long as the request is coming from a different company/organization, the banks evaluate based on the organisation that is requesting the loan, not the leadership’s failed previous attempts from other businesses.
Incorporated companies have limited liability from their owners. While the owners operate as agents of the business, ultimately the business itself is liable for their decisions. They don’t bear any responsibility. So their actions are based on what will get them, personally, the most value extracted from the business, not based on what’s good for the long-term success of the company itself.
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Every time I read something like this, it makes me want to burn money.
Well, money is only as valuable as we think it is, and what goods or services it can be traded for.
The money itself carries very little value itself, only what we assign to it, or associate to it.
If the economic system based on the currency currently in use collapses, the money you have won’t be worth the paper it’s printed on.
Why did they have to pay off the loans that were used to buy them? That’s something the buyer should be responsible for.
Probably because the C suite assholes who negotiated the buyout agreed to place the burden of the loan on their own company and shaft their employees. It’s basic capitalism, really.
Basic? It seems this kind of wizardry only happens to companies who are in their own kind of abomonative category. I’ve never seen this happen to small to large businesses. They are also capitalism, that doesn’t make sense
The exact workings im not familiar with but it’s called “leveraged buyout” where the net worth of the firm which is bought is the collateral.
So … you buy firm A with money you lended. When the sale gors through all belongings of firm A are yours! So you sell them off, you know what? You want to make a profit so you sell EVERYTHING.
Now firm A is but a husk of it’s former self. So now is the time to put it in some holding company or something. Now the husk of firm A is indebted to you.
Oh noes! It goes bankrupt! With your investment firm as the biggest lender to it!
should
Yep.
Pretty much nothing in “the economy” works like it does in theory. It’s always way more complex so the people with the most power and money can squeeze more exploitation out of it. I really like how this guy explains it
https://www.facebook.com/reel/976701137942045
https://www.youtube.com/shorts/1LcJjd6Wosw
He’s got a whole series on Private Equity
I think that’s the natural outcome. that’s the emergent behaviour of capitalism.
those with more money have more power and more influence to make the system better for those with money and power.
the rest, like almost all “economics” its just BS to hide that simple fact.
Sometimes teenagers ask me about how the stock market works.
I love explaining shorts, because the reaction is always “how does that even make sense?”
The short answer (ba dum, tisssss) is that some forms of mutual funds buy a little bit of every stock rather than picking and choosing. Then, for reasons never really made clear, they let other investors borrow those stocks as long as they return them later.
Toy R Us is still a thing in Canada, you can just go there and get your kid legos like its 2002
It’s still kind of a thing in the USA, you just have to visit a Macy’s department store at the local dying mall. The Toys R Us is a small section in the back.
Which is far more depressing than if the brand was outright dead.
Back to the good old corporate raiders like Lorenzo. For a while there we kept them on a leash. Now with the Land of No Consequences and leashes becoming meaningless these leeches are free to buy and pillage as they see fit. The housing market is gonna be destroyed next, wait until they start selling the homes off to shell companies and taking loans to pay for the deteriorating properties and property taxes (which trump has floated getting rid of to keep these hoarders afloat even longer).
That’s why the Canadian toys r us is doing great.
Too bad we can’t say the same for Sears
Everything they did was to line their pockets and destroy the company and leave creditors holding the bag. They should ban buying with loans, no taking loans against acquired companies for X years. The sale and leasing of assets back by the same owners stinks.
My first ever job as a high school kid was stocking the shelves at Toys R Us; I have found memories of that place, and those people to this day.
Fuck Mitt Romney, I will never forgive him for this treachery.
Should have paid them back in Geoffrey Dollars.
I highly recommend the book, ‘Bad Company’ by Megan Greenwell, which covers this exact topic. Great read.
This is one of those situations where it once again shows that:
- Private equity stakes in companies are bullshit and at the very least need to be utterly regulated to hell and back.
- More specifically, it should not be allowed to buy a company “on debt”. If you want to buy somebody, you need cash-on-hand to do that. That’s the only allowed form.
Selling property to rent it back should also be super illegal. Is there ever a time this makes sense. If you want to sell land to profit, close the fucking place, there’s no way it’ll suddenly be more profitable while renting.
Not defending PE, but there are situations where this type of thing would make sense. If the rates were low enough a company could cash out it’s property value using something like this and use the cash for an expansion, to make a moonshot investment, or maybe as a last ditch to survive in a downturn.
That’s not what’s happening here, but turning real assets to cash through debt to then invest in the business is a decent tactic.
Wouldn’t using those assets as collateral for a loan achieve the exact same thing though? Conceptually it’s the same principle except you retain your ownership if you don’t default.
I guess selling the asset would bring in slightly more immediate revenue than loaning (at the expense of extreme volatility in long term costs). But I don’t think this justification really makes sense for a company not trying to cook the books. If this kind of move ever becomes a true necessity, entering a bankruptcy procedure is probably a better option for everyone involved lol
I see your point, though I don’t know of an example (they’re doing it with Hospitals now too).
Still if you have so many locations that you have enough capital in their land, it seems like closing the locations that you’d sell would make a moonshot more likely to succeed.
Yeah, since I wrote that I’ve been trying to think of a real world example and haven’t come up with one. Perhaps my ramblings are purely hypothetical or maybe pulled directly from my ass.
McLaren did this with their campus location to allow them to restructure (survive)
the government rarely wants to incentivise direct job loss
It would make sense for me to sell my apartment and rent it back because I get fucked by ODSP if I take a roommate while I’m an owner and I can’t afford to live here alone.
It would make sense for an entity that needs to make use of their equity for other things. Many many individuals and companies mortgage their properties or get secured loans. That’s basically the same thing.
If you’re a business owning a building, maintenance is another thing you have to take care of as well as the business. If you’re not equipped to maintain the building or pay people to do it, then it might be better to rent and have the landlord take care of that stuff.
My union is selling our building because it wasn’t really anybody’s job to keep up on maintenance for the last 30 years. Now people that care are in there and they got estimates and whatnot, and it came to like a $600,000 bill to get it all caught up.
So we’re partnering with a local non-profit and moving our office in to their space with meeting rooms and whatnot that we can share. We have one meeting a month and training sessions already happen elsewhere. All of work is done away from the building aside from 3 people in the office full time, so it makes sense in our situation.
Yeah this makes sense, basically the downsizing I was talking about. Though I was thinking about an org with many branches, rather than underutilized office space.
it should not be allowed to buy a company “on debt”. If you want to buy somebody, you need cash-on-hand to do that. That’s the only allowed form.
A company is not somebody, it’s a thing, like a home or a car that you have no problem getting a loan to pay for. Or maybe it’s special because we’re talking about a means of production? C’mon. Say it. Say “means of production.”
No, no companies are people. Buying and selling them is slavery.
The Supreme Court said corporations are people enough to be protected by the first amendment.
The Supreme Court can say the moon is a person and the sun is God. It can decide what entities it will extend the protection of rights to, but it cannot redefine what a person is outside of its own technical jargon.
Citizens United has entered the chat
The very first words of US law:
1 U.S. Code § 1 - Words denoting number, gender, and so forth
…the words “person” and “whoever” include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals;
Okay? That’s a definition that only has scope within that specific document and those it governs. Plus, it’s a definition of two entirely different words.
If we had a strong reform minded government, our leaders could oppose these parasites, and then make examples out of those that mistreat our productive companies. Like which of these private Equity douchebags can’t be hit with a crime for something or another? Not a single one, you can get everyone with the tax evasion charges.
We need leaders that protect us from these monied parasites.
