Okay, now I get the Equity LBO process

[CAwireman]

Wallstreet Journal
Friday July 7th
“How a Blackstone Deal shook up a workforce”

Here’s the gig:

1) Companies in the “Equity sector” research a
weak company’s operations.

2) One or more Equity companies supply funds from internal accounts and also secures greater funding from banks and other sources to make the initial purchase. Example: Equity comanies up with 1 billion, banks come up with 3 billion. $4 billion total. This debt lands on the purchased companies balance sheet. (Where else would it go?)

3) Here’s the Payoff – Then, the Equity company secures another loan and pays off the amount it put up for the purchase of the company. So, in this example, the additional loan was taken out for 1 billion and it was paid to the Equity company. These are called “Dividend Recapitalizations”
All this debt remains on the victim companies balance sheet and the equity company pulls out as quickly as possible after either selling the company in whole or in pieces or after taking it public and setting it adrift.

4) “The companies new debt load makes it more
urgent to generate cash”. So, a weak or otherwise vulnerable company is acquired, “streamlined”, modernized, and saddled with arguably massive debt.

Once we get the chance to step back and look at the equity acquisitions over the last number of years, and look at how the bulk of them are doing on their own, post overhaul, we’ll be able to make a better judgement of whether it was a long term positive, a negative, or neutral.

Its a short term boon for the equity companies, they make out like bandits early on, and divest to move on to other conquests. Hmmm, if you can’t beat ’em, join ’em?

Higgybaby

(Did I get it essentially right?)

[CAwireman]

Article was Friday July 27

HiggyBaby

[CAwireman]

Article was Friday July 27

HiggyBaby

[JustSayYes]

And as soon as the economy hits any sort of slowdown that debt starts to really hurt.

I also suspect part of the rosy projects included refinancing of the debt. Wall Street is totally addicted to any prospect of a Fed rate cut. For example when is the last time your heard a Wall Street CEO, pundit or money manager call out for a rate INCREASE? It just doesn’t happen. Couple that with the fact that the structural flaw in the fractional reserve banking system is inflation.

You simply cannot create money from nothing without resulting inflation.

[JustSayYes]

And as soon as the economy hits any sort of slowdown that debt starts to really hurt.

I also suspect part of the rosy projects included refinancing of the debt. Wall Street is totally addicted to any prospect of a Fed rate cut. For example when is the last time your heard a Wall Street CEO, pundit or money manager call out for a rate INCREASE? It just doesn’t happen. Couple that with the fact that the structural flaw in the fractional reserve banking system is inflation.

You simply cannot create money from nothing without resulting inflation.

[GoUSC]

In general I think all these deals are just put together to make a handful of people very very rich and nothing more.

[GoUSC]

In general I think all these deals are just put together to make a handful of people very very rich and nothing more.

[CAwireman]

Radelow,

I have to agree with you.

And at the same time, it puts hundreds or thousands of people out of work. Though, in many cases the company is flagging anyway and needs to be restructured.

Though, there are some examples of profitable companies caught in the crossfire.

I didn’t realized that the equity gravy train had begun to grind to a halt until just recently. But, there are still lots of deals going through all the time, or at least until last week.

He who has the gold makes the rules.

HiggyBaby

[CAwireman]

Radelow,

I have to agree with you.

And at the same time, it puts hundreds or thousands of people out of work. Though, in many cases the company is flagging anyway and needs to be restructured.

Though, there are some examples of profitable companies caught in the crossfire.

I didn’t realized that the equity gravy train had begun to grind to a halt until just recently. But, there are still lots of deals going through all the time, or at least until last week.

He who has the gold makes the rules.

HiggyBaby

[CAwireman]

Other reflections on the deal:

http://www.bloggingbuyouts.com/2007/07/30/what-blackstone-is-doing-to-travelport/

And this:

http://usmarket.seekingalpha.com/article/42866

Thomas Tan
“PE firms are getting more and more short term lately. In the good old days, PE firms more focused on improving the acquired firms long term. They took a long time to aim (improve) then fire (sell). These days, PE firms fire first before aiming, seeking a very quick cash-out. In such short term, there is no way to improve the company materially, and what they do is basically to jack up both sides of the balance sheet, increasing asset and liability, then cashing out on the asset and dumping the liability to the public by IPO. The problem is during an unfriendly credit tightening market like now, the public is holding the bag of those low quality and risky bonds while the PE partners are cashing out with vast wealth in hand.”

I wonder when/if laws could be passed to minimize this type of dealmaking? It would have to be part of a global effort, which makes it next to impossible….

HiggyBaby

[CAwireman]

Other reflections on the deal:

http://www.bloggingbuyouts.com/2007/07/30/what-blackstone-is-doing-to-travelport/

And this:

http://usmarket.seekingalpha.com/article/42866

Thomas Tan
“PE firms are getting more and more short term lately. In the good old days, PE firms more focused on improving the acquired firms long term. They took a long time to aim (improve) then fire (sell). These days, PE firms fire first before aiming, seeking a very quick cash-out. In such short term, there is no way to improve the company materially, and what they do is basically to jack up both sides of the balance sheet, increasing asset and liability, then cashing out on the asset and dumping the liability to the public by IPO. The problem is during an unfriendly credit tightening market like now, the public is holding the bag of those low quality and risky bonds while the PE partners are cashing out with vast wealth in hand.”

I wonder when/if laws could be passed to minimize this type of dealmaking? It would have to be part of a global effort, which makes it next to impossible….

HiggyBaby

[Allan from Fallbrook]

Times they are a changin’, though.

Blackstone’s share price is getting savaged right now, KKR is having similar issues, as is US Foodservice (when it comes to floating issues) and many of the senior players in the bridge financing business are increasingly reluctant to “play along” with the big PE and hedge fund players.

Much like the LBO frenzy of the 1980s, at some point the party comes to a close and the bill comes due. If we are not at that point, we are darn close.

The more things change, the more they stay the same. And, as bad as some of this dealmaking is, I would prefer to keep government and legislators out of the market. You’d just be trading one evil for another. Much of the dynamism found in our market is due to exactly this kind of buccaneering behavior. Is it prone to excess? Yup. Is it always bad? Nope.

[Allan from Fallbrook]

Times they are a changin’, though.

Blackstone’s share price is getting savaged right now, KKR is having similar issues, as is US Foodservice (when it comes to floating issues) and many of the senior players in the bridge financing business are increasingly reluctant to “play along” with the big PE and hedge fund players.

Much like the LBO frenzy of the 1980s, at some point the party comes to a close and the bill comes due. If we are not at that point, we are darn close.

The more things change, the more they stay the same. And, as bad as some of this dealmaking is, I would prefer to keep government and legislators out of the market. You’d just be trading one evil for another. Much of the dynamism found in our market is due to exactly this kind of buccaneering behavior. Is it prone to excess? Yup. Is it always bad? Nope.

[no_such_reality]

It’s still the same junk bond game that Milken was famous for.

[no_such_reality]

It’s still the same junk bond game that Milken was famous for.

[Author]

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