A few years back, I discussed the Bain Bustout school of capitalism, which is how companies that are in areas that don’t yield massive profits can be made very profitable–for a while (boldface mine):
Bain Capital didn’t get lucky once or twice, they generated these kinds of profits repeatedly, again often in industries with relatively low profit margins. The short answer is that you perform the financial equivalent of a mob bust out. Here’s the special sauce (boldface mine):
1) Neutralize a possible battle with the board of directors of the target company by giving them preferential personal benefits from the buyout. Starting with the CEO, the buyout firm offers him a guaranteed role as CEO of the new, private company. He and his fellow executives receive a generous allotment of private ownership shares, which will make them very wealthy once the firm is brought back to public ownership. Similar arrangements are made with key members of the board of directors.
2) Buy up a majority of the common and voting stock of the company. Once 51% or more of the public stock is sold to the buyout firm, the game is over, and with management and the board intimately involved in the buyout, there is little chance that a shareholder revolt will erupt to prevent the takeover.
3) Install the new management team and make sure the buyout firm has a majority of the shares in the private company, and a majority of seats on the new board of directors, giving it full voting control.
4) Join the Globalization movement in a big way, by closing down as many manufacturing plants as possible and moving manufacturing to China, Thailand, Mexico, etc. Force unions to accept renegotiation of their contracts in order for the company to impose lower salaries, benefits, and retirement obligations on the workers. Impose these reductions automatically on non-union employees, firing as many of them as necessary, and cancelling benefit programs altogether where possible. When it comes to health care benefits, for example, the goal is to get as many workers on a 39 hour week so they are considered part time and not eligible for health care. The local emergency rooms can bear this burden rather than the company.
5) Take control over the pension plan and change the assumption of future annual returns from 8% to something like 10% or even 12%. Never mind that actual annual returns have been running at 3% at best – everyone knows the stock market produces at least 8% annual returns in the long run. With a much higher return assumption, you discover that the pension plan is now overfunded, so you can bring $250 million of the plan’s reserves back into retained earnings for the company.
6) Borrow at least $1.0 billion whether you need it or not. Say it is for a rainy day.
7) After about a year, with all these cuts in expenses, the company is beginning to show some profits. Therefore, declare a $500 million dividend for the owners, i.e., for the buyout fund. Take this money directly out of retained earnings, which means the $250 million pension plan savings are de facto transferred to the pockets of the leveraged buyout owners, and $250 million of the proceeds from the loan are given to the owners as well (debt which the company still has to pay back). [Mad Biologist: for instance, Domino’s Pizza]
8) By 18 months, the profitability is respectable, but more important, the return on equity is looking great. This is because the equity in the company has been dramatically reduced through fat dividends to the owners. The leverage ratio – the amount of debt compared to equity – is looking horrible, but the stock market doesn’t look at leverage. The stock market only looks at profitability and the return on equity. Therefore, it is time to cash in and sell out. The buyout firm arranges for an IPO – an initial public offering of common stock. Wall Street firms like Goldman Sachs and JP Morgan get a very generous 7% of the proceeds of an IPO, so they have every incentive to get as much stock sold as possible at the highest price possible. They hype the new stock to the public, and the IPO is a big success. The leveraged buyout firm says “adios” to the employees, communities, customers and new shareholders of the company, which by now is financially much weaker than it was before and less able to survive in the market.
If you can pick up some tax breaks while you’re at it, more power to you.
This is not value investing. This is not making a company ‘mean and lean’ so it can compete, no matter how much progressive useful idiots claim otherwise…
This is not Schumpter’s creative destruction, this is looting.
When the mob does this, we recognize it as fraud. When men from good schools with nice, conservative suits do this, it’s called financial engineering, even though it’s really no different in kind…
By now, you might have heard that the New York Daily News, which filled the important niche of working class newspaper, laid off half of its employees. Actually, it was Tronc, which bought the paper, that did the layoffs. And there’s a lot of jonc in the Tronc (boldface mine):
This past spring, Michael Ferro resigned as chairman of publicly traded media-looting hell-company Tronc, Inc., just ahead of the publication of sexual harassment allegations against him. As a parting gift, Tronc paid him $15 million, voluntarily bundling up the total value of a three-year consulting contract into one lump payment expensed against the company’s earnings and putting itself $14.8 million in the red for the first quarter. Today, Tronc gutted the New York Daily News, laying off at least half of its editorial staff to cut costs. In a society not crippled and driven completely insane by capitalism, motherfuckers would go to prison for this.
When people talk pejoratively about “class warfare,” they almost never are referring to things like the above sequence of events. But what happened to the Daily News at the hands of Tronc is class fucking warfare, a massive redistribution of wealth from the paper’s working people to a disgusting handsy shitbag multimillionaire, in a decision made far above those working people’s heads by a small handful of executive- and investor-class vampires. The journalists who lost their livelihoods today in effect had their salaries and benefits re-routed to Michael Ferro’s bank accounts. Against their wills, they were made to pay him for being a fucking pig.
…Deadspin’s parent company, Univision, recently bought out dozens of people across our network of sister sites—originally they’d intended layoffs, before negotiating with our union—not because we’re doing unprofitable work, but simply as a means of passing along the outrageous debt the company’s owners took on when they purchased Gizmodo Media Group in the first place. Next they’ll sell us off—altogether or piecemeal, as best suits their wallets and nothing else. It is, pretty much exactly, the Fuck you, pay me! sequence from Goodfellas, playing out in real time…
In absolutely any moral sense these things are pure theft, but they’re all legal, because in America, despite all this society’s supposed hatred of “class warfare,” it’s legal for the rich to prey upon the rest of us. In America, a common person might go to jail for writing a bad check, but a billionaire vampire can destroy people’s careers and strip their healthcare from them and just straight-up hand that money over to one of his rich pals and nobody can even so much as write either of them a fucking ticket for it.
Note to ‘centrist’ New Democrats: this is one reason why part of your base, the part that ten to twenty years ago called it self ‘liberal’ or ‘progressive’, is now radicalized and increasingly calling itself ‘social democratic’ or ‘socialist’ (AAAAAIIIIEEEE!!!). When people lack agency, including economic agency, they get angry–because anger is the appropriate emotion.
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Reblogged this on Scotties Toy Box and commented:
Thank you for this clear and easy to follow explanation of how corporate raiding works and how the greed of the wealthiest people is destroying the country. There is no way an economy can work if all the money is concentrated at the top. History has shown that the country is most profitable for everyone when financial means are much more equal. You have to have a base that can buy goods and services for there to be a need to manufacture or provide those services. In our country due to class warfare that base has been destroyed. Hugs