Rolfe Winkler
Option ARMageddon
Back to (buyout) biz as usual
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Reason #147 that nothing has changed: leveraged buyout private equity shops Carlyle and Hellman & Friedman are tapping the loan market to pay themselves dividends. From Pierre Paulden and Kristen Haunss at Bloomberg…
Carlyle Group, the world’s second-largest private-equity firm, and Hellman & Friedman LLC are seeking to take advantage of a record rally in high-yield, high-risk loans to take cash out of companies they bought last year amid the financial crisis.
Goodman Global Inc., a maker of air conditioner systems bought by Hellman & Friedman, has asked lenders to allow a payment of as much as $115 million to the private-equity firm. Booz Allen Hamilton Inc., the U.S. government-consulting company purchased by Washington-based Carlyle, is seeking a $350 million term loan to finance part of a $550 million payout to its owners, Marie Lerch, a Booz Allen spokeswoman, said last week.
PE can be a great gig. Get control of a company, take cash out, leave bondholders to clean up the mess when the company falls into bankruptcy. A recent example is Thomas H. Lee Partners buyout of Simmons:
For many of the [Simmons'] investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company’s downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees — more than one-quarter of the work force — laid off last year.
But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.
Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years.
How so many people could make so much money on a company that has been driven into bankruptcy is a tale of these financial times and an example of a growing phenomenon in corporate America.
Every step along the way, the buyers put Simmons deeper into debt. The financiers borrowed more and more money to pay ever higher prices for the company, enabling each previous owner to cash out profitably.
But the load weighed down an otherwise healthy company. Today, Simmons owes $1.3 billion, compared with just $164 million in 1991, when it began to become a Wall Street version of “Flip This House.”
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This is not new, and so is not a sign of the times anymore than it was two decades ago. Recall Elliot Richardson’s activities in the late ’80′s.Unstated is the loss of tax revenue due to the tax shield of the huge loans. In business school, I learned how this game was played. Find a company with enough earnings to suck up in the form of a premium to 51% of shareholders, and in the form of loans to compensate the raiders. Thereby drive earnings to zero. The company may not survive in even good economic times, but what do you care, as long as it survives long enough for the money to be transferred into your account.Long term employees – who cares?
…sort of a debt-driven, vice deposit-driven, Ponzi scheme.
Hello RolfeThis is Sandeep from AhmedabadWhat is this going on in the market ??Sudden surge and immediate dropsAgain Dubai CrisisIs this Artificial or a scam?how to deal wid itI have invested 500,000 in Dubai World
see my prev dialogue
I work for a US subsidiary of a French company, and discovered that French companies can’t pay a dividend unless they are profitable. I think they can dip into previous years profitability to the extent those profits were not distributed, but only to the extent that the accumulated losses and dividends over that time were not more than the accumulated profits. While profitability can be manipulated to some degree through capitalization of what should be expenses, and sales of low book value assets, this type of rule would cut out this type of shenanigans. Private equity would actually need to make a company profitable to cash out. It would also make the takeovers of cash-rich companies less likely, since the buyer can’t extract the cash without making a profit. It wouldn’t stop flippers, but it would make the market for flippers less appealing.
GREED is going to be the downfall of this country!! These people are nothing but thugs in suits! No better than the drug dealers roaming the streets!
The pundits claim that wall street activity (bubble building etc.)enhances productivity and provides seed capital to entrepreneurship and vital funding to industry and propels growth so why the net effect is minus a negative in terms of long term employment homeownership and positive household balance sheets.Why this accumulation of debt has become all pervasive and how can use of debt enhance overall growth.