Research Demonstrates That Private Equity Is VASTLY Overpaying For Acquisitions

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ByLoSellHi

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HIGH & LOW FINANCE
Owners Lose and Bosses Win in Bad Mergers
Published: April 20, 2007

Academic research offers insights into how the very equity-based incentives that were supposed to make managers think like owners have instead encouraged them to overpay for acquisitions.

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http://select.nytimes.com/2007/04/20/business/20norris.html

Alas, I don't have a subscription to read the rest of the article.
 
They do that , then they go in and fire a bunch of managers and F*ck up things. They hold a bunch of meetings with the current employees, who are scared of being labeled with a bad attitude (the Kiss of Death in 21st century late stage American style Capitalism) if they question anything. They cook the books, wait a while, hirean Investment banker to take them public again. Barbarians at the Gate and such.
 
And the first thing you do when you take over is take out a loan to cash out the "private equity" and their bankers. Then you sell everything that has any value. Then you try to sell the carcass to the public with an IPO. Rinse and repeat.
 
As long as the bank will lend the money plus their big fee, they don't care, because once they get it, they have no liability, and the banks and bondholders are left holding the bag. After that, the cost cutting needed to be able to make the payments ensures the employees are screwed.

Then if/when there is anything left to IPO, they make another big fee going the other way.

Yeah, "rinse/repeat"
 
Quote from originalskunk:

And the first thing you do when you take over is take out a loan to cash out the "private equity" and their bankers. Then you sell everything that has any value. Then you try to sell the carcass to the public with an IPO. Rinse and repeat.
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Right on!!!!!!


How long this can go on for is anyones guess, I wrote about this yesterday how something is going to go wrong in this area. It cannot stay this good forever. These private equity firms are taking on too much debt.
 
Quote from S2007S:

These private equity firms are taking on too much debt.
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Dude, you gotta stop being so dense.

The Private Equity firms take on ZERO debt. It's all attached to the company being bought out.
 
Quote from thriftybob:

As long as the bank will lend the money plus their big fee, they don't care, because once they get it, they have no liability, and the banks and bondholders are left holding the bag. After that, the cost cutting needed to be able to make the payments ensures the employees are screwed.

Then if/when there is anything left to IPO, they make another big fee going the other way.

Yeah, "rinse/repeat"
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Are you a socialist? Communist?

ThetaSpec
 
Actually, corporate bond yields are very low compared to equity yields (eg, for equity yield, try the inverse PE ratio of earnings to price, or EBITDA/EV).

As long as it persists, basically Private Equity is arbitraging the public markets by buying companies (cheap asset) and selling corporate bonds (expensive, due to the low yields).
 
Of course, to play devil's advocate for a moment, the Google purchase of DoubleClick shows that private equity can significantly underpay for a company as well.

Google is spending money like a drunken sailor. The private equity firm that they purchased DoubleClick from paid only $1.1 billion (using only $300 million of their own equity) , then flipped for three times as much. Not a bad deal.
 
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