Funny how liberals (like Romney) are so big in amoral financial shenanigans. Making those megabucks via shoving pension funds onto the American taxpayer and extracting $$$ from a victim company until it bankrupts. This is what took place most of the time
Romney’s father ran an automobile company, a captain of industry. His lazy arse son gets together with fellow Mormon Robert C. Gay and founds Bain Capital with a few others
They saw that you could buy a company through a leveraged buyout and radically reduce its tax rate. The company then could use those savings to pay off the increase in its debt loads. For every dollar that the company paid off in debt, your equity value rises by that same dollar, as long as the value of the company remains the same.
So the business model is based on a capital structure and tax arbitrage?
Yes. It’s a transfer of wealth as well. It’s taking the wealth of the company and transferring it to the private equity firm, as long as it can pay down its debt. It think it is real – the very early firms targeted industries in predictable industries with reliable cash flows in which they by and large could handle this debt. As more went into this industry, it became very hard to speak to the original model. Now firms are taken over in very volatile industries. And they are taking on debts where they have to pay 15 times their cash flow over seven years — they are way over-levered.
The most common argument for why Bain Capital and other private equity firms benefit the economy is that they are pursuing profits. They aren’t in the business of directly “creating jobs” or “benefitting society,” but those effects occur indirectly through the firms making as much money as they can.
But even here, “profits” — how they exist, where they come from, and how they are timed — have a crucial legal and regulatory function. A recent paper from the University of Chicago looking at private equity found that “a reasonable estimate of the value of lower taxes due to increased leverage for the 1980s might be 10 to 20 percent of firm value,” which is value that comes from taxpayers to private equity as a result of the tax code. Can you talk more about this?
That sounds about right. If you took away this deduction, you’d still have takeovers, but you’d have a lot less leverage and the buyer would be forced to really improve the company in order to make profits. I think that would be a great thing.
If you look at the dividends stuff that private equity firms do, and Bain is one of the worst offenders, if you increase the short-term earnings of a company you then use those new earnings to borrow more money. That money goes right back to the private equity firm in dividends, making it quite a quick profit. More importantly, most companies can’t handle that debt load twice. Just as they are in a position to reduce debt, they are getting hit with maximum leverage again. It’s very hard for companies to take that hit twice.
If you look at Ted Forstmann, an original private equity person who just passed away, he would rail against dividends in this manner — borrowing money to pay out dividends. He was more interested in taking companies public and selling shares and paying down debts and collecting proceeds that way. I can respect that a lot more. The initial private equity model was that you would make money by reselling your company or taking it public, not by levering it a second time.
Private equity and buyouts started as a way to take advantage of tax gimmicks, not as a way of saying “we’re going to turn around companies.” And now it’s out of control. I look at the 10 largest deals done in the 1990s, during ideal economic times, and in six cases it was clear that the company was worse off than if they never been acquired. Moody’s just put out a report in December that looked at the 40 largest buyouts of this era and showed that their revenue was growing at 4 percent since their buyout, while comparable companies were growing at 14 percent.
In January — so just in the past 12 days — Hostess, the largest bakery in the country, just went bankrupt. Coach, the largest bus company, just went bankrupt. And Quizno’s is about to go bankrupt. All of these were owned by private equity.
This battle is part of a larger discussion of, in Henry Manne’s phrase, “the market for corporate control.” The tax code is set to overlever firms, which require increases in earnings to go toward debt payments instead of research and development, expansion, and other things that build the firm. What could we change to generate different outcomes?
That’s exactly right. Right after this goes on for a few years, you’ve starved your firm of human and operating capital. Five years later, when the private equity leaves, the company will collapse — you can’t starve a company for that long. This is what the history of private equity shows.
What I’d like to see Mitt Romney do is to show an example of a buyout that went well. The only success stories he’s talking about on any level are venture capital investments — Staples and Sports Authority. Personally I like venture capital, I think it provides a lot of value, but that’s not what he did mostly, and that’s not what these takeovers are about.
The big fix I’d encourage is an end to interest-tax deducibility for leveraged buyouts. The tax system encourages companies to borrow as much as they can. For certain industries, like telecom, these deductions might make a lot of sense. But it was never intended for financing leveraged buyouts. If you put a cap on this you would find buyouts and private equity firms that were much more focused on building companies.
Ms. Harrop, so far I have not seen an article by you attacking Obama for his paying back political backers through government backed loans to failed Solyndra Corp. http://www.foxbusiness.com/markets/2011/10/03/solyndra-bankruptcy/
What is more they knew before the company was even started that it had a failed business model because the Chinese were already producing better cheaper solar cell with different technology. http://blog.heritage.org/2011/11/22/labor-department-may-sink-another-14-million-into-solyndra/
How about your comments on Nancy Pelosi who has taken over Military Bases in San Francisco and arraigned to have them sold to companies owned by relatives. Treasure Island was a Navy Base that was sold to San Francisco then to a Florida company run by her nephew. Funny thing the bidding process was so strict that only one company met all requirements, the one run by her nephew. Nancy also got her hands on two other retired military bases, and even gave some land to Mikhail Gorbachev environmental propaganda organization.
http://www.canadafreepress.com/2006/ans-cover-news111506.htm
So unless you attack Liberal, Democrats, and Marxist Presidents with same vigor you go after Conservatives, Republicans, and the Tea Party; you are nothing more than a propagandist and a liberal hack that has really no standards. I really think that Vladimir Lenin would see you as a useful idiot.
The only thing making my blood boil is that a Freeper is pimping a hit piece from a person who labeled TEA Party patriots as 'terrorists'. Check out this video from the Daily Show.