My wife and I were talking today about corporate buyouts where the company is crippled or destroyed because of debt payments. Specifically, payments that were used to pay off the leveraged buyout investors. Harry & David is a the only example we could think of:
What other high profile examples of raiders using company credit lines to make themselves whole, then letting the business flounder and possibly fail?
Thanks!
Kohlberg, Kravis and Roberts developed the high art of leveraged buyouts while they worked at Bears Stearns, and later started their own investment company in 1976. Their biggest investment was the leveraged buyout of RJR Nabisco in 1988. (Oddly enough, that was to “save” the company, which at the time was allegedly being looted by its CEO.)
Nabisco ended up selling off its international businesses and the DelMonte canned foods line.
Carl Icahn bought TWA, sold off its most profitable routes and assets. That and some truly bad management decisions pushed the airline into bankruptcy. Icahn not only escaped whole, but cut himself a deal for millions of airline tickets. He then formed a travel agency to sell them at discount prices, undercutting TWA. That helped push the airline into bankruptcy a second time.
kunilou, this is exactly what I was looking for, thanks!
Here’s an article about Simmons Bedding Company, which was bought and sold by private equity groups seven times between 1986 and 2009. Every time, the private equity firm made money, but the employees lost money or their jobs and other investors lost money.
Kmart, twice, by the same guy. In 2003, the hedge fund ESL Investments purchased Kmart’s debt while they were in bankruptcy. After the proceedings, the hedge fund ended up owning Kmart and bought Sears shortly after. The new company, Sears Holdings, has been slowly torn apart by Eddie Lampert, founder of ESL Investments, and CEO of Sears Holdings, so he could funnel real estate and cash to his hedge fund.
Thanks Dewey and boffking! Very helpful!
I think Radio Shack and Bloomingdales were also buyouts that went bad. For a while in the 80’s and early 90’s buyout and going private were all the rage.
Read* Barbarians at the Gate* for a more detailed history of the RJR Nabisco buyout. I wouldn’t say the CEO was looting the company; more precisely, it followed the same pattern as so many other old US companies - complacent management, excessive middle management structure, too much money, not enough focus on the business. Perhaps for RJR that was inherent in the business - the whole reason for the tobacco stock doing poorly was the negative image of tobacco by the late 80’s. However, a lot of people still smoked and competition was fairly lackluster, so the cigarette business was a HUGE cash cow, bigly. Management used that cash to hire celebrities to play golf with customers, they had a fleet of private jets, Manhattan penthouses, etc. Top management figured they could quietly sneak in a buyout to themselves- IIRC they started by offering about $58 a share. Since this had to be done publicly, KKR saw what was going on and made a counter-offer; after the back and forth, the final price was about $107. However, to pay for this, they spun off some pieces, dropped all the perks like the “air force”, etc. It’s a fascinating read - at one point they are speculating what percentage of the total liquid wealth of the world that they are using (borrowing) to complete the buyout. But, that was the magic of the process; the shares had been in the $45 range ($58 was designed to sound generous) so anyone who happened to have shares got a massive payday.
Burger King and Avis (or is it Hertz?) have each been run through that wringer several times. As soon as the company recovers, somebody comes in and steals all the current and future value then sets it up on a path to destruction again.