Did you even read your own link? Goldman Sachs Capital Partners was involved in financing leveraged buyouts … buying providing private equity. They partnered with Bain Capital on buyouts including Burger King and Sungard … by providing equity.
Now, what exactly did you claim I was incorrect about again?
GAAP balance sheet equity is absolutely meaningless. No one looks at that. Apple’s balance sheet equity is $76 billion. Why would stockholders trade it at a $578 billion valuation if anyone thought the balance sheet equity had meaning?
People look at the balance sheet to get a sense of the capital structure and the working capital situation of a company. They don’t look at it to assess value at all. You could do a quick look at an income statement to get a ballpark number of value. You could never do so with a balance sheet.
I guess I’ll need you to explain what you think is wrong with how Goldman’s role was described in the article.
Yes: they probaby made no such estimate, because it’s incredibly stupid and utterly pointless. Bain Capital, frankly, doesn’t care what you think of them, and even if they did, it would in no way, shape, or form have helped them in future acquisitions. They people they bought from wouldn’t give a damn, either, because it would have no bearing on their specific case. Bain would have focused at the level of companies, not individual employees. Their metrics will be value added via Bain restructuring, i.e. purchase price /\ sell price. If that’s significantly positive, which it is, they’ve done what they set out to do.
According to more or less all economic theory, they basically did all mankind a favor in the process.
Plus, even if they did make such an estimate, they wouldn’t release it because it’s proprietary information and not something they would want anyone to know. And they would know damn well, too, that such an estimate is going to be too inaccurate to be of any value.
The simple fact is that no company needing a loan goes to Goldman Sachs. It is not their business. I am not saying that they have never provided or participated in a corporate loan. I am saying it is an absolutely tiny, insignificant portion of their business and that your average regional bank makes more corporate loans than Goldman. Just checking their 12/31/11 10-K, they made $96 million in total net revenues from lending; the company’s total net revenue was $28.8 billion. Goldman Sachs is a pure investment bank. They differ from the JPMorgan, Bank of America, Citibank, Wells Fargo group of big banks that has both commercial and investment banking activities. Similarly, Goldman Sachs has some very minor depository services. However, people do not go to Goldman Sachs to open up a checking account.
Their role is described as the lender who provides the 60-90% debt portion of the capital compared to Bain who is described as providing the 10-40% equity portion. Goldman isn’t a lender in the traditional sense though. Generally speaking, a traditional lender raises money through deposits and then lends that money out at a higher interest rate making a spread. This would be commercial banking. Goldman Sachs is an investment bank that makes their money providing fee based services such as underwritings, research, trading, etc. There certainly are banks that provide a mix of commercial and investment banking services such as JPMorgan; Goldman is not such a type though.
The Goldman Sachs Capital Partners group that you referenced is more of a competitor to Bain. They provide equity. Their role in the Bain LBOs is that they essentially partnered with Bain, in the same role that Bain was in, and provided a portion of the equity.
You keep talking in absolutes, and then making exceptions. You were wrong: GS makes loans. The simple fact is that some companies and/or individuals go to them for loans, otherwise they wouldn’t have made US$96 million in total net revenues from lending that one year. Making loans is part of their business; they say so right on their website and they have financial information available that shows that they do in fact make loans.
Forgive me if I look at your assertion that people don’t go to GS to open a checking account, as well as all your other assertions, with a healthy degree of skepticism. If you’d like to provide cites, I’ll be happy to peruse them.
People look at the income statement when the company’s greatest value is massive cash flow due to sales volumes. Others may look for hidden assets - that Manhattan property carried on the books at 1930’s prices that nobody else may have noticed; or the opportunity to sell off the plant from under them for a lump sum, then lease back the building your business relies on at modern prices - just another way to pile on debt.
But wait, I thought that the net jobs added was a measure of the health of a company? And surely, Bain would have an easier time getting the cooperation of existing stockholders, equity firms, etc., if they had that evidence that their activities increase the health of the companies they take over.
You’re getting to the artificial heart of the matter. The ‘health’ of a company is a subjective measure, and people assess businesses in different ways. Otherwise the original owners of these companies wouldn’t sell out to Bain, and newer owners wouldn’t end up buying the companies from Bain, and Bain wouldn’t end up buying businesses that go bankrupt.
Net jobs growth would be a likely byproduct of a growing healthy company.
Yes and no. If the company is declining but has not yet had a panic attack, has not laid off the people it no longer needs, then there is healthtot be gained and cash to be recouped from laying people off to match the current level of cash flow and labour needs. (More likely to have been the case 10 or 20 years ago. A company that is bloated today has led a charmed life.)
But then, how many people you need is always a subjective thing; you can cut a few more than are necessary. You can remove middle management by making one boss responsible for a lot more people, by replacing full-time bosses with “team leads” etc. If you overdo the cuts and stress the organization, or get rid of the wrong people and lose expertise, usually this is not apparent for months or a year or two. By then, you have re-sold the comapny with the wonderful new balance sheet and income vs cost projections.
Not that Bain was doing anything wonderful innovative, special or unusual (or bad or mercenary). They were just one of hundreds of hyenas wandering the landscape with sufficient capital to pull off this trick on company after company, gnawing on the carcasses of the American business world.
One other trick - the accountants will look at the income statement and say “an average company in this situation should have X employees.” It’s one of their analysis tools. So companies might do a 10% force reduction just because their banker or stock analyst told them to. Then, to make up for the fact they needed some of their 10%, they hire those people abck as contractors - less job security, possibly lower pay, and they don’t qualify as “head count”.
“You’re my favorite head count…”
-Pointy Haired Boss,** Dilbert**
Ah, I think I see what you’re getting at - your claim is that Taibbi is getting his banks crossed. That Goldman Sachs Partners provided some of the equity for the purchase and then BK got huge bank loans from some other bank (some of which went to pay a big “special dividend” to the PE firms).
From what I can find (it’s hard to find articles from 2002 for some reason) BK took out about $1 bill in bank loans and sold $500 mill in bonds (to mainly JP Morgan Chase and Citigroup). I can’t seem to find who they got the loans from.
Burger King is interesting as it’s now been through this cycle twice in the last decade.
You are simply speaking out of ignorance. I’m not trying to be rude, but you are completely wrong here. If an article has the quote “On Halloween, moms across the country load up on candy for trick-or-treaters from stores such as Walmart and Yankee Stadium” I will state in matter of fact terms that moms don’t go to Yankee Stadium to go candy shopping, and I will be correct. It does not matter that Yankee Stadium sells candy, advertises that that they sell candy on their website, and recognizes revenue from candy sales on their financial statements. An autistic person might have trouble with that concept, but a rational minded person will not.
Goldman Sachs makes loans in only very select type circumstances, and they are not a part of their core business model. For example, If they have an equity investment in a company and the existing lender is saying the company is in default on their loan and pushing them toward bankruptcy, Goldman might step in and take an assignment of the loan in order to protect their equity investment. Or they might have a good customer in a business that they do focus on (investment banking) that is rounding out a bank group and requests Goldman to participate in it, and Goldman might do that for client relations. Or they might want to have voting rights in a bank group and participate. Or any number of random rare reasons.
I think we have now taken this diversion from the thread topic far enough, and I’m done arguing it or discussing it unless you have an honest question.
That’s right. I haven’t tried to look up the specifics for Burger King, but I can tell you what likely happened. Bain and Goldman and possibly others went out and injected equity into Burger King in a collaborative manner. Essentially one of them led but the dollar amount was more than they wanted to expose on a single transaction, and so they brought the idea to others to participate in.
If the debt portion is as you said ($1B bank loans and $500MM bonds) then here is probably how that went down. The bonds were probably high yield public debt. Essentially, JPMorgan and Citibank probably acted as bookrunners for the bond offering, but this was sold to the public meaning that JPMorgan and Citibank really only made a fee for helping to sell the debt. The bank loans would have been provided by a syndicate of probably 10 or more banks. Basically, JPMorgan (probably) negotiated the terms and helped bring together a bunch of banks that all had a portion of the same loan. The bank loan was probably a senior secured revolving line of credit with a shorter maturity date (3-5 years) and variable rate of interest and the bonds were probably senior unsecured, longer term (7-10 years) with a fixed rate of interest.
That makes sense, thanks for the explanation. Sloppy writing by Taibbi.
To expand just a little on this, the problem is that we use the word bank to mean a lot of different things. I see you are in St. Louis. There are pure commercial banks there like U.S. Bank. There are banks that do both commercial banking and investment banking there like Bank of America. You would obviously see bank branches for both of these around town, and if you wanted a corporate loan, you would probably find that they have lenders located in St. Louis making loans in the city. Then there are investment banks like Goldman Sachs and Morgan Stanley that probably have offices there, but have no traditional banking presence.
The thing is, if you were a private St. Louis company and all you wanted was a loan and cash management services, you would never talk to Goldman Sachs. You probably wouldn’t even talk to Bank of America as they would want public companies that they can use their commercial banking products as a way in for their investment banking products to be sold. You would deal with the basic commercial banks like U.S. Bank. Goldman Sachs and U.S. Bank have essentially nothing in common. Bank of America has something in common with U.S. Bank and Goldman Sachs.
Sure, I get the concept of buying an undervalued asset; however, you wouldn’t be able to really gain that knowledge by looking at the balance sheet. Balance sheets are not detailed enough to do that sort of investigation.
Also, it’s well enough known that assets are valued on a cost basis under GAAP, so I think people ignore the book value of the assets when attempting to value. That’s why I think there is such a massive discrepancy between book equity and market value equity on the stock market. Everyone already knows they can ignore the book value equity. Otherwise, there would be a tendency to not deviate too far from the book value, and I don’t think you see that in the public equity markets at all.
Nope. Employee headcount has nothing to do with company health. Frequently the opposite.
Whether it’s politic or not, headcount is often something which does need to go away. I’ve not really been a fan of Chainsaw Al-style cutting, but it has a very specific and worthwhile goal. Quite often, the only way to make the business worthwhile again is to simply cut what isn’t working, sometimes even most of the company must go.
It’s not pretty, but it’s true. Companies have only so much leadership talent available, and only so many fiscal, physical, and organization resources. In such cases, you sometimes have to drop or spin off parts of the business in order to make the remainder worthwhile. You could have a billion employees, but if your annual profit amounts to 1 then you're losing. Better to have a 100 profit on a mere million employees, because the economy is going to be better off for it. You can spin off the remainder, or another company will pick up the slack, and int he end we all win.
From Bain Capital’s perspective - or any similar group - they’re looking for a company with potential but one that needs additional management talent, and often a heavy dose of the will to cut deadweight. It sucks for the people affected, but there’s basically no evidence that it hurts the long-term economic prospects or those of the company affected. Bain wouldn’t be buying it if the companyw as
Now, whether you think this reflects well or poorly on Romney is another matter. I tend to go for the cold numbers in my economics, and so I don’t really care either way. Yes, he probably has a better understanding of how business functionally operates than any candidate we’ve had in decades. And he probably understands management very well. he ahs a good track record. I don’t assign a moral value to that, and I don’t think it will ultimately affect his Presidency that much. I think even less of hyperactive effort to demonize him, because it betrays a complete ignorance of economics, although that’s pretty typical for politicans.
So ultimately the metric that Bain cares about is what I said earlier: delta of purchase price to sales price (actually modified by risk and inflation and its judgement of alternatives, but that’s neither here nor there). That’s the measure of how much value Bain adds to the economy. They can’t cheat that, because their customers know basically everything Bain does about the possible puchases.