Valuation is based on someone else’s expert opinion, which means they use their opinion to pay you $X for something. Millions of dollars of such expert opinion said facebook was worth close to $40/share. Much of this sort of detail analysis is a combination of wild-ass guesses, and should be given the weight it deserves.
The article doesn’t say that at all. Management compliance is purchased by greasing the skids with bonuses, so that management goes along with whatever the new managing company wants. The article seems pretty plain on that.
And here I have to question if you even read the article, much less the quoted excerpt: the article says, “floundering businesses with good cash flows.” You somehow changed that to, “company with little debt and good cash flows.” I’m absolutely at a loss as to how you got from “floundering” to “little debt”. The KB Toys example on page 3 of the article is illustrative. I don’t have a figure for how much debt KB had before they encountered Bain, but, despite having 1300+ stores and a foothold in shopping malls everywhere, KB was facing increased competition from large retailers such as Toys R Us and Wal-Mart and feeling the pinch. Bain took the helm with promises of a turnaround, then broke the piggybank, grabbed everything they could, and split.
Gonna have to break the next paragraph up a bit:
There isn’t necessarily an “evil idea to destroy the value”. If the PE firm succeeds in turning the company around, all the better. However, even if the purchased company tanks, Bain stands to lose nothing, having taken on so little of the risk themselves. This is spelled out in the article.
The dividends listed in the article, such as the $121 million paid by KB Toys and the $500 million paid by Dunkin Donuts, were very real, were reported on, and are without question. What you say is very likely true, if you assume that each side of the transaction is working at odd purposes for their own interests. When all sides are colluding to loot the treasury, it’s a different story.
They don’t have to recoup the investment from management fees, they still hold an asset which may be sold. Management fees are just gravy.
We’re talking about leveraged buyouts here. What the original owner wants is just noise in the background to these guys.
Like I said before, failures aren’t the norm, and they’re not what Bain hopes for. Still, Bain doesn’t care if the company fails, since Bain makes money either way. Bankruptcies, as noted in the article, happens after about seven percent of PE buyouts, which doesn’t seem excessive.
Right, so the whole article is wrong because he said “Goldman Sachs” rather than spelling out “Goldman Sachs Capital Partners, the private equity arm of Goldman Sachs”. If I used smileys, this is where I’d put a “rolleyes”.
Let’s see.
[QUOTE=Rolling Stone]
Romney and Bain avoided the hostile approach, preferring to secure the cooperation of their takeover targets by buying off a company’s management with lucrative bonuses.
[/QUOTE]
He is talking about securing the takeover (buying the ownership interest from the existing owner) by buying off the management with bonuses. Why in the world would they need to secure the management compliance to buy the company? You need to secure an agreement from the existing ownership that the price you are offering is fair. Once you own the company, you don’t need to convince management to go along with your plans. If they don’t then they should be fired and replaced. If you are the owner, it is a given that management would go along with what you say as long as it is not illegal. They have no other choice. His statement here makes no sense as written.
I think you missed my point. I’m well aware that he calls them floundering. The little debt part comes because the entire purported plan is to load the company up with debt to help finance the acquisition. You can’t load up a company with debt if it is already loaded up with debt. So with that and him saying they have good cash flows, I am questioning how good cash flows plus (at a minimum) manageable debt, can be described as floundering. My point here isn’t that the company isn’t floundering, I’m sure they are. Its that the author seems to be trying to have it both ways. He acts like they were fine before Bain ever came into the picture. He also must state that the reason Bain came in was because they weren’t in good shape (hence the floundering language). My point is that I believe he is underselling just how bad a shape some of these companies were in.
And I am saying that he undersells the amount of risk they take on. 10% to 40% of the purchase price is the equity investment according to him. If the company completely fails you lose all of that.
The KB Toys stuff is ridiculous. The article of course does state that this all happened after Romney left Bain, but it still leaves out important details. Namely, that KB Toys went bankrupt not once, but twice. Even after going through a bankruptcy court reorganization, they still couldn’t survive and were just liquidated the second time. Furthermore, the article (even though it previously pointed out that the KB Toys transactions all happened after Romney left) somehow blames Romney for not turning them around.
[QUOTE=Rolling Stone]
In the end, Bain never bothered to come up with a plan for how KB Toys could meet the 21st-century challenges of video games and cellphone gadgets that were the company’s ostensible downfall. And that’s where Romney’s self-touted reputation as a turnaround specialist is a myth.
[/QUOTE]
How was he supposed to turn them around when he was never even a part of the deal?
Bain’s asset is the equity of the company. However, the claim is that the company’s assets have been encumbered with so much debt that they can’t even support it. Therefore, the company’s equity value should be essentially nothing: assets minus liabilities equals equity. Therefore, the Bain asset should be worth nothing in a sale if they really did load these companies with so much debt.
You missed my point. The article’s logic goes something like this. Company sold by Old Owner to Bain for $10. Bain pays $1 and uses a $9 loan that the company was able to get to pay for that $10. Bain then pays themselves $1 in management fees. Bain then has the company borrow another $3 and give them a dividend. Bain then sells the company to new owners for $5. Company then fails. Bain makes 900% return. Company is stuck with $12 additional in debt and had to pay out $1 in management fees and interest on debt. New owner seems to think company was worth $5 even with $12 additional debt. Why did the Old Owner sell for so little? Why did new owner pay so much for this nearly failed overleveraged company? Seems like the old owner should have sold for so much more and the new owner should have never bought this clearly failing company. Why is Bain able to consistently buy for less than a company is worth and sell for more than a company is worth?
Or Bain actually does take a financial risk and does lose money on certain deals that don’t work out. That seems to be the obviously far likelier scenario. I’ll note that later in the article, the author uses this quote.
[Quote=Rolling Stone]
“Bain’s fundamental flaw, at least according to the math,” Ritholtz writes, “is that they took lots of risk, use immense leverage and charged enormous fees, for performance that was more or less the same as [stock] indexing.”
[/QUOTE]
So which is it, are they taking lots of risk or are they entering into a riskless transaction that they win either way?
[Quote=Rolling Stone]
Right, so the whole article is wrong because he said “Goldman Sachs” rather than spelling out “Goldman Sachs Capital Partners, the private equity arm of Goldman Sachs”. If I used smileys, this is where I’d put a “rolleyes”.
[/QUOTE]
You completely misread this. My claim, which I have no idea how you possibly missed this considering the amount of back and forth there was on it, was that the article says that Goldman provided debt when instead they provided equity. No where did I say this invalidated the entire article; the previous several reasons I gave were enough to do that. This shows that the writer does not even have a basic understanding of the roles that these various companies play. In other words, he probably wasn’t very well educated beforehand. How in the world did you come to the conclusion that I cared about the naming convention that he used?
Take it up with puddleglum, then:
On The Daily Show last night, Jon Stewart was making hay on the stat that Romney said the government should not be picking winners, in fact it couldn’t. Then Stewart quoted some articles that in fact only 8% of Obama’s “picks” went bankrupt, not 50% as Romney’s camp claimed. He went on to quote another study that 22% of the Bain Capital invested companies went bankrupt within 8 years after.
Of course, a recent report on Bain just might be biased, and no detail about what proportion were managed vs. sell-offs, but during a bankruptcy it’s a safe bet that some jobs disappear.
That’s a rather silly comparison for several reasons, the most obvious being that Obama has been “picking” companies for less than 4 years.
It’s certainly a valid comparison in the context in which it was made. Someone with a 22% failure rate shouldn’t be criticizing someone with an 8% failure rate. If the number of years involved matters (4 vs. 8), then Romney should have waited 4 years to bring it up.
That’s an interesting opinion, but not a fact.
I assumed that was the theme you had established.
The difference is that Bain was a turn around specialist, so it bought sick companies and tried to make them better. Government loan guarantees go to growing companies looking to expand production. The comparison is apples to oranges. It would be like comparing an oncologists survival rate with a pediatricians.
It’s not apples and oranges, but it is tangerines and oranges. If the implication is “I can do a better job” then the evidence on the face of it suggests “not as far as we can tell”. I think the main point was to criticize too the claim “50% of the companies Obama’s government invested in have failed”. You want your proposed president to be a bit better at math or truthiness.
You know what happens when we assume? 