Corp A and Corp B are competing businesses producing similar products of similar quality. They are the two top players in their niches, and are regularly price-cutting and innovating to try and take the top spot. They are bitter rivals who would never consider a merger.
You come along and enter private negotiations with both companies simultaneously, keeping it secret. Buy both companies.
Step 1: Eliminate redundancy. Cut back to just one accounting department, one sales force, one development team. Clear out equipment not operating at 100% capacity (e.g., each company owns an expensive piece of gear that’s used a few hours a day. Sell one and use the other for both product lines).
Step 2: Now that you own both companies, stop with the price-cutting competitions. Raise prices (or hold to list prices) on both lines. Less competition means less advertising required, too. With equal resources, the weaker product line will start to falter on its own.
Step 3: Kill the weaker product line entirely and gut the remains of the company that produced it.
If these are small or medium-sized business that won’t attract FTC attention as a monopoly problem, you end up with one business owning its niche and controlling pricing.
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I don’t see how they can simultaneously be " the two top players in their niches" and “small or medium-sized business that won’t attract FTC attention”. But do you have some examples of this having happened?
It’s fairly unlikely that a merger would just escape the attention of the FTC, unless the companies and transaction were small enough that no Hart-Scott-Rodino Act filing with the FTC is required before the transaction can be completed. I haven’t looked at the threshold requirements recently, but Wikipedia says that all transactions worth more than $63.1 million require a filing if one of the parties is worth at least $12.6 million, the other is worth at least $126.3 million and the total amount of assets now owned by the acquirer reaches $252.3 million.
Acsenray, the famously bad LBO was Ohio Mattress Co., now known as Sealy Corporation, in 1989. (The mattresses themselves, as opposed to the company, had been known as Sealy all along.) It was clear within days of the LBO that the company was badly overleveraged.
A business that carries a lot of ‘dead wood’ can be easily undervalued. If it has unproductive divisions and unneeded employees the ratio of profits vs. costs may look very bad. Get rid of the excess employees, sell off unprofitable assets and close unproductive segments of the business and the perceived value and marketability of the business will increase. The middle man has allowed relieved the purchaser of the costs and risks of the downsizing.
Here is an article about the history of Simmons Mattress Company. A private equity firm bought it in 1986, sold some businesses and sold it in 1989 to the employee stock ownership group. The economy went south and the employee owners lost a lot of money in it, and it was bought by another investment firm in 1991. That firm sold it in 1996, and it was sold again in 1998. It was sold once more in 2003. At the time the article was written in 2009, it was very weak with a lot of debt and bank loans. But the private equity firms that bought and sold it made lots of money.
I have always been fascinated by Kirkorian-he actually bought and sold MGM several times!
My question: he must have added value to the firm-otherwise, how would he have been able to sell the firm?
Another question: Carl Icahn’s activities-have they beena plus or minus for the firms he took over?