What happens after an LBO?
After you do an LBO, does the PE firm have complete control over the acquired company's operations? Does the PE firm perhaps insert one of their own guys into the company's management to help run it? or does the acquired company continue to do their own thing, without intervention?
I've checked out study guides and while they teach you how an lbo model works, no one bothers telling me what happens after the company is acquired. Can anyone elaborate? Thanks!
After an LBO, the acquiring PE firm has complete and utter control over the company, which enables it to fire all redundant staff and set the Oregon Trail pace of the company to "Grueling." Because the debt load is so high, all focus turns to meeting cash flow expectations. Cost cutting is a primary focus, and any unnecessary costs are eliminated, and some maybe necessary ones as well.
So once you've fired a bunch of people, and made the company into a miserable but well running cash flow machine, but also a machine of death for the remaining employees, you go out and you sell that cash flow machine for more than you bought it for, maybe to another PE that thinks it can do even better, or maybe you IPO it and make money that way.
The alternative (common) case is that the PE firm put too much debt on the company, had far too rosy of projections, and ends up defaulting on the debt, after which the company must declare bankruptcy and restructure or liquidate, and in the last case noone has jobs anymore.
Bottom line, if you are working for a company that might be acquired by a PE, be cautious and have a backup plan.
This post is partly facetious but also I think not too far off. PE guys, feel free to tell me different. I realize there are many great PE success stories (Staples and the like) but there's also a bloody trail of destruction from overlevering and running companies down to the bones.
Wow, kids... this right here, this is what happens when you allow yourself to become desensitized by Barack Obama (this coming from a black person).
OT: The financial sponsor does not always have complete control, there are also syndicated deals, too.
That's true, there are some firms that do minority deals, but it's pretty rare in the US. In emerging markets it's extremely common. Just a cultural thing.
I'm telling you different. The FACT of the matter is, PE-backed companies are less likely to default than public companies.
http://dealbook.nytimes.com/2012/01/27/another-view-private-equity-crea…
Running a company "down to the bones" is not a good way to maximize your exit value. I understand why Obama benefits from attacking PE, but I don't understand why so many people are stupid enough to fall for it hook line and sinker.
This is interesting, thanks for the link.
My views come more from my restructuring background, where many of our assignments came directly the result of busted LBO's - see TXU for example. So if anything, I owe something to PE for making those opportunities.
I'm actually undecided whether PE net creates or destructs value, and I think my initial post probably tilted too far, and I honestly didn't even think of the campaign in writing it. I certainly agree the PE bashing in the current campaign has been excessive, I've got a lot of respect for what Romney accomplished and I think he's a great businessman, and I'm no great fan of Obama. I'm still not sure where my vote is going to land this year, will probably come down to the Republican VP nomination.
Like the quote in your sig ThunderRoad, and Springsteen is the man :)
There are thousands of studies (Bull, 1988; Kaplan, 1989; Salvi, 2006; Wright, 2008; etc.) that show that LBO transaction create value and enhance companies economic and financial performances. It is also demostred that these type of transaction has an impact on companies headcounts (it still grows but it grows lower than in other listed entities) but this is far from what you have been describing, especially because the LBO market plays a massive role in ensuring capital to thousands of companies out there that cannot finance their projects via banking loans.
Notice anything about the dates of those studies? yea they're all before the big bang (ok Wright is after but doubt any 2008 data was used and late 2007 shit hadn't really hit the fan quite yet). no doubt LBOs do infact create value, but the 2006/7 vintage....maybe not to the same extent.
+1
The acquired company certainly does NOT just continue to do its own thing, no matter what you read in press releases.
Otherwise the PE would just buy the common stock and wait.
It really depends on a lot of factors. Generally, a PE firm doesn't want to completely replace management, because that's both messy and risky -- they'll generally hold on to current management while also giving them equity ownership in the company's new capital structure.
The PE firm looks to exit in, generally, 5 years while trying to fatten the company's EBITDA during that time period. The exit can occur through a sell-side transaction (through an investment banks M&A group), or through an IPO (those are the two most common exit strategies). In some cases, the PE firm plays an integral role in management, in other cases, the company is already-stable, but just presents a good investment, so there isn't a whole lot of work to be done on that side.
Let me know if that clarifies things at all.
Prior to the LBO, the PE firm usually has identified a list of things it wants to accomplish. Sometimes it includes augmenting management, sometimes it means trimming it, sometimes it's replacing managers. It could be improved working capital management, eliminating unprofitable products, expanding geographically, improving manufacturing efficiency, etc. Different funds have different strategies, but generally they do influence operations. They will almost always control the board of directors with principals of the firm and usually a few industry/management experts they have on retainer, but ideally their influence is based on a shared understanding with management developed prior to the deal.
Also, when an LBO happens the capital structure completely changes. The PE firm generally structures the new financing, sometimes with the help of an investment bank. The structuring usually includes devising management incentives such as equity, options or earn outs. Management alignment is more important that most people realize, because even though firms are involved in operations, they still are usually relying on existing managers.
Very often, PE firms' strategies include an M&A component, since this is an area of stength for most firms (usually staffed with ex-bankers). So they will identify targets to roll up or in some cases divisions to spin off, and they will do most of the work on the transaction.
In this vein, the PE firm often uses its financial expertise to assist the CFO with project finance or anything else that might come up where they can be of assistance, especiallly for smaller companies that have less sophisticated management teams.
The PE firm will then monitor and evaluate the various exit opportunities- IPO, sale to strategic or sale to another financial buyer, choose the best option and work with investment banks to effect exit.
The actions taken generally depend on the firm's focus and strategy. A turnaround firm is obviously going to have a unique way of doing things that's different from an average middle market firm. A middle market firm that deals with $10MM EBITDA companies is going to face different challenges from a KKR or TPG that buys large, industry leading companies.
Everyone dies.
Read Barbarians at the Gate. lets just say its a mess..
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