Sitting on with bunch of cash
I am not pretty sure how the industry works in terms of legislation, fee structure, or other technical aspects of the industry, but when I the PE firms’ portfolios and their intents of buying out companies, things pretty get obvious. While there may be numerous reasons for their attempts such as bolt in acquisition, turning around a distressed company, and so forth, but the thing I want to ask about right now is the companies that are sitting with big cashes. A lot of buyout companies try to acquire companies sitting with big amount of cashes in their balance. Why is the reason of this? Is it because the management are not performing their fiduciary duty by investing in new businesses to increase the shareholder’s value, and by acquiring these kind of firms they could make the business active again?
Companies hoard cash for a variety of reasons. Namely, as a cushion to carry them through during lean times (i.e. the current recession) and as a war chest to fund new internal strategic initiatives or acquisitions. PE shops look for mature companies that have stable cash flows to ensure that they are able to service the massive amount of debt that is normally placed on the acquisition target.
Wouldnt you want to purchase a company with a massive cash pile so that you could de-lever (pay off existing debt) and/or do follow on acquisitions? PE shops generally like to keep idle cash to a minimum as it is not an efficient use to increase your ROE.
If I were more cynical, I would say that PE shops like companies with hoards of cash so they can immediately pay themselves large one-time dividends - but I'm not, so I won't.
The replies were all very helpful.
Although I'm not in a PE shop, and actually working as an intern in MM,
IB and PE goes hand in hand. PE are one part of our potential clients.
I should study how these guys operate.
Any useful websites that would be helpful?
If the company is a generating lots of cash from operations in addition to the cash they already have on the balance sheet, a good explanation would be they are using it for potential acquisitions. A lot of companies have required excess cash flow sweeps at year end so it doesn't make sense to hoard cash unless you're planning to spend it on something, it's just going to go towards paying down principal anyways and you might as well prepay if you can to avoid interest. No way banks will let you do a dividend.
But these days alot of companies will pay for acquisitions in all cash because incurring any more debt will blow up existing credit agreements put in place before the meltdown and thus well below market.
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