[jeffbee]

All of it, essentially. The company lent Bain the money needed to acquire itself, Bain didn't bring capital to the deal. Then, over the course of 13 years, the company paid Bain hundreds of millions of dollars in management fees, in cash. So Bain already got paid. They got hard money for driving the company straight into the ground.

[richardwhiuk]

"The company lent Bain the money needed to acquire itself"

How does this work exactly? Why would the company lend an acquirer money?

[dasudasu]

They approach a bank, or issue some bonds, and it goes something like: "Lend us 1 billion to acquire this company. We'll pay the interest from the operating income. It will also be secured against the assets of the company."

So from the point of view of a bank or bond-holder, it's not such a bad deal if the company survives. It's not a bad deal either for the past owner who does cash out. Then, after the acquisition, they put the debt on that company's books because they were technically costs incurred from that company, and there is nobody to stop them anyway.

[cstejerean]

You can imagine it as buying the company and then immediately using your new control of the company to take on debt to repay yourself for the purchase price.

In practice it’s a little different as you arrange the debt financing before buying the company, but conceptually it works the same way. As the new owner of the company you can saddle it with debt (as long as lenders are willing to lend you the money).

[bena]

It's a little more complicated than that. Bain Capital and other vulture capitalists aren't the ones being lent the money.

They find a public company that's not doing great. Maybe they're just stagnant or they had a down year. Either way, you find someone who wants to sell a publicly traded company.

Then they put up a small amount and have the company itself take out a loan to buy back its stock.

So now the company is paying interest on the debt it took on to buy itself and also paying "management consulting fees" to places like Bain Capital.

In short: Toys R Us should have never had to close its doors. https://theweek.com/articles/761124/how-vulture-capitalists-...

[sideshowb]

How does a stock buyback work in this case - do they just buy up 51%? If so do the remaining 49% of shareholders get value 'extracted' on their behalf too or do they also get screwed?

[lotsofpulp]

Who is lending money to a business so the business can pay its owner?

[jeffbee]

Large companies can just sell debt on the open market. When Bain's subsidiary "merged" with Guitar Center, Guitar Center sold $1.78 billion in debt and Bain paid $1.9bn for the company. Guitar Center got murdered on the interest rates of between 6 and 10% on these debts, which were rated as junk even at the time. The details are in the various SEC filings, you can read them online.

"""In connection with the execution and delivery of the merger agreement, Parent and Merger Sub entered into a debt financing commitment letter with J.P. Morgan Securities Inc. and JPMorgan Chase Bank, N.A. to provide up to $1.815 billion in debt financing, consisting of (1) a senior secured asset-based revolving facility with a maximum availability of $375 million, (2) a senior secured loan term facility in an aggregate principal amount of $800 million, (3) a senior unsecured bridge loan facility in an aggregate principal amount of up to $300 million and (4) a senior subordinated unsecured bridge loan facility in an aggregate principal amount of up to $340 million. """

As to the question of why company management would agree to do this, it's because they personal get paid a huge amount of money to execute the merger. Guitar Center's old CEO got paid $25 million by immediately paying out all his future stock grants on the date of the merger.

"""Each stock option to purchase our common stock outstanding immediately prior to the merger, whether or not then exercisable or vested, will become fully vested and will be deemed to be exercised and canceled at the effective time of the merger, and each holder of such stock option will be entitled to receive a cash payment..."""

[freeone3000]

They had a controlling interest in the company.

Guitar Center voted to give Bain Capital money by one person wearing two hats.

[lotsofpulp]

Where did guitar center get this money to give Bain?

[freeone3000]

They took out loans against their equity.

[AtlasBarfed]

Sounds like Sears

[jeffbee]

Well, the guy who bought Sears did it the other way around, lending Sears a lot of money on secured loans and taking the interest out, as well as taking out cash through stock buybacks. But the process is similar: gain a majority stake in a company by whatever means are available, appoint yourself as the chief executive, and manage the company with the goal of enriching yourself, rather than with growing the company.

The structure of the Sears deal was really interesting and suspicious. Sears bought a small number of Kmart stores for an enormous cash price, which sent Kmart stock into orbit, then Lampert used the inflated Kmart stock to acquire Sears. Pretty shady.

Another difference is Lampert is a black sheep, but Mitt Romney is for some reason still socially accepted despite having wrecked dozens of American companies.

[lotsofpulp]

I would like to see evidence that Lampert actually made a decent return on Sears. Seems like he would have done much better for a lot less work buying VOO.

[acomjean]

Mitt ended up Governor of my state (Massachusetts). He did ok as Governor and oddly got us universal health care, which the federal Affordable Cares Act is based on, which I guess made him more palatable.

Our democratic governor Deval Patrick went to work for Bain after he left office.