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by hack_fraud13
616 days ago
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I'm curious how this actually works. If it were that easy to buy a company, bankrupt it, and somehow make money selling it off again why wouldn't everyone do that instead of going through the trouble of operating the business? It doesn't make sense why selling capital equipment would pay for the acquisition, when almost every business trades over book value. Loading it with debt and paying the PE firm a fee doesn't sound like it would cover the cost of acquisition, either. A lot is said on the internet of the practice of loading companies with debt, but done within reason this is the financially responsible thing to do. There's even a financial theory that debt provides a disciplining effect on management[0], meaning that the management of companies with reasonable debt levels are less likely to take on unfavorable risks and more likely to find returns above the WACC. The point of leverage is that it increases returns. Here's a really good example of that in the context of real estate, where leverage almost doubles the IRR. [1] [0]https://www.jstor.org/stable/1818789 [1]https://www.youtube.com/watch?v=ocnMZDp52zA&list=PLyyvHNlYa0... |
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It’s not always an objective for the target company to go bankrupt, but if they do, the management has already pulled their money out. A company I worked for was a cash cow used to borrow and buy 3 other companies. The combined entity grew due to some growth hack stuff and one-shots, then got acquired. The PE boys made a lot of money, and the company itself was pretty much toast after the second acquisition.