[cameronh90]

That's only possible if the financial system is valuing things systematically incorrectly.

IFF a company is truly, honest to god, less valuable than the sum of its parts, then it (or the subset that would have more value to someone else) SHOULD be dismantled, and those resources sold and reallocated to more productive use. You probably make these sorts of decisions in the capacity of your own personal finances without even thinking about it.

On the other hand (and what I believe is likely happening is) if cynical financial engineering is allowing you to turn a useful company that's valued poorly by the market into a useless company that's is paradoxically highly valued by the market, in the short term, and that keeps happening over and over again, then the tools used to calculate the market value are wrong.

This is illustrated by how PE commonly trashes trusted brands. A brand doesn't show up in your EBITDA. If you trash a brand quickly enough by cutting costs and quality, some institutional sucker will buy the company because they haven't clocked that the current EBITDA is elevated due to asymmetry in how quickly the costs come off and how quickly the revenue falls off after burning the brand.

They've simply valued the company wrong.

[mcphage]

> That's only possible if the financial system is valuing things systematically incorrectly.

Well… yeah. I mean, it seems clear that the market is pretty bad at valuing companies. At the very least, valuations are based on a combination of (a) measurable attributes, and (b) vibes. (a) will always be incomplete, and runs into all of the same measurement problems that everything else does. And (b) is really unreliable.

Plus, PE companies are not especially interested in long timelines, whereas companies can eventually provide a lot more value that they’re worth right now.

And that’s not even getting into situations where they own enough of the market to not care about losing customers.

[cameronh90]

> PE companies are not especially interested in long timelines, whereas companies can eventually provide a lot more value that they’re worth right now.

The value of a company does include the value of future returns. The standard model is net present value. In theory, if the market is valuing those future returns correctly, a PE fund would probably just do the value maximisation through investment and genuine business rationalisation, and skip the financial engineering phase of the cycle. I believe this is actually what most PE managers would prefer to do. They generally don’t actually want to burn their efforts for a short term fake valuation boost. They are still people after all. It just seems to be what the market wants them to do, and they prefer money.

> the market is pretty bad at valuing companies

The market has always been bad, but probably more randomly bad, historically. Different people had their own finger-in-the-air methodologies and an estimated market value of a company had a lot more random noise around it.

The issue is now that ~every large institutional investor is valuing companies in the same wrong way, which creates opportunities for, essentially, an arbitrage between reality and their dumb models which these types of PE funds are exploiting.

It also creates systemic risk to the financial system. When everyone is making the same mistake, “independent” market participants aren’t really independent. This is in essence what any bubble is, but usually isolated to people misreading the fundamentals of a particular sector. If the techniques behind financialisation are themselves a bubble, however, we could be in for one hell of a pop if the market realises. Like when the market realised they’d been valuing subprime mortgage books wrong in 2008.

[samat]

Language is the house of the being

I believe you are using the wrong language

> some institutional sucker will buy

They are committing fraud in the high trust society. Literally sucking blood from our kids and grandkids who would have to rebuild, if that’s even possible

[everybodyknows]

> some institutional sucker will buy the company

What sort of institutions would try to take on operating such a business? And when does word get around, and the pool of suckers dry up?

[lmm]

> What sort of institutions would try to take on operating such a business?

Essentially anyone - other PE funds, competitors merging, the general stock market if you take it public. And they're not wrong want to buy it - there's a valuable business there - they're just bad at assessing the right price.

> And when does word get around, and the pool of suckers dry up?

One born every minute. And it's hard to even notice you're being taken for a ride as opposed to mismanaging the business you bought or just being unlucky.

[freejazz]

>That's only possible if the financial system is valuing things systematically incorrectly.

...have you looked around? Some of the biggest companies in our economy basically just serve ads...