one more problem hidden underneath

Discussion in 'Economics' started by canmo, May 19, 2010.

  1. canmo

    canmo

    http://www.bloomberg.com/apps/news?pid=20601087&sid=arh9nevzJwVA&pos=5

    Yeah, let's talk about IPO from LBO of PE :) , what the hell is that and why it's a problem ??
    If you didn't know about that till now, let's face it - in addition to all crap we already know about ..
    I feel like ByLo talking about it :( .
    IPO - initial public offer(original meaning), in simple words(nowdays) - selling more chips to gamblers. Not a good time now, but still possible..
    LBO of PE - leveraged buy-out from private-equity. Simple thing - you want buy a big company, but you don't have money, so what you do? LBO is the word - you take a huge loan (as much as you can, better bigger then your target market cap), paying for your target purchase - of course, not forgetting to pay yourself/ legal/advisory/bunch of friends-politicians-local government guys fees. After that, you set this loan on your traget company balance sheet and make the IPO - bingo! And if you can break your target into a few pieces and make an IPOs separately for each one - it's even better.
    That's basic description for LBO, but there are much more tricks in there, for example, it might be situation when some big share stake holder(institutional) of big and indebted company decide to get rid of its shares by initiating LBO(otherwise no chance to sell the stake without huge loss). Then this stake holder takes a loan, pays all shareholders higher-then-market price (and, meanwhile, rescue himself out of that crap shares), then target company gets one more loan to pay and that's it.. Of course, it's better to get the loan from your friendly bank, because a normal sobber banker won't give a penny for such a deal, but creative solutions might work there as well..
    Everybody gains - all participators of the deal.. There is a very small problem with that, really tiny one, so tiny that nobody cares - the target company (which usually indebted even before it was targeted by LBO) is indebted terrifically now, and basically has no prospect to be profitable for couple of zillion years. It would be great success for it if it keeps paying that LBO loan on its balance sheet for a few years. And if that company is selling some products to public(which usually happens ), it will be struggling - in addition to its new debts - very tough market environment with less spending clients..
    When it happens just ones - not a problem, the target company goes bk, shareholders who bought IPO are screwed, the bank which gave a loan, takes a loss or/and fails, when it happens twice - same happens with 2 companies, twice IPO buyers and two banks, when it happens 3 times... and when it happens overall the market...
    So, according to the article it looks gamblers not buying that crap now, and that crap is about 2 trillion pay-the-piper LBO loans outstanding... Surprise-surprise..
    And, I forgot to say why it's a problem - that public doesn't buy IPO's of LBO from PE - the problem - and the real problem - is that if you don't get money from IPO, it means the targeted company has to pay the LBO loan by itself, with no help from IPO, and that means, even it's good company, producing goods, well-managed etc., it will go BK, sending its workers home, in turn causing more bank losses etc..