Enter your mobile number or email address below and we'll send you a link to download the free Kindle App. Then you can start reading Kindle books on your smartphone, tablet, or computer - no Kindle device required.
To get the free app, enter your mobile phone number.
The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis Hardcover – November 12, 2009
"Rebound" by Kwame Alexander
Don't miss best-selling author Kwame Alexander's "Rebound," a new companion novel to his Newbery Award-winner, "The Crossover,"" illustrated with striking graphic novel panels. Pre-order today
Customers who viewed this item also viewed
Customers who bought this item also bought
What other items do customers buy after viewing this item?
From Publishers Weekly
With exhaustive research and a rogues' gallery of interviews, journalist Kosman puts together a convincing and disquieting argument that private equity firms are about to cause the next great credit crisis. Many people don't realize that private equity is just a new name for a leveraged buyout, and that private equity firms make their money by loading their acquired companies with debt, garnering short-term gain at the cost of the businesses' financial longevity. Exposing the pernicious practices of various high-profile firms (including Mitt Romney's company, Bain Capital, notorious for its company-destroying practices), Kosman reveals how they cripple their acquired businesses competitively, limit growth and cut jobs without reinvesting the savings, all without even generating good returns for their investors. But if only half of PE-owned businesses go bankrupt, that would leave almost two million Americans out of jobs. What's to be done? Kosman is a proponent of legislation that encourages buyers of companies to hold on to them for at least five years. This alarming book will keep anxious credit watchers on their toes—and hopefully inspire some pressure to keep PE firms from going the way of mortgage brokers. (Nov.)
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.
Time and again, Mr. Kosman details how the rest of us suffer at the hands of the buyout barons, 17 of whom are members of the Forbes 400. The private-equity firms pay lowball prices, he says, shortchanging public investors, by teaming up with management to pre-empt competing bids. They cream fees from their acquisitions, generating profits no matter how the companies fare. The companies cut more jobs than publicly owned competitors and sidestep proposed reforms by currying favor with politicians. Mr. Kosman finds a University of Chicago study showing that, for the years 1980 to 2001, the private-equity firms' investors got returns that fall short of the broad market average, after fees.
Mr. Kosman provides exhaustive specifics."
--Wall Street Journal
Author interviews, book reviews, editors picks, and more. Read it now
Top customer reviews
There was a problem filtering reviews right now. Please try again later.
In short, the book is a good overview for readers who want to know more about Private Equity firms. I recommend it.
PE firms are not Hedge funds. Those take investor money and invest it in a variety of schemes to increase the value of the money in the fund and for the investors. PE firms are not venture capitalist firms, either. Those entities invest in companies with the goal of making them stronger and increasing their worth, without the need of excessive debt acquired in the process.
Private Equity firms, in contrast, put down cash, usually no more than 30-40% of the purchase price of the acquired company, to acquire a company. The company, itself, finances the rest of the money required for the purchase. Within five years, the Private Equity firm plans to sell the company. Frequently, it sells to yet another PE firm.
For PE firms the whole exercise is to make money. Pure and simple. The more the PE firm can sell the acquired company for, or pull out of the company before it is sold, the better. Neither the long-term success of the company nor the status or future of its workers are much of a concern for the PE firm.
In the 1990s, the PE industry was known for "leveraged buyouts." Per the book, the industry simply changed its name to "private equity." PE was red hot in 2007, growing substantially from the beginning of that decade. Some of the big names were the Blackstone Group, the Carlyle Group and Bain Capital. In 2007, PE buyouts totaled nearly $500 billion. The big banks loved it. They made tons of money from fees on the loans PE took out to finance takeovers.
KKR is another major PE firm. It started acquiring companies back in the 1970s, completing the very first hostile takeover, a buyout of the Beatrice Companies. By 2008, it owned companies with total employees of nearly one million, making it, effectively, the second biggest U.S. employer, behind only Wal-Mart. It made the biggest deal of that era in the buyout of Nabisco for $30 billion.
But if there is any good news in all this, it is that the U.S. tax code was changed so that PE firms like KKK could not buy a company, then sell off its parts and not pay taxes on those gains. With this part of the tax code changed, much of the incentive to buy a company, the sell its parts was lost. But before this change, it was a strategy that worked like a charm. What remains, however, is that PE firms can borrow heavily to buy and/or further leverage a company, then write off the interest on all the loans. Congress has been unable to pass legislation to remove this essential benefit to PE firms.
What fueled much of the success of the PE firms in the early part of this century were investments by pension funds and other major holders of wealth. By the early 2000s, these groups were looking for improved returns. They poured billions of dollars into PE firms, which typically lock investors in for a minimum of seven years. It was new-found money for PE firms.
Of major concern, per the author, is the sheer number of major U.S. companies are now owned/run by PE firms, and how many of these companies could go bust in the future because of excess debt. Like a consumer loan, where the lender receives their return on investment before any principle is paid down, PE firms tend to suck their investments, plus profits, out of a company before the company has improved enough to stand on its own two feet. At their worst, PE firms get their money back. But, more likely, they get their money back and more, primarily by distributing handsome dividends to their investor/shareholders, at the expense of the acquired company.
Per the book, about half of the major takeovers by PE firms have resulted in bankruptcies. Allied Stores, Burlington Industries, Federated Department Stores and Owens-Corning are on this list of casualties. A rare success was the PE takeover of General Instruments, the history of which has a chapter in the book.
PE firms argue that they take over companies to make them more profitable, to save them, and, as a result, to create more jobs. But the string of well-known names of companies taken over, overburdened with debt, reduced of many seasoned employees and more, goes on and on: Hertz Rent a Car, Warner Music and KB toys are but a few examples. The book gives detailed information about how firms like Bain Capital, under Mitt Romney, did their thing to mattress company Sealy in 1997. It is not, for the most part, a pretty picture. KB Stores, another Bain Capital takeover, as the result of its bankruptcy, closed 600 stores and fired 5,000 employees. Bain Capital, it would appear, still made a profit in the failure at KB. Another concern is that PE firms seem to like takeovers of medical and/or hospital firms.
By 2008, there was more PE action in England than in the U.S., and a chart in the book shows that the "influence" of PE firms in 2007 was less in the U.S. than in six European countries, including the United Kingdom. Right behind the U.S. in this chart is France, Finland and a host of other European nations.
Back in the U.S. and on Wall Street, there is a mutual fund that represents investments in PE firms and Hedge funds: Fortress Investment Group. And PE firms are also into Initial Public Offerings (IPOs) as a way to make money. The scale of PE wealth and ownership is incredible, as PE firms apparently own about 2,000 American companies which have approximately six million Americans working for them.
If PE firms had goals of improving company performances, increasing jobs and all, then things could be fine. But, per the author, "the only winners in private equity are the partners...." The well-known "carried interest" tax loophole is still on the books. The industry, collectively, controls about $500 billion in investable money, or more. Its power of the PE industry may be too great to control, by government or even by itself.
For the most part, the author seems to see himself as a messenger, not a solution.
But he does give us a reference for up-to-date information: [...]
A PE [private equity] company wants to buy a well performing company with an LBO [Leveraged Buyout Offer] in order to loot the company for as much cash as possible. First the PE firm finds investors, usually retirement funds because they promise extremely unrealistic return percentages, and then they put up about 10% of the purchase price and borrow the rest from a fee loving bank. They get the company.
OK, the first thing the PE firm does is take out a huge amount of loans, or more accurately, they make the successful firm they just bought take out loans in *the name of the firm* -- that means the business is liable, not the PE firm (who also scored a transaction fee from their investors as part of the deal). Then the PE firm fires 5-10% of the company workforce, usually the entire research division and most of customer service, in the name of 'leanness', but what they are really doing is raising as much short term cash as possible. The goal of the PE company is to flip this (formerly) successful business after gutting it of money. If the successful company is a conglomerate, the PE firm 'spins off' and sells the less profitable divisions as separate companies (after loading them with debt).
At this point the PE firm is sitting on a pile of money. First they use this money to pay off the bank loan which they took out to buy the company, which is why banks love PE firms -- fast loans, some paid off, some sold off as arcane securities (CDO's) and huge fees accrued. Next the PE firm issues dividends to themselves for 'leadership', and they may include the CEO, CFO, or board members in this windfall, if those people were instrumental in selling the cash cow company to the PE firm. At this point the PE firm has always made it's money back, maybe more. The firm may stay on for about 3-5 years, milking the cash cow before it dies of starvation, because paying off company debt is federally tax deductible in the USA. Depending on the robustness of the company, they may issue one or more IPO (Initial Public [stock] Offerings) to raise additional money, or alternatively, make the company take out more loans to issue more dividends to the PE firm.
After the PE firm has bleed the formerly healthy company dry of assets, they sell it, or let it go bankrupt, re-investing *as little as possible* back into the company. In the spirit of the 'quick flip', once a PE firm has quadrupled it's investment, the company is often sold to another PE firm, which proceeds to cut deeper, loot harder, until bankruptcy happens.
This will eventually precipitate a crisis of some sort when all these unpayable loans taken out by companies controlled/owned by PE firms come due. The author estimates about 3 million American jobs will be lost from this looting of industry.
In a nutshell, that is what a PE firm does. For more supporting details and additional money making obfuscations, read the book. Kosman really taught me about how Private Equity enriches a handful of connected men at the cost of thousands of jobs.
Most recent customer reviews
This should be required reading in High School and College.Read more