Turnaround (Private Equity, LBOs, MBOs, etc.)

[MadMoney]

It has been over a year, but I am back to learn more about Communist views on lots of things y'all probably never think about. I want to keep things civil and educated, so if you want to bash me/others be funny and brief. If you want to make a real argument, please be knowledgeable and concise. Anyway...

I realize y'all dislike "capitalism" and want to shake things up. I have no idea what the future holds. Maybe y'all will start the revolution tonight and soon I'll be dead. Regardless of what our future as a whole looks like it seems to me that if we are going to live in any functional society, efficiency is better than inefficiency. More specifically an organization that produces more or wastes less is better than one that serves the same function but produces less or wastes more.

In private equity, the goal is to create value by purchasing controlling interest in a private company, public company, part of a company, etc. and improving its efficiency (often by eliminating upper management but retaining most employees). Once the improvements have been made, the company is "exited" through a sale or IPO at a price that is higher (hopefully) than the price for which it was purchased. These transactions take place all the time and, to me at least, seem to be a great way to benefit everyone.

Why?

1. The original owner(s) of the acquired company benefits because they voluntarily sell their business for more than they thought it was worth (otherwise they would not sell it).

2. The employees and investors of the private equity fund benefit by earning a profit after the turnaround and exit (if they do it right).

3. The acquirers of the new and improved company benefit because they now own part of a more functional enterprise, which they believe is worth more than the price they paid for it (otherwise they would not willingly buy it (or a portion of it)).

4. Consumers benefit because now the product or service provided by the organization is either better, costs less, or both.

So, what is inherently "bad" about what is happening here (aside from any sort of dislike of profits)? Additionally, without a profit motive, what will be the incentive to improve inefficient organizations in a communist state? Further, even if there is an incentive, how would one get rid of the wasteful and/or incompetent leaders of the original organization (a typically necessary step of a successful turnaround) if there is no system of private ownership?

[RGacky3]

efficiency is better than inefficiency. More specifically an organization that produces more or wastes less is better than one that serves the same function but produces less or wastes more.


Its not black and white, keep in mind whos interest its serving, for example in a society where many people go hungry, a slightly less efficient farming company is worth much more than a much more efficient ipod making company (not in market terms but in social terms, in market terms its just wherever the money is).


In private equity, the goal is to create value by purchasing controlling interest in a private company, public company, part of a company, etc. and improving its efficiency (often by eliminating upper management but retaining most employees). Once the improvements have been made, the company is "exited" through a sale or IPO at a price that is higher (hopefully) than the price for which it was purchased. These transactions take place all the time and, to me at least, seem to be a great way to benefit everyone.


Thats not the way it works in the real world, people who buy stock rarely have actual control of a company, they are basing it of trends. People that control the company many times dont' have much of an interest in the long term well being of the company, its quarter to quarter bonus to bonus, and they can always leave and are many times involved in many other companies.


1. The original owner(s) of the acquired company benefits because they voluntarily sell their business for more than they thought it was worth (otherwise they would not sell it).

2. The employees and investors of the private equity fund benefit by earning a profit after the turnaround and exit (if they do it right).

3. The acquirers of the new and improved company benefit because they now own part of a more functional enterprise, which they believe is worth more than the price they paid for it (otherwise they would not willingly buy it (or a portion of it)).

4. Consumers benefit because now the product or service provided by the organization is either better, costs less, or both.

Some problems, perpetual growth is impossible, people will take as MUCH out of a system and put as little into it, so someone that aquires a company could actually make much more money doing that then they could building it up, even if they build it up, its not gonna really benefit the employees that much.

Also it depends what consumers, a company that used to build affordable housing might find out more money can be made in mansions, so there are less people in the affordable housing market, price goes up for low end housing, poor people get hosed, the rich have a larger market for them (thats what always happens), so the consumers cannot be put into a block, class has to be taken into account.


So, what is inherently "bad" about what is happening here (aside from any sort of dislike of profits)? Additionally, without a profit motive, what will be the incentive to improve inefficient organizations in a communist state? Further, even if there is an incentive, how would one get rid of the wasteful and/or incompetent leaders of the original organization (a typically necessary step of a successful turnaround) if there is no system of private ownership?

Profit motive does'nt nessesarily make things more efficient, it makes things geared more toward money, and those with money.

Whats bad about it is it creates an ologarchy and essencially a tyranny of the rich over the rest.

In a communist society the incentive would be to make your life better, instead of being decided by wealth however, its decided democratically, efficiency would be driven by wanting to get more for less essencially, if your gardening there is no monitary profit motive, you want to have a nice garden for less work, its the same thing with communism, however when many are involved its decided democratically rather by wealth.

Private ownership would be replaced by democratic ownership.

[Dean]

It has been over a year, but I am back to learn more about Communist views on lots of things y'all probably never think about. I want to keep things civil and educated, so if you want to bash me/others be funny and brief. If you want to make a real argument, please be knowledgeable and concise. Anyway...

I realize y'all dislike "capitalism" and want to shake things up. I have no idea what the future holds. Maybe y'all will start the revolution tonight and soon I'll be dead. Regardless of what our future as a whole looks like it seems to me that if we are going to live in any functional society, efficiency is better than inefficiency. More specifically an organization that produces more or wastes less is better than one that serves the same function but produces less or wastes more.

In private equity, the goal is to create value by purchasing controlling interest in a private company, public company, part of a company, etc. and improving its efficiency (often by eliminating upper management but retaining most employees). Once the improvements have been made, the company is "exited" through a sale or IPO at a price that is higher (hopefully) than the price for which it was purchased. These transactions take place all the time and, to me at least, seem to be a great way to benefit everyone.

Why?

1. The original owner(s) of the acquired company benefits because they voluntarily sell their business for more than they thought it was worth (otherwise they would not sell it).
Conceivably. However, there is capital fraud (in particular in the form of mortgage fraud http://www.npr.org/blogs/money/2010/07/23/128720556/atc-flipping) which frequently translates into good-faith sellers being exploited.


2. The employees and investors of the private equity fund benefit by earning a profit after the turnaround and exit (if they do it right).
Employees do not typically have much stock in a company, but a lot of stake. I have never had a job where increases in its marginal profit rate translated into increased wages or compensation. What about hostile takeovers?


3. The acquirers of the new and improved company benefit because they now own part of a more functional enterprise, which they believe is worth more than the price they paid for it (otherwise they would not willingly buy it (or a portion of it)).
That's assuming that it was a 'good-faith' purchase whose business model was to expand and enrich the purchased company, not to eliminate it as competition.


4. Consumers benefit because now the product or service provided by the organization is either better, costs less, or both.
Except in cases where lower quality or increased prices, or both, are deemed to be more successful business models.


So, what is inherently "bad" about what is happening here (aside from any sort of dislike of profits)? Additionally, without a profit motive, what will be the incentive to improve inefficient organizations in a communist state? Further, even if there is an incentive, how would one get rid of the wasteful and/or incompetent leaders of the original organization (a typically necessary step of a successful turnaround) if there is no system of private ownership?
What's "bad" is that acquisition and utilization of capital toward fulfillment the profit motive is also a competition between the purchaser and seller, both of labor and of commodities and capital, to achieve the best possible outcome - atomized consumers and laborers are not in possession of the same tools that capitalist firms are, so there is no "fair" competition, but rather, an increasingly stratified economy which proves every day that the above "benefits" you point to are not as compelling as the centralized economic power endemic to capitalism: http://www.businessinsider.com/not-everyone-is-hurting--the-rich-get-richer-as-the-income-inequality-gap-explodes-2010-3

[Bud Struggle]

Conceivably. However, there is capital fraud (in particular in the form of mortgage fraud http://www.npr.org/blogs/money/2010/07/23/128720556/atc-flipping) which frequently translates into good-faith sellers being exploited.


True, but there is Stalinism, Kimism, Maoism, etc., which leads to good faith Socialist being exploited.

[RGacky3]

we're not talking about that bud.

[MadMoney]

Employees do not typically have much stock in a company, but a lot of stake. I have never had a job where increases in its marginal profit rate translated into increased wages or compensation. What about hostile takeovers?

I meant the employees of the PE fund in this circumstance. They earn their bonus based on success.

Hostile takeovers are something completely different than what is being discussed here.


Except in cases where lower quality or increased prices, or both, are deemed to be more successful business models.

This is NEVER a successful (profitable) long-term business model. If you can provide an example that shows otherwise, I will be shocked beyond belief.


Its not black and white, keep in mind whos interest its serving, for example in a society where many people go hungry, a slightly less efficient farming company is worth much more than a much more efficient ipod making company (not in market terms but in social terms, in market terms its just wherever the money is).

I am simply talking about improving one company to create value, not the relative merits of two different kinds of companies.


Thats not the way it works in the real world, people who buy stock rarely have actual control of a company, they are basing it of trends. People that control the company many times dont' have much of an interest in the long term well being of the company, its quarter to quarter bonus to bonus, and they can always leave and are many times involved in many other companies.


Please read my post before replying. I am talking about purchasing controlling interest not buying a minority share in a public company. However, you are right that there can be serious principal-agent problems, but PE firms try to fix these through their turnaround process.


Also it depends what consumers, a company that used to build affordable housing might find out more money can be made in mansions, so there are less people in the affordable housing market, price goes up for low end housing, poor people get hosed, the rich have a larger market for them (thats what always happens), so the consumers cannot be put into a block, class has to be taken into account.

This is a topic for another post, but this seems to just be a market correction. Anyway, if suddenly the supply of affordable housing did not meet the demand of "poor people" than surely there would be a tremendous opportunity for new entrants. Either way, let us just assume that the target customers of the acquired company does not change.

Aside from "rich getting richer" arguments, what is fundamentally wrong (from a rev left perspective) with the sort of transactions I have described?

[McCroskey]

2. The employees and investors of the private equity fund benefit by earning a profit after the turnaround and exit (if they do it right).


In my opinion, what is wrong is that this never happens. Profits achieved by a private company never result in the improvement of conditions for employees. In fact, for a turnaround of a company to be possible, 99 out of 100 times it involves a reduction in costs, to appeal to potential buyers, and this reduction in costs always come from te employee side. The usual move for a company to increase its market value is reducing employee costs, ie wages, conditions, protection, etc. If you look at it, every time a company changes hands is bad news for the workers.

[MadMoney]

Quote:
Originally Posted by MadMoney
2. The employees and investors of the private equity fund benefit by earning a profit after the turnaround and exit (if they do it right).


Maybe I confused you guys. What I meant by this point is that the investors and the partners, associates, analysts (managers/employees) of the private equity fund benefit through this transaction. It does not make sense to lump these individuals into the same category as employees of the acquired company.

[Dean]

I meant the employees of the PE fund in this circumstance. They earn their bonus based on success.

Hostile takeovers are something completely different than what is being discussed here.
You can't claim that acquisition or sale of capital is consistently beneficial and then simply rule out the cases where it is not, in fact, beneficial. You're just escaping to a safer edifice - unfortunately, in doing so, you totally discredit your argument.


This is NEVER a successful (profitable) long-term business model. If you can provide an example that shows otherwise, I will be shocked beyond belief.
Planned obsolescence is a form of degraded quality.

This point alone shows how delusional you are about the business world. There are plenty of cases where better - or worse quality, and higher or lower pricing is considered a better business model.

I'll give you a personal one. I work for a small business whose pricing is absurdly low. If I took it over, I'd raise prices, because they are not making up for a lot of the basic costs that go into their business model, etc.

In addition, there are many cases where too much capital is spent on quality parts. We sell industrial tape machines, and they could use chrome feed wheels which would last forever. But it would cut into two revenue streams:

-replacement part sales to replace the inferior polyurethane feed wheels
-initial costs to build the tape machines.

If the given management today had taken over that company when they were still using the superior feed wheels, they would have an incentive to downgrade. The mere fact that they have a choice today and choose to stick with the inferior part proves my point succinctly.

In other words, you're a childish idealist who thinks that the business world consistently translates into the "good" outcome: better prices, better quality. I doubt you've had any serious relationship with the dealings of any business, or that you've engaged in any serious study of economics on any scale.

[MadMoney]

You can't claim that acquisition or sale of capital is consistently beneficial and then simply rule out the cases where it is not, in fact, beneficial. You're just escaping to a safer edifice - unfortunately, in doing so, you totally discredit your argument.


I agree that not every sale is good, that is why I qualified the deals I am talking about as successful one. In fact, many deals lose value for shareholders (negative NPV). But, typically this is in the realm of strategic acquisitions. The point of this post was to address the beneficial aspect of capital in removing waste and inefficiency from an organization.


This point alone shows how delusional you are about the business world. There are plenty of cases where better - or worse quality, and higher or lower pricing is considered a better business model.

I'll give you a personal one. I work for a small business whose pricing is absurdly low. If I took it over, I'd raise prices, because they are not making up for a lot of the basic costs that go into their business model, etc.

In addition, there are many cases where too much capital is spent on quality parts. We sell industrial tape machines, and they could use chrome feed wheels which would last forever. But it would cut into two revenue streams:

Higher pricing to cover costs makes sense in the short term, but it creates no advantage. Prices are not only determined internally but by outside forces as well. Consumers of these goods could easily choose a new supplier if prices went up, so the BEST way to turn around this business would be through an attempt to lower costs.


In other words, you're a childish idealist who thinks that the business world consistently translates into the "good" outcome: better prices, better quality. I doubt you've had any serious relationship with the dealings of any business, or that you've engaged in any serious study of economics on any scale.

Ad hominem would only impress me if you were funny about it. I have no desire to present you with my work experience or education, however, you could not be more off base in your assumptions.

Regardless, I feel you, and a few others who have posted, have missed my key point (or perhaps I did not make it as clear as I should have). Capital and the profit motive can help to eliminate waste and increase efficiency in an organization. How would a communist society improve underperforming organizations?

[Dean]

I agree that not every sale is good, that is why I qualified the deals I am talking about as successful one. In fact, many deals lose value for shareholders (negative NPV). But, typically this is in the realm of strategic acquisitions. The point of this post was to address the beneficial aspect of capital in removing waste and inefficiency from an organization.
Wow, so you're only interested in discussing capital sales which result in good outcomes (what you consider "successful" acquisitions). Too bad that this qualifier only further discredits your argument.

"Let me defend increased spending on project Y, but I'm only interested in discussing the positive outcomes." Get real, kid.


Higher pricing to cover costs makes sense in the short term, but it creates no advantage. Prices are not only determined internally but by outside forces as well. Consumers of these goods could easily choose a new supplier if prices went up, so the BEST way to turn around this business would be through an attempt to lower costs.
No, it wouldn't be the best way because you're not fucking listening. Their prices are too low. that is to say, if 7-11 decided that $1.50 was a good price for a bag of chips, these people would look at the same data and think that $0.78 is a good price. Its not, and if I or any other person acquired the business, pricing would go up, end of story.



Ad hominem would only impress me if you were funny about it. I have no desire to present you with my work experience or education, however, you could not be more off base in your assumptions.

Regardless, I feel you, and a few others who have posted, have missed my key point (or perhaps I did not make it as clear as I should have). Capital and the profit motive can help to eliminate waste and increase efficiency in an organization. How would a communist society improve underperforming organizations?
Wait, now its "eliminate waste and inefficiency"? Which are you going to go for?

Both those ideals would lead to inferior products. In terms of inefficiency, well that's precisely what a business model is that doesn't have prices high enough to get the most profit out of each unit - an inefficient business model.

I'm guessing you're "shocked" now. :laugh: You wouldn't be if you weren't such an idiot that you think you can assert ideals onto market phenomena.

[MadMoney]

Wow, so you're only interested in discussing capital sales which result in good outcomes (what you consider "successful" acquisitions). Too bad that this qualifier only further discredits your argument.

"Let me defend increased spending on project Y, but I'm only interested in discussing the positive outcomes." Get real, kid.


I think you misunderstand my point. Yes, poor transactions occur. People make mistakes. However, many successful acquisitions and sales do take place. I want to know your opinion on these sorts of transactions.


No, it wouldn't be the best way because you're not fucking listening. Their prices are too low. that is to say, if 7-11 decided that $1.50 was a good price for a bag of chips, these people would look at the same data and think that $0.78 is a good price. Its not, and if I or any other person acquired the business, pricing would go up, end of story.


Perhaps in this case the only solution for business is to raise prices or stop doing business. However, raising prices above the market price would lead to them being out of business soon either way. Damned if they do damned if they don't.

BUT, a proper long-term business model is never to raise prices above the market rate. On the same note, trying to always be the least expensive is not sustainable in the long run unless the organization has a unique advantage that allows it to do so, but this is a topic for another post.


Wait, now its "eliminate waste and inefficiency"? Which are you going to go for?

Both those ideals would lead to inferior products.


Eliminating waste and inefficiency does not necessarily lead to an inferior product. Adjusting for inflation almost everything we have now costs less than it did 20 years ago. In the case of a typical private company that is acquired, it is very common to see redundancies in its operations. Eliminating these without sacrificing the integrity of the product/service is the goal.

Yes, it doesn't always work. But many times it does. Still, you have not told me how in a communist state one would rejuvenate a failed institution that is suffering from improper management in a peaceful manner.

[Dean]

I think you misunderstand my point. Yes, poor transactions occur. People make mistakes. However, many successful acquisitions and sales do take place. I want to know your opinion on these sorts of transactions.
No, you're trying to promote the capitalist system by painting acquisitions as positive changes in the economy. Its ludicrous to discuss the issue and then say you're "no interested" in discussing contrary examples. You're a fraud.


Perhaps in this case the only solution for business is to raise prices or stop doing business. However, raising prices above the market price would lead to them being out of business soon either way. Damned if they do damned if they don't.

BUT, a proper long-term business model is never to raise prices above the market rate. On the same note, trying to always be the least expensive is not sustainable in the long run unless the organization has a unique advantage that allows it to do so, but this is a topic for another post.
We're not talking about the market rate or the equilibrium price or any of that.

You said that you'd be "shocked" to hear of an example where acquiring a business would lead to higher prices in the context of a more rational or efficient business model being implemented. I gave you an example where the company I work at is undercutting the market price by 50% when it could achieve the same level of sales by undercutting at 5% or 10%. It's clearly rational to raise prices.



Eliminating waste and inefficiency does not necessarily lead to an inferior product. Adjusting for inflation almost everything we have now costs less than it did 20 years ago. In the case of a typical private company that is acquired, it is very common to see redundancies in its operations. Eliminating these without sacrificing the integrity of the product/service is the goal.
It doesn't have to, but often does. Quit pretending that all your capitalist ideals line up - they don't.


Yes, it doesn't always work. But many times it does.
Do you have any data which indicate this at all? All you've given is vague assertions, 2 of which I've proven to be flat-out wrong per the above.


Still, you have not told me how in a communist state one would rejuvenate a failed institution that is suffering from improper management in a peaceful manner.
Excuse me, kid, but I wasn't even aware that was the point at all. You were trying to "prove" how the cumulative effect of capital acquisition was positive for all engaged in the processes (at least where it is, since you're narrowing your definition each time to the "good" examples you like). I showed where your edifice was fundamentally flawed.

But I guess that doesn't matter, since examples concluding in negative economic results are "uninteresting" to you. :laugh: That's some real serious critical assessment buddy!

[MadMoney]

No, you're trying to promote the capitalist system by painting acquisitions as positive changes in the economy. Its ludicrous to discuss the issue and then say you're "no interested" in discussing contrary examples. You're a fraud.


No. Not all are. I have conceded that many are poor decisions when it comes to M&A, especially in the realm of strategic acquisitions. However, acquisition and turnaround work in general seems to be a very effective way to improve bloated and failing organizations (Hertz and Kmart for example).


We're not talking about the market rate or the equilibrium price or any of that.

You said that you'd be "shocked" to hear of an example where acquiring a business would lead to higher prices in the context of a more rational or efficient business model being implemented. I gave you an example where the company I work at is undercutting the market price by 50% when it could achieve the same level of sales by undercutting at 5% or 10%. It's clearly rational to raise prices.

Ok, you got me. I concede that to cover costs for this company, raising prices would help their business model. Yet, consider this. If they were to not improve this you claim they will be in a desperate situation. Wouldn't they be more likely to retain current and to hire new employees if they were in a better economic condition? A change in the management through an acquisition and restructuring could actual help the labor your care about.


Do you have any data which indicate this at all? All you've given is vague assertions, 2 of which I've proven to be flat-out wrong per the above.

I am sure I could find data on the success of private equity firms, but there is a reason why PE firms are successful and are considered by employees in the financial sector to be the most coveted place of employment. If their deals weren't successful, PE shops like Carlyle wouldn't be making an average of 30% ROI for decades.


Excuse me, kid, but I wasn't even aware that was the point at all. You were trying to "prove" how the cumulative effect of capital acquisition was positive for all engaged in the processes (at least where it is, since you're narrowing your definition each time to the "good" examples you like). I showed where your edifice was fundamentally flawed.


I am not out to prove anything. I know I cannot change your mind. But, I believe that turnaround through acquisition of capital and operational improvements CAN and often do improve failed institutions. You have dodged the questions I originally posed:

Is there something morally wrong with this from a Communist/Revolutionary/Leftist perspective (aside from typical profit motive stuff)?

Is there a mechanism aside from the profit motive that you believe can be used after/during your revolution to improve failed organizations (which will exist, albeit not as businesses)?

I came here to learn, not to have my perspective turned into a strawman, while my real questions are dodged.