Typically they cut a bunch of expensive overhead, like employees, which juices the books to make it look much more profitable, then sell to someone else left holding the bag of a dead shell of a company. Cut long term viability for short term gains.
Total shit show.
The owners? The customers? The employees? The country? Competitors? My 401K? The creditors?
Some of these stakeholders net-win when zombies die, and some of them net-lose. The economy isn't a zero-sum game, but particular categories of actions in it can produce net-negative outcomes for one of these groups. You can't just wave a large brush and say that everyone net-wins when this happens. It's a case-by-case thing.
Eddie Lampert's corporate plundering of Sears is an example of just about everyone but him (Maybe including him? It's hard to tell) losing.
> stakeholders
I hate this term. It's a deliberate attempt to blur the boundaries of who owns something and who does not. It's not shoplifting if I'm a stakeholder in this pack of cigarettes, right?
(Eg fire too many employees to cut costs)
But of course that "pure market" viewpoint doesn't take into account the social costs and individual pains these operations entail.
Let’s take Debenhams in the UK as an example
- Used to own all it’s stores - Got bought by PE (who attached the debt they used to buy Debenhams to Debenhams so the PE group now owe zero) - Split the stores from the retail operation but made the retail operation lease them on ever increasing rents - Sold the stores to British Land - Eventually Debenhams retail can’t afford the rents (as they only ever increase), and the debt payments so goes bust
Similar patterns with PE acquired companies not being able to afford their debt payments is common, coupled with PE companies extracting any free cash as a dividend shortly after purchase
What PE companies are doing isn’t culling the weak but extracting the most they can from businesses and then leaving suppliers, employees, pension scheme members to pick up the cost
You look at Toys R Us, and a few other major retailers, it is as you say.
Lastly, "Cutting long term viability for short term gains." actually sounds somewhat noble. Why should a company exist for 50 years when all of its usefulness (i.e. profit) can be extracted in 5? Let everyone move on to something else productive. If you owned an oil well you could exhaust in 5 years, you'd do it, not sip at it for the next 50.
Was an article about this in the Financial Times recently
And whoever invested in the second fund, which for example may be your pension scheme, is left carrying the cost
a) why when you can hold back and affect the price b) this logic had better change soon or we are all screwed with climate
This really only exists in large cap deals. Most middle market deals are actually about long term viability...mainly because they have to sell to other PEs or strategics that will underwrite the long term viability during diligence when they go to buy. Large cap on the other hand will typically try to IPO it where the public investor might be left holding the bag (or creditors, or employees).
Or, do you think sometimes the buyers are not getting a dead shell?
Or maybe that's anecdotal and not necessarily the brought trend.
It isn't so wild when you consider cases like Sears, where Eddie Lampert in effect used a variety of shell companies to sell off the profitable parts to himself.