We really need a ban on leveraged buyouts where the leverage becomes the responsibility of the purchased entity. You shouldn't be able to borrow money to buy a company, then transfer the debt used to buy the company on to the company itself. Any theoretical arguments about why this is OK or a good idea should fall silent against the repeated observations of what happens in practice and the observable incentive structure created.
Yes that interest shouldn't be tax deductable. The limit on share buybacks being expensible needs to return at least for these leveraged buyouts. And debt aquired for leveraged buyouts and debt used for share repurchase needs to be moved far down the bankruptcy priority tree.
Who is the lender in this deal? Why would they agree to this transfer of debt? Like...if I buy a house with 20% down and then create an LLC and want to transfer the house to the LLC, the bank is not going to approve. Because there's no assets in the LLC to come after in the case of the mortgage being underwater.
This is a private transaction, for the profit of the banks providing the money to perform the buyout.
The banks are betting that the company/brand, once stripped of any valuable assets and being stretched to painful profitability at the cost of its reputation, will last long enough, with enough assets left at bankruptcy, that their high-interest, high-priority debt will be more than repaid.
If the private equity buys a firm in a leveraged buyout, sells off all its assets in a week, and shuts down immediately, it's the banks that get stiffed; The banks aren't idiots.
If you for some reason prioritize long-term survival & good/service provision of the ailing business, you need to take a bite out of the banks funding private equity takeovers that hit chapter 11 ("reorganization bankruptcy") or deprioritize their debt in chapter 7 ("liquidation bankruptcy") to disincentivize them providing funds.
There are certain shenanigans with private equity related to valuation and compensation ("My company is worth $1000, so I'm awarding myself 50% shares as part of a tax exempt retirement plan") that should be not just outlawed, but which should cause the IRS to send a CPA to go back and slap them in the face with a wet trout for having the fucking gall.
The cycle of enshittification that private equity often participates in, is less a problem with the fact of private equity, and more a problem with the giant piles of money in the finance industry growing much larger and taller than the economy they are theoretically structurally resting on. A problem with financialization and wealth inequality itself, with the system designed for upwards wealth redistribution, trying to transfer the last 10% of the world's money (which the poor are using as their medium of exchange) into the same dragon's hoard that has the rest.
> The company is already walking dead; they're just feasting on the corpse. Left alone they'd peter out faster.
Is that actually true, or just a story used to justify the bad actions? There are a lot of meme-stories like the latter, floating to justify all kinds of money-making behavior. People with money have the resources to plant them.
TFA makes a strong argument that that isn't the case.
I would say it's even the thesis of the article. Joann Fabrics was a healthy company with customer demand and zero debt and was basically assassinated by a leveraged buyout.
Except that the vulture capitalists definition of walking dead also includes companies that are profitable and healthy but not perpetually expanding and multiplying revenue every year. God forbid a company grow, reach some sort of local cap on size, then just comfortably exist to deliver a good service without trying to extract everything it possibly can from every customer. That's not walking dead and if all of the companies in the US were satisfied doing that this would be a much better country to live in.
Many things far more complicated than this have been made illegal.
And yes, people will try to wiggle around it. That's what regulatory agencies are for. Yeah, they don't 100% work. Believe me, you're unlikely to out-cynic me.
In practice, a "ban" consists of personal loan guarantees of a certain percentage thereby limiting the frequency and magnitude of this sort of financing.
Essentially, that means some amount of corporate risk is leveraged upon the principal investors.
This is common practice in the EU for so-called "club deals".
Our Best Buy is great. Usually pretty good stock and good variety. People there seem to be pretty nice as well. Bought a laptop there a few weeks ago. The one I wanted was in stock, they had a good price and gave me a fair trade in for my old one. Wife loves the place too as she can try on all their phone cases before she buys. It’s great to have a local option so that is one of the reasons I also choose to support them.
Best Buy price matches Amazon, I get what I want same day, no need to pay a monthly fee for "free" shipping. I used to browse Amazon for reviews (hoping at least some weren't fake) then buy in the real world in person, but now that Amazon is replacing access to reviews with AI summaries (there's a login barrier to see more than the first few) there's no need to go there at all.
I have a similar experience at my local Best Buy stores. I buy most of my electronics from there because I can't trust Amazon to give me a product that isn't counterfeit or defective to some degree. In general I largely prefer to buy things in person these days than have it shipped. No more Prime.
Yes, it's the same reason that I recommend people just buy stuff from Costco if they have the item.
A buyer at Best Buy or Costco explicitly made a decision to stock the item at the store/warehouse, where shelf space is not free. If that item has a lot of returns or complaints, the store will stop selling the product. It takes up space where a better product could be, and returns waste the time of employees.
Amazon doesn't have these controls. Listing an item on Amazon is cheap and Amazon has no incentive to prune their marketplace of junk. The only controls on Amazon are user reviews which can be gamed.
Just be careful with BB when buying some products, like external hard drives. There are many stories on r/datahoarder from people buying HDDs only to plug them in and find the previous buyer has swapped out the drive, resealed it and returned it.
I stopped patronizing Best Buy when their store phone numbers started going to a corporate call center that couldn't tell me if something I was looking for was in stock at the store.
They do show stock on their website. For other things such as price matching their chat service has worked well for me and seems to be backed by real people. I can't remember the last time I tried to call in.
I've had a similar experience with the Best Buy in my area. They also seem to be really good about keeping things in stock that people actually buy (seems like a basic concept, but you would be surprised).
Also they're typically right on par with Amazon's pricing and no need to wait for it to ship, just a quick trip there and back (although they usually get me buying something I didn't go there for) >:(
NewEgg is still great if you specific "Fulfilled by newegg" or whatever magic checkbox stands for "No actually this is a product we have bought and have in our warehouse from a real company and you are paying us to sell that physical item to you from our warehouse"
Of course, that eliminates 90% of their "inventory", but I only ever wanted to buy computer products from them anyway.
The rural Best Buys kind of are terrible. “Middle America” and “Empty Nester” targeted locations really don’t give you anything other than medicore middle-of-the-line product selections. What I’d kill for one of the “Urban Trendsetter” format locations…
Yes absolutely. My local Best Buy is a depressing hollow shell. The drone section is vacant, the PC part area is now vacant (no GPUs, no RAM, no SSDs). I have visited glorious Microcenter in Dallas, which is a long way from here, and a magnitude different (better) experience.
Here’s the part I don’t understand. If they can’t exit, don’t they lose money in spite of the limited downside risk? For example, the Toys “R” Us example:
"$1.3 billion came from the buyers’ own pockets”
"PE consortium collected $470 million in fees and interest over the course of ownership”
Yes, this is exactly the question I always have with the PE narratives - what do the supply-side incentives of PE look like? Is this an overall profitable activity where the vultures and their debt-backers win out? Is it merely profitable for the PE firm but a whole bunch of debt-bagholders lose out? Are those losers corporate junk bond stuffed into retirements funds and whatnot, but the funds' managers are happy with their own fees, and customers don't really notice the slightly lower returns from a few "bad investments" (but are still ultimately being swindled) ?
The article touches on this a little in vague terms, citing some studies, which is more than I can say for most. If this is an economically destructive dynamic, and it most certainly feels like it is, then some type of investor must be losing out, right?? It seems worth it to focus on who those parties are to see if that source of energy can be cut off.
As the article says, leveraged buyouts of retail end in bankruptcy only 41% of the time, and most of those bankruptcies are presumably not a total loss for the banks. So it's just a matter of pricing the loans to ensure the successes cover the losses.
(Why do private equity firms want to be in this business? Because the 59% that don't fail often generate very good returns.)
> (Why do private equity firms want to be in this business? Because the 59% that don't fail often generate very good returns.)
The way they limit their own exposure to risk seems to increase the odds of the targeted business completely failing, though. I think that's the part people have a problem with.
> Amazon is very good at bits but has repeatedly failed at atoms.
This idea of bits vs atoms was stolen straight from the CEO of Uber, Travis Kalanick. During the infamous Silicon-Valley-TV-Show-esque Las Vegas company offsite, one of his big talks was about how Uber had to not only deal with bits, ie. the virtual world, but also atoms, ie. the real world. That made it a bigger challenge than all the other companies like Google, Facebook, etc where they could dictate their own rules since they controlled everything, but Uber didn't have that luxury.
> The list of PE-owned retail chains that have filed for bankruptcy or liquidated includes Toys “R” Us, Payless ShoeSource, Sports Authority, Gymboree, rue21, The Limited, Barneys New York, and many others.
Once again, you can't lump all PE groups into one all cohorts. All of these companies were bought out by Large-cap PE which is notoriously predatory. They may have an overwhelming amount of the drypowder, but in terms of absolutely number of PE groups, there are far more operating in the middle and lower middle market who don't do this.
Counterpoint: I thought it was a useful analysis — I was very disappointed when the local Joann's closed and this added a bunch of context I would not have had otherwise.
As was I, but I don't see how the comparison to Best Buy supposedly aping Amazon is useful when step 1 is "don't go billions of dollars into debt for no benefit."
Readit News
The banks are betting that the company/brand, once stripped of any valuable assets and being stretched to painful profitability at the cost of its reputation, will last long enough, with enough assets left at bankruptcy, that their high-interest, high-priority debt will be more than repaid.
If the private equity buys a firm in a leveraged buyout, sells off all its assets in a week, and shuts down immediately, it's the banks that get stiffed; The banks aren't idiots.
If you for some reason prioritize long-term survival & good/service provision of the ailing business, you need to take a bite out of the banks funding private equity takeovers that hit chapter 11 ("reorganization bankruptcy") or deprioritize their debt in chapter 7 ("liquidation bankruptcy") to disincentivize them providing funds.
There are certain shenanigans with private equity related to valuation and compensation ("My company is worth $1000, so I'm awarding myself 50% shares as part of a tax exempt retirement plan") that should be not just outlawed, but which should cause the IRS to send a CPA to go back and slap them in the face with a wet trout for having the fucking gall.
The cycle of enshittification that private equity often participates in, is less a problem with the fact of private equity, and more a problem with the giant piles of money in the finance industry growing much larger and taller than the economy they are theoretically structurally resting on. A problem with financialization and wealth inequality itself, with the system designed for upwards wealth redistribution, trying to transfer the last 10% of the world's money (which the poor are using as their medium of exchange) into the same dragon's hoard that has the rest.
The company is already walking dead; they're just feasting on the corpse. Left alone they'd peter out faster.
Is that actually true, or just a story used to justify the bad actions? There are a lot of meme-stories like the latter, floating to justify all kinds of money-making behavior. People with money have the resources to plant them.
I would say it's even the thesis of the article. Joann Fabrics was a healthy company with customer demand and zero debt and was basically assassinated by a leveraged buyout.
Why not and how would you stop? It’s no different than a company issuing bonds to buy back its own equity.
I agree that it’s contributing to the enshitification of many end consumer industries, but I’m not sure what such a “ban” would look like it practice.
And yes, people will try to wiggle around it. That's what regulatory agencies are for. Yeah, they don't 100% work. Believe me, you're unlikely to out-cynic me.
It should still be illegal.
Which was illegal until 1982 and could be made illegal again.
Essentially, that means some amount of corporate risk is leveraged upon the principal investors.
This is common practice in the EU for so-called "club deals".
A buyer at Best Buy or Costco explicitly made a decision to stock the item at the store/warehouse, where shelf space is not free. If that item has a lot of returns or complaints, the store will stop selling the product. It takes up space where a better product could be, and returns waste the time of employees.
Amazon doesn't have these controls. Listing an item on Amazon is cheap and Amazon has no incentive to prune their marketplace of junk. The only controls on Amazon are user reviews which can be gamed.
Also they're typically right on par with Amazon's pricing and no need to wait for it to ship, just a quick trip there and back (although they usually get me buying something I didn't go there for) >:(
Me too but I enjoy browsing through the store so it’s (sometimes not so much) cheap entertainment.
Of course, that eliminates 90% of their "inventory", but I only ever wanted to buy computer products from them anyway.
"$1.3 billion came from the buyers’ own pockets”
"PE consortium collected $470 million in fees and interest over the course of ownership”
So they lost $830M on the deal?
The article touches on this a little in vague terms, citing some studies, which is more than I can say for most. If this is an economically destructive dynamic, and it most certainly feels like it is, then some type of investor must be losing out, right?? It seems worth it to focus on who those parties are to see if that source of energy can be cut off.
It's important that firms are not led in a way that prevents them from competing on price, and that may require limiting how they may take on debt.
(Why do private equity firms want to be in this business? Because the 59% that don't fail often generate very good returns.)
The way they limit their own exposure to risk seems to increase the odds of the targeted business completely failing, though. I think that's the part people have a problem with.
This idea of bits vs atoms was stolen straight from the CEO of Uber, Travis Kalanick. During the infamous Silicon-Valley-TV-Show-esque Las Vegas company offsite, one of his big talks was about how Uber had to not only deal with bits, ie. the virtual world, but also atoms, ie. the real world. That made it a bigger challenge than all the other companies like Google, Facebook, etc where they could dictate their own rules since they controlled everything, but Uber didn't have that luxury.
Once again, you can't lump all PE groups into one all cohorts. All of these companies were bought out by Large-cap PE which is notoriously predatory. They may have an overwhelming amount of the drypowder, but in terms of absolutely number of PE groups, there are far more operating in the middle and lower middle market who don't do this.
You mean, until they do.
or consolidate into someone who does.