Are there any examples where a company was purchased via a leveraged buyout and the company went on to be more profitable afterwards? Because the only examples I know of resulted in the purchased company going bankrupt fairly quickly.
First of all, investment banks are awash in capital thanks to 14 years of ZIRP and massive profitability. They don't like keeping cash on hand, so that means they dole it out into investments, some of which will flop.
Second, banks are the primary creditor in these deals, meaning they get paid first. They don't do these deals without ensuring that the company has enough saleable assets to ensure they get their pound of flesh. Lots of companies have billions in pension-earmarked reserves they don't have to pay out on if they declare bankruptcy. Guess who gets first dibs on that cash.
Third, they can shift the risk by selling their interest in these companies to another party. They are not stuck with it forever.
Image you have a goose that lays golden eggs. You could just keep selling the eggs every year but somebody comes up to you and offers you 2 billion dollars now and the public market values your golden egg business at 1.5 billion dollars so it seems fair.
It turns out that if you kill the goose there's a cache of 3 billion dollars worth of eggs within it.
The goose is gone and everybody made money off of it's demise.
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PE (not always) is effective at finding under-valued companies and ensuring that they record the value on the PE's books.
Because it sometimes works. But it also sometimes destroys the companies.
But the “works” here is to just make PE richer in the short term, not to actually improve the company in the long term. That short term thinking leads to many impractical decisions that have caused bankruptcies
Because the goal is short term profit, not long term business success. It makes absolutely no difference if the company survives the process or not, what matters is that the PE firms extract their money from the process.
I think if you actually reflect on the matter you would realize that PE firms need to be able to sell the business in order to make money, and that they do in fact sell the business for a profit in the majority of cases. The extremely rare cases of yore where you could buy a business for less than the value of its assets and simply sell off the assets and leave the carcass for bankruptcy are long gone.
leverage increases the disparity of returns (so some companies are definitely out of business because the of the leverage put on them) but by far the vast majority of LBO’s are at least moderately successful.
Many sports teams come to mind. Pretty much any F1 team that exists is now worth a lot more on paper than it was purchased for. A few EPL teams come to mind too.
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“ The Glazer family’s acquisition of Manchester United remains controversial to this day.
Their £790m takeover in the summer of 2005 came by way of a leveraged buyout: when a significant amount of borrowed money is used to fund the acquisition of a company, with the debt secured against that company itself.”
I don't think you're right. During its last fiscal year on the stock market, Twitter reported a net loss of $221 million.
We don't have exact insights to X.com's books, but we have credible reports from the Financial Times that they produced over a billion dollars in ebitda in 2024. This is completely possible with a 50% revenue drop. They laid off 80% of the company, something like 6,000 people.
Beautiful turnaround if those figures are reliable, but like Munger calls them, EBITDA tends to bullshit metrics derived by cobbling up bullshit to hide that a company is losing cash.
Just like Figma booking $700M in 2023 profits which was only possible because of the $1b Adobe breakup fee. Proceeded to lose $732m on $749m in revenues the very next year.
A big part of why Twitter needed to cut expenses drastically after the buyout was that it suddenly had an extra >1$ billion of yearly debt repayments to handle.
Did not helped they alienated paying customers (as in companies selling ads) at around the day 2 by literally ignoring them and not providing the service.
IIRC Musk wanted to get an LBO, but wasn't able to find anyone willing to loan the money.
Keep in mind that a LBO is actually a good deal for the bank, because if the purchased company goes bankrupt, the bank can recoup their investment by liquidating the company.
However, that only works if there are assets to liquidate. This can include physical assets, valuable IPs, or favorable lease agreements. In other words, anything that someone else would want to purchase.
Twitter, being a website, doesn't have a whole lot of assets they could sell. Which meant that other collateral was required for Musk to secure financing.
> However, that only works if there are assets to liquidate
Ownership of the company itself can be sold, but this only works if there's someone who believes the company was overvalued. Unfortunately for Musk, Twitter's market cap dropped by tens of billions between the time he locked-in his offer and the deal's effective date. It's hard to find banks to fund your LBO when you're paying significantly more than what the market believes the company is worth.
