Can someone explain to me the advantages of a private equity firm taking over a public company?

[Narmer]

To me, it seems like once they've bought the company, they streamline it until there is zero fat and then load it up with debt. They eventually put it back on the block but loading a company up with debt (especially one that had little to no debt before) is bad for the owners. Furthermore, once you cut all the fat, how do you expect the company to grow organically? Fat can mean R&D. The new managers may be good, but are they looking out for the long-term or just short-term (once they sell the company and reap the profits)?

 

[ultimatebob]

I'm not an accountant, but I think that there are tax and regulatory advantages to being privately held.

 

[halik]

right now? Don't have to waste money on sarbanes oxley...

 

[Schadenfroh]

Advantages:
[*]Do not have to disclose to the public information about cost of manufacturing and other things, which if you are selling your product via third parties, this can piss them off when they know certain things about how much you are charging them and how much it costs you.
[*]Company no longer has to go through as much paper work that arose after Enron / WorldCom

 

[JS80]

customer point of view: neutral
employee with stock opion/ownership stake: cash out of shares, if you get fired get severance
employee without ESOP/ownership stake: get fired with severance

 

[iversonyin]

What you said only happen 3-4 % of all the private equity take over. Most private equity take a firm over because they see profit potential. Once the company is private, they can do a lot more than it was public. (not require to satisfy any public shareholders, no require to report financial statements). They usually bring the company private, fix it up, bring it to profitability and readjust the balance sheet before bringing it back to public.

What you mention started to happen because private equity these days are awash with cash. The one quick way to make a quick return is to borrow in the debt market (because its so cheap to borrow), buyout the company with the debt, then they pay themselves some absurd amount of fees for managing the company. (that's why cash loaded company are attracted) I think Hertz is a good example of that.

 

[iversonyin]

Originally posted by: JS80
customer point of view: neutral
employee with stock opion/ownership stake: cash out of shares, if you get fired get severance
employee without ESOP/ownership stake: get fired with severance

The customers might actually get better services/products because the private equity is trying to turn things around.

 

[Dr. Detroit]

No more SOX-404 compliance.

With reduced costs from not having to do SEC filings the Company should be able to focus on its core competenicies rather than on the regualtory environment it operates in.

 

[Narmer]

Originally posted by: iversonyin
What you said only happen 3-4 % of all the private equity take over. Most private equity take a firm over because they see profit potential. Once the company is private, they can do a lot more than it was public. (not require to satisfy any public shareholders, no require to report financial statements). They usually bring the company private, fix it up, bring it to profitability and readjust the balance sheet before bringing it back to public.

What you mention started to happen because private equity these days are awash with cash. The one quick way to make a quick return is to borrow in the debt market (because its so cheap to borrow), buyout the company with the debt, then they pay themselves some absurd amount of fees for managing the company. (that's why cash loaded company are attracted) I think Hertz is a good example of that.

If what you say in the second paragraph is true, then who the f**k would want to invest in a company that's loaded with debt when it's being resold to the public? Furthermore, the target companies should charge a far higher price if they have little to no debt considering this is the game that private equity plays with companies.

 

[JS80]

Originally posted by: iversonyin

Originally posted by: JS80
customer point of view: neutral
employee with stock opion/ownership stake: cash out of shares, if you get fired get severance
employee without ESOP/ownership stake: get fired with severance

The customers might actually get better services/products because the private equity is trying to turn things around.

agree, but there is no immediate effect to the customer

 

[IGBT]

..many municipalities are contracting in house work to private companies especially in the transportation industry (mass transit). because of union contracts and narrow work rules it's cheaper and faster to unload the work to a private contractor.

 

[db]

About making money for the equity partners. Usually the employees take a hit in the form of layoffs or cut wages. Capitalism--our unofficial national religion.

 

[iversonyin]

Originally posted by: Narmer

Originally posted by: iversonyin
What you said only happen 3-4 % of all the private equity take over. Most private equity take a firm over because they see profit potential. Once the company is private, they can do a lot more than it was public. (not require to satisfy any public shareholders, no require to report financial statements). They usually bring the company private, fix it up, bring it to profitability and readjust the balance sheet before bringing it back to public.

What you mention started to happen because private equity these days are awash with cash. The one quick way to make a quick return is to borrow in the debt market (because its so cheap to borrow), buyout the company with the debt, then they pay themselves some absurd amount of fees for managing the company. (that's why cash loaded company are attracted) I think Hertz is a good example of that.

If what you say in the second paragraph is true, then who the f**k would want to invest in a company that's loaded with debt when it's being resold to the public? Furthermore, the target companies should charge a far higher price if they have little to no debt considering this is the game that private equity plays with companies.

A company that has debt and profitable is still a decent company to invest in

Why would the company get sold the first place? Huge incentives for those who make those kind of decisions...they get a piece of that big management fee...shareholders get immediate 20-30% premium. The only people that get screw over is the inefficient managers and workers they are going to layoff.

Look at Hertz, its a good example.

And let me ask you this, you can pick a profitable company that has more debt vs a company thats losing money and has not much debt on the balance sheet. On top of that the company with more debt is more efficient. Which one will you invest in?

Growth and profitability is what drive stock price, not the amount of debt.

 

[Syringer]

The main reason to go public in the first place is to raise money by selling shares of your company. Of course as said above, there are many sacrifices in doing so..so once you're profitable and don't require much funding anymore, going private can make a great deal of sense.