[Author's note: there really wasn't an entry today, but I see I sparked some interest in my chitchat about hostile takeovers. Here's a little bit more on that topic which I wrote at the same time. Hostile takeovers normally take the form of using a company's own equity to buy out the existing shareholders and pocketing the difference. That equity is usually a big, fat, paid-up employee pension plan.]
A quiet day, one where I will teach about “hostile takeovers”. I haven’t researched this; it is all my opinion of how it is done. The idea is to let future readers follow my logic to see if I got close. Why? Because people around me seem to think it’s complicated and I know, if it happens by management, it cannot possibly be complicated.
Take a factory in business for 100 years. Ma and Pa Kettle worked there, same with their children and grandchildren. The factory was established before “credit” and has built up some fairly large reserves of equity in buildings, machinery and land. It has also established a regular history of paying the bills. Now, at some point, some really dumb point, they raised money by selling company shares on the stock market. Strangers now own part or most of the company.
Years later, say 1980, some crooked operators spot that equity buildup. They see inflated land values, a fat company pension plan and a company full of employees stupid enough to think the pension money is safe and sound (Enron) but these crooks have no money. Not a problem, they offer the shareholders a high price if they will sell their shares to the crooks, who then take over the company. But wait! How can the crooks offer a high price if they have no money?
Easy. There is at least a 30 day lag time between the time you buy and you have to pay. Once you take over the company, you now own value. Borrow to the hilt off the company’s good reputation to pay off those shareholders. Now the company is yours. At first this is easy to do, because you are selling off equity. You no longer own the assets that make the company work, but don’t worry about it. You are never planning to pay off that loan. You are intending to go bankrupt. As major shareholders, you vote yourself some ridiculous salaries of $1,000,000 per day, month, year, whatever, you are now the boss.
Now you begin to gut the company. Bring in your cousin, the efficiency expert. What can be done in Mexico, send south. Quietly sell anything somebody does not use every day. Contract out the labor part of any job function and ignore long term maintenance. Grab that pension plan, sell the land held for future expansion. Begin to stall paying for supplies, capitalize all credit sales, make things look good on paper while you rip out the infrastructure. For a mid-sized business, this can go on for years before some people take notice.
In the end, no land, no plant, no equipment, no equity, no buildings – and no workers and no pay. Everything hits the auction block. And the crooks, bankrupt, do not have to pay back anything. All quite legal, from what I understand. My view, as you picked up, was not the crooks; it was the original decision to sell shares on the market. The market does not care about you or your company, only that they make a killing. The crooks are simply there to satisfy that craving.
True, this only works for certain types of companies in situations they could not foresee. Myself, I always foresee trouble when you borrow money. And “going public” is borrowing money from the public, the worst gang of undisciplined rabble that exists and who would love nothing better than to burn down your house and sift through the ashes for your jewelry. They would love to dance on your grave and divide up the spoils.
Return Home
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
