Can someone explain to me how hedge funds bankrupt companies?
In: Economics
Here’s a basic ELI5 way… hedge fund buys XYZ company, which it thinks is underperforming. They spend $1b in hedge fund money buying up the company’s shares to take it private. Then XYZ company borrows $1b to pay back the hedge fund, leaving newly private XYZ company with $1b in new debt to pay back. if hedge fund can actually grow XYZ corp as it believes it can, they additional revenues will allow the company to grow, pay back debt, and eventually be a more profitable company with new growth once debt is repaid. If the company doesn’t see the anticipated growth, however, the debt burden becomes too much and the company ends up in bankruptcy. Maybe it’s a recession, delay in major product launch, growth projections or quick fixes were too optimistic.
Toys R Us, for example, was still cash flow positive as far as selling toys went, but because they couldn’t grow their online sales fast enough, kids were spending fewer years playing toys before moving on to sports or video games, more competition from Amazon, Target, Wal-Mart, people having fewer babies meaning less demand for all the baby products Babies R Us sold, etc. prevented the growth needed to pay down all the hedge fund debt the company was saddled with.
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