I somewhat understand how a company in debt may be bought out, but how could another company add debt to buy them out? Does that debt happen before or after they take over the struggling company?
In: Economics
Step 1. Private equity company takes out loans.
Step 2. Buy company with loaned money.
Step 3. Have bought company take out loans.
Step 4. Bought company announces a special dividend to its owners (private equity company). Takes loaned money and gives to its owners.
Step 5. Private equity company pays off its loans with special dividend money.
In theory what should be regulating this is step 3. To get loans, the company must go to a bank who must clear them for loans. If the company is too unhealthy and probably won’t pay off its loans, then the bank won’t offer a loan, step 3 fails.
Generally this isn’t done to kill the company with loans, but more because the people who want to buy the company have some but not enough cash on hand to buy the company.
Toys R Us.
Profitable company. Sold to an equity clearinghouse. They invested nothing in the stores and took out loans (based on the stores’ profitability) until the company was upside down and then they declared bankruptcy.
There was nothing wrong with their stores or their markets. They just got raped for cash and left on the road.
Its a crack addict’s way of doing business and its completely legal and profitable.
dystopian.
Step 1, borrow a lot of money. Step 2, use that money to buy a company. Step 3, transfer the debt to the company. Step 4, ???? Step 5, profit.
It’s not unlike getting a mortgage. You borrow money to buy a house, and the loan is secured by the house you now own.
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