Are LBO's coming back when the broader market is about to hit
new all-time highs?
Leveraged buyouts (LBO's) occur when management works with private
equity or other partners to buy all of the stock of a company with
the hopes that managing it privately will result in higher
profitability. You usually see a LBO when the market is depressed
and the stock is not "fully valued" by investors.
The old formula called for private equity companies to come in and
buy a company. The experts would then come in and clean up what
they could, which generally means a whole lot of people get fired.
Management would then have the company raise several hundred
million dollars in debt. The money would then be used to pay a
one-time dividend to the owners. The company, having seen its
expenses contract, is likely to show greater profitability and is
then sent back to the public via another IPO.
Lately we are seeing a new trend in the LBO market. The founders
are coming back and looking to bring their old companies private
because they believe they can run them better. The two great
examples of this are
). Each is an interesting story in its own right, but the concept
of the LBO and why the founders are risking billions of their own
dollars is a lesson that needs to be learned.
Chairman Richard Schulze, who founded the company and owns about 20
percent of its stock is looking to work with private equity groups
to take the company private. The goal here is that the company
generates plenty of free cash flow, so the new owners would likely
look to use that to pay the interest on any new debt or loan taken
out to acquire the company.
Shares of the retailer fell 49% in 2012 as investors were concerned
that consumers were using the store as a showroom for later
purchases made online at sites like
). Buyout discussions date back to August, but little has happened
outside of rumors since then. One thing is certain, the potential
total value of the deal has contracted by a big amount.
The thing to learn from this deal is that just because some wants
to buy something, it doesn't mean you should too. Since the August
talk of a buyout started, the stock has dropped a little more than
17%, and that comes after 32% increase from January 7 to present
A more recent story is that of Dell, and its founder Michael Dell
moving to secure private equity and an investment from
) to take the company that bear his name private. Dell holds
approximately 16% of the company and has billions more invested in
MSD Ventures, his investment vehicle.
News the LBO deal for Dell hit on January 14, and was discussed as
a deal that is hard to get done... at least until the news of a
Microsoft participation of for as much as $3 billion hit the wires.
Dell has been under fire from
) a company that has innovated around products where the Dell model
called for the removal of unnecessary costs in the supply chain.
After the majority of costs were removed, there wasn't much else
for Dell to do. Apple, on the other hand, developed iPods, iPhones
and iPads and owned the "coolness" factor.
The take away from the Dell deal is all about the cloud. Maybe you
have heard about this thing call the internet and how companies are
moving to have all their software or programs accessible from the
cloud. This means they will need a significant backbone in the form
of servers to handle the traffic and storage space required for
such a move. Dell's most recent quarter saw consumer sales struggle
and server sales skyrocket.
Who else could be on the list?
I took a look around for other stocks that could be the focus of
) tends to fit the bill with a founder holding a large stake in the
company. Barry Diller has made many deals in the internet space but
yet the stock is down slightly over the past year.
Some good free cash flow and a lower price over the last year does
not make a stock a must have in a portfolio. It does, however, lend
itself to the discussion of an LBO which may be enough to make a
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