Thursday, January 08, 2009

Money Management

As reported in The Hightower Lowdown, the Tribune Company is going under. It was bought last year for $8.2 billion by real estate magnate Sam Zell. Because he didn't have enough cash for the deal, he colluded with the CEO to use the employees' pension fund as collateral for a loan. The crushing interest rates meant that he had to slash payroll to try and make ends meet.

Not only is the deal itself troubling, but I do not see how a company can be bought with borrowed money, and then be profitable enough to pay the loans and make more.

Perhaps the whole idea of large amounts of credit is itself the problem?


Gary said...

Good point

Nick Drew said...

how a company can be bought with borrowed money, and then be profitable enough to pay the loans and make more

there's a trivial answer to this, Sackers ...

(simplifying a bit, = "when the rate of return on the total price paid is greater than the interest-rate on the amount borrowed")

... so I'm missing the point

(obviously I agree the pension-fund scam is bad)

Sebastian Weetabix said...

I'm astonished the pension fund scam is even legal. Nice to know the scumbag is prepared to risk his employees retirement to make himself a packet. As we say in Scotland, it'll be the bad fire for him.

Anonymous said...

Yes, The whole notion of Private Equity deals (which should surely be renamed as Playing with Other Peoples' Money Deals) was daft, and a sure sign that a huge credit bubble was being created. To somje extent the thing was driven partly by the Yen carry-trade - large amounts of cash essentially for free that needed to be turned into something real. The low interest rates meant thing could be bought for nearly free - as long as you had no intention of paying back the CAPITAL! Now the problem is that to avoid paying back the capital you need to roll over the capital into a new loan - bit tricky now of course. Which means I suspect that almost all of these private equity deals will become spectacularly unravelled over the next couple of years. Not that anyone you know will be badly hurt by the fallout - just the mega rich.

Nicks' comment is an over-simplification, since many of these private equity deals were used to buy companies that were not actually making a profit - such as Philips Semiconductor (If these companies had been making a profit then their price would have simply risen to reflect the fact that someone was interested in buying them - absorbing any of the likely profit to the buyers after their loan interest was taken into account.) The idea was to buy crap companies then re-invent them to make them profitable. In the UK we used to call this asset stripping. Problem is that asset stripping in Europe tends to be rather expensive as the social cost of large-scale redundancies hits hard. The new owners find themselves discovering that the old owners were not quite as incompetent as the new owners had suspected - they were just trapped between a rock and a hard-place.

They will learn some painful lessons I think, and will be amongst the biggest losers in the credit crunch.

Sackerson said...

Nick: not me; Padders. But one wonders at the boldness of Zell's purchase, since he had the example of Robert Maxwell and Macmillan to consider.

Paddington said...

The idea of asset-stripping weak companies, pioneered by such souls as Jimmy Goldsmith, has been taken to extremes in the US, and not just in business.

'Obviously', public schools are inefficient and badly run, so let's compete against them. Every place it's been tried, the administrative costs were even higher than before.

Elby the Beserk said...

Indeed. Same way Manyoo was bought. With any luck they will go spectacularly bust in the next eighteen months.

Yes, I am a Citeh fan :-)