LBOs coming in 2016
Nothing to fear.
What’s an “LBO”? What’s it mean to you? What are the signs that it is coming?
Leveraged Buy Outs, (LBOs), is a term applied to corporations when they borrow money for the purpose of purchasing a company.
This, (early 2016), is a great time for companies to pursue LBOs because the cost to borrow money is still very inexpensive, relatively speaking. This economic lending period of time is called “easy money”. We also had easy money in the past few years, including 2015.
What makes me believe that LBOs will be the executive craze in 2016 is their behavior last year, in 2015, when so many companies drove their own stock prices way up there by borrowing easy money and using their free cash flow to purchase their own stocks. Of course the underlying motive was to offset the expected slowing stock prices due to lack of revenue and profit growth. It was no coincidence that executives are paid rather handsomely with wads of their own company’s stock in the form of bonuses or employee/executive stock options. Buying back shares can, at times, net some firms as much as a 10% jump in stock price. Now that THAT “bullet” is spent, I don’t expect those executives to repeat that same tactic in 2016. They need another. And, that would be turning to LBOs.
There are a number of common strategies for acquiring companies to pursue LBOs:
- Competitors are suddenly inexpensive and irresistible at, or near, bankrupt prices, whose assets can be acquired at pennies on the dollar instead of at full price.
- Pursuit of a purposeful strategy to become the monopoly player in an industry or segment.
- Acquiring a company that is legally registered to a country other than USA to reduce taxes paid on corporate profits. (This is called a Tax Inversion.)
- Rebranding or rebuilding the brand of the acquired company
- Ripping apart various divisions or “pieces” of the acquired company to sell off each of those parts. Here the premise is not that the sum of the parts will equal the whole. Rather, that selling off the parts, the pieces when sold, will result in far greater returns on investment than would otherwise selling once again the whole company. This particular strategy is likely the only one that will provoke high anxiety in employees. To make the pieces much more attractive to other corporations looking to purchase, the pieces must be made highly productive and relatively extremely inexpensive. Hence, costs, including people costs, must go. This might be the exception to that which was suggested by Kaplan and Stromberg, “… relative employment declines are concentrated in retail businesses. They ﬁnd no difference in employment in the manufacturing sector.” [Source: “Leveraged Buyouts and Private Equity” by Steven N. Kaplan and Per Stromberg. Journal of Economic Perspectives—Volume 22, Number 4—Season 2008. p. 14.]
- Strengthening a product line by broadening into associated classes of products only available at the target firm.
- Setting the stage for entering a market or segment new to the acquiring company. An acquisition can be an accelerated way to enter a new market or niche.
- Effecting a turnaround of a failing company by adding the strengths of the acquiring company.
In conclusion, let me assure you that you need not FEAR the approaching perfect storm for LBOs. If you have any anxiety, your best tranquilizer will be to keep your resume updated and to keep aware of the employment marketplace. That way, you’ll be ready to spring into action almost instantly, if you ever have to.