More Big Deals

Leveraged buyout dealmakers have purchased $864 Billion in public companies in the past three years.

$250 Billion has been raised in the past year.

But wait. The number above, “$864 Billion in public companies in the past three years”, that was “public companies”. In the past ONE year there have been $856 Billion in buyouts including public and private companies.

Fidelity, America’s largest fund company with money from the average Joe controls about $1.4 Trillion in assets. The company has been around for decades.

The amount of money flowing into the private equity industry is staggering. Combine this with the amount of money going into Hedge Funds and it is truly mind boggling.

It is as if the US Mint is just printing money and giving it to these guys. Where do they get so much cash? Increasingly it is your pension. I read the other day that companies like Goldman Sachs take their client’s assets and borrow huge sums against these assets to fund their own private trading and investment activities. They are criminals.

They are just one company.

I cannot answer to where the money comes from to finance the private equity dealmakers. I have read it comes from high wealth individuals, companies, pension funds, the employees of the firms who plough money back in after each deal and banks. Now I also read that the last by Goldman Sachs raised $20 Billion. $12 Billion of this came from its own employees. Wow. Now that is the place to work.

What is the draw? Well, if you buy a public company and take it private you can then borrow huge sums of money using the company as your vehicle and pay those borrowed monies to yourself.

For example: “London-based Cinven Ltd. and BC Partners Ltd. borrowed against Madrid-based Amadeus Global Travel Distribution SA, the travel agency they acquired in 2005, to pay themselves a $2 billion dividend.” (Bloomberg) I only wonder how much real money they put into the deal to begin with.

In 2006 buyout firms funded 40 dividend payouts with a record 8.3 billion euros of debt last year, according to data compiled by Fitch Ratings. This is just Euro debt financed dividends. In fact the dividends last year enabled buyouts companies to recover 72 percent of their investment within 20 months, according to Fitch data.

72% of your original money back within 20 months. Remember, they still own the companies they took private using that money. So if I told you, “You give me $10 million dollars and I will give you back $7.2 million of it within 20 months while you maintain ownership of a chunk of a company that will be sent back to the public markets within a few years likely netting you three times your original investment wouldn’t you get in the business. I mean, you did not produce anything. You don’t work. In fact you could do this while continuing with your life uninterrupted, making money selling widgets or whatever it is that got you the $10 Million to begin with.

On top of all this, you would be told you were crazy if you did not borrow a whole bunch of money against your newly owned company because banks are banging on the door to do the deal. You may even get to refinance all of your debt at lower interest to boot. Yea, banks just want to lend you money. They don’t care if you do nothing productive with the money like pay it out to yourself as a big dividend. Hell, even public companies have been encouraged to take on debt to pay off the guys that just took a 5% stake so they will leave you alone. And this action is taken as having some kind of fiduciary responsibility or obligation to shareholders. Can you imagine?

Does all of this sound a bit strange? It is not I assure you. Strange that is. The only strange thing is wondering how much longer guys can continue to find people willing to give them billions of dollars so they may convince investors to sell companies to them and they can go about systematically stealing the company’s assets to do more deals.

This is all reflective of the 1980’s only this time there are many more products and schemes making it all possible in ways never dreamed of before.