It’s quite bad for the business as a going concern and its ability to serve customers and employ employees when it suddenly, and for no obvious reason, takes on tons of debt. Money isn’t free and loans demand payment.
In Twitter’s case, its $13B in new debt on the balance sheet means that, every year, they have to come up with $13B times the interest rate in additional revenue and/or reduced cost merely to be in the same place profit/loss-wise. Elon already massively overpaid what Twitter’s business-as-usual can generate even before accounting for that $13B; as a result, the post-acquisition Twitter has to try a bunch of negative-expected-value moonshots in the unlikely hope that one of them hits against the odds and the others don’t turn out fatal, because doing nothing or iterating sustainably kills the company via debt service.
In a lot of cases the best solution would be for the company to declare bankrupcy, reorganize, and discharge the debt by convincing creditors to take pennies on the dollar and a share of the resulting smarter-run healthier company, and a judge that the plan is reasonable. However, Elon both poisoned that well by firing people, angering advertisers, and bumbling around product-wise, and also staked a bunch of $TSLA that would need to be liquidated to go through with the bankruptcy.
Yeah, it's private equity 101. I can't believe it happens. A bunch of MBA sharks get loans to buy something with some chop shop plan or other ruthless scheme to carve up or spitshine a company.
The loans are then assigned to the company they bought, rather than the core sharks ... uh investors. The "investors" then repackage/selloff/spit shine as necessary to get it resold to some sucker. The investors get THEIR money back with a profit, leave the debt to the company and the sucker who buys it, and look for the next victim/target.
Musk likely went the rapacious route because he made a dumb move, and this is the only way he's getting the money he committed to the deal back.
Oh yeah, and when they buy the company, they are in charge of it. So they can pay themselves whatever they want in executive bonuses / etc.
Why is that possible or legal? It feels like a loan for purchase of a company necessarily should belong to the purchasers of the company and be paid by the sale of the equity they bought or profit. This way just feels… rigged.
The people who buy the debt know what they are getting into. (And if those 'suckers' don't know, honestly, they shouldn't be investing in junk bonds etc.)
It is not a bad thing as such. The main problem comes when a business is stripped of all its assets and/or weighed down with more debt than it can repay and fails as a consequence, leaving employees out of a job and communities without a formerly productive enterprise.
It is more that it tends to beat raw deal for the purple who lose their jobs for no good reason. The Twitter people will likely mostly land on their feet but most leveraged buyouts aren't affecting highly compensated employees with highly in-demand skills.
> Yeah, it's private equity 101. I can't believe it happens.
Why not? It's pretty good for all the stakeholders that have a say.
The old shareholders sold for a nice price.
The new ownership didn't have to pay for the whole thing.
The lender gets to charge a pretty good interest rate because there's a good chance of default. If they're lucky, they get repaid; if not, maybe they made enough in interest to make it worthwhile; maybe when it defaults, they'll be able to make something worthwhile out of the wreckage they got at a nicer price.
Leveraged buy outs aren't great for stakeholders that don't have a say. Employees usually get new terms worse than the old ones; in this case, there's been some severance at least. Customers get a promise of a big bang bankruptcy in the near to medium term, rather than a slow fizzle. Sometimes companies with a large payment they can't make can restructure, and sometimes they shutdown with little notice. As a private company without public accounting reports, there will be a lot of guessing about revenue and debt service.
Which goes to demonstrate the very sorry state of our society, a society where employees are not (anymore) part of the "stakeholders that have a say" group.
Because at the end of the day, as you mention, it's the employees and their families that will suffer the most. But as long as those employees don't have board seats while strikes and labor-related physical protest movements have become a thing of the past then I guess this is the reality we'll have to live on for the foreseeable future.
No he did not. It was initially proposed but there's no margin loan against his TSLA holdings in the final deal. For the debt that Twitter took on in the buyout the collateral is the company itself. There's zero connection to Tesla in the actual financing.
