Sometimes going public is a bad idea. I think too many businesses are in a rush to do it and this is what they expose themselves to in the process.
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I really donât understand your point. I can explain this to you very simply and I am a former CEO of a publicly traded company. I will keep it simple. Guitar Center owed a lot of money. The interest payments were eating them alive. So, Ares Capital, which held most of the debt converted that debt to stock in the company. Simply put, the company no longer has to pay back the debt and Ares, which was owed the money now owns stock in the company instead. Because of this conversion, Ares ended up being the majority shareholder. This is done all the time. Believe me, Ares didnât want to have to do this, but they didnât have any choice. As far as the company is concerned, it can now use the money it was paying on its debt for new stores, more inventory, staff, etc. I fail to see how this is a bad thing. The company stays in business. Employees keep their jobs. Customers get a better selection. The alternative was probably bankruptcy. It is also not possible to compare a company like Exxon which is in a totally different industry, with different pricing, margins, etc. Plus, Exxon is a public company. GC is a private company. They are two different animals.
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Know how I know you didnât RTFA, or are simply ignoring it?
Under the current deals, GC would owe over $950 million in 2017 alone, an amount that would be impossible to pay off.
There are also descriptions in the article about how complex the financial arrangements surrounding the company are. Your freshman-level business course description doesnât bear any relationship to the reality in this case.
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Except in this case, it is exactly their money. Unless youâd like to make the case that Guitar Center is systemically important to, well, anything.
See, this guy / gal gets it. A little greed, and probably some stupidity both pre- and post- private capital, is the extent of the evil here. And the right people will probably get their due.
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I didnât read the article, I read the financial release issued by the company. You have no clue what you are talking about.
Do you have any idea what private equity is? The majority of it is from pension funds and insurance companies.
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Some of it is pension funds, some insurance, some wealthy individuals / trusts, some university endowments, some other PE in an incestuous risk sharing agreementâŚagain, all âsophisticatedâ investors. Again, other than a few teachers in Bumpkis, IA, whose pension management team got a little frisky and cost them twenty bucks a month in future income, these are all people who know what type of situation they are stepping into when they make the decisions and should be pricing it accordingly. As youâre well aware, thereâs a reason itâs called âriskâ. By the math, sometimes people lose, and the people deciding to give a struggling anything more money ought to be acutely aware of that.
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What I find bizarre is that anyone would buy the bonds. Any money manager who buys bonds in companies controlled by Bane Capital should lose their license for incompetence.
Mitt Romney essentially made his fortune by borrowing money that he never intended to repay. There should be recourse against such people. If a company borrows money to pay shareholders a dividend it should be clawed back the same way that the bankruptcy courts clawed back profits earned by the Madoff investors who managed to cash out.
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Iâm going to say fundamentally I agree with you. However, some level of inter-generational connection to land/property might be worthwhile. The trick is to find a way to allow people to be born into familial connection to something/someplace, without that inherently meaning being born into wealth. Stewardship is the word that comes to mind.
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Yes, he did RTFA. so did I.
The wikipedia entry on Guitar Center is most helpful.
- GC expanded in 80s, killing a lot of Mom & Pop retailers by using cheaper Japanese sources. GC also used their size to squeeze domestic suppliers
- In 1997, GC went public, becoming just another large corporation.
- In 2007, GC sold out for $2 Billion to Bain, at a hefty profit.
- In 2009, GC used PIK bonds to stay afloat. This is obscure. A PIK bond is an act of desperation. It buys the company a year or two, but if the profits donât improve immediately, the interest payments destroy the company. I assure you the folks running GC knew this.
- PIK stands for âPayment in Kind.â If the owners canât produce the money, hey have to âpay in kindâ â that is, they hand over the company. Just like finance company repo-ing a used car.
This was bets between informed rich people, thirty years after GC had transformed itself into a standard corporate behemoth that crushed small retailers and suppliers as a matter of explicit strategy.
If you want to blame anyone for destroying the jobs of your friends at GC, blame Amazon and Ebay. Ares capital is just the undertaker.
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⌠the arrangement described in the article wasnât that complex, or unusual.
Do you have any clue what a PIK is and why itâs used? Guitar Center was already in trouble in 2009, or they never would have gone with a PIK in the first place. Thatâs what PIK is all about: one last desperate chance for the management to maintain control, before handing over the keys to the bondholders. Ares capital, in this case.
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Thatâs because the people running these scams own the White House, the Legislature and both Parties. Organized Labor has been destroyed. The Feds and the States are in competition to see who can deregulate faster. Unlimited campaign contributions ensure else will be able to buy the government. It will continue until there is nothing left to suck out of the American economy.
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They always bring up the Family Farm with visions of the Waltons being kicked off their land.
Too bad itâs complete nonsense.
The agricultural sector has seen more consolidation than anything except media in the last 35 years. Much of that started in the 80s when the Reagan USDA decided to shift policy to subsidize the âbiggest and most productiveâ operations. It has been a long time since we were the rural/agricultural/bucolic/bootstrappy paradise misty-eyed libertarians claim to remember. Now agriculture is almost all a few enormous vertically-integrated operations. The few small farmers are mostly in niche-markets which are gobbled up as soon as the big boys sense profits. And they are almost all heavily indebted bringing down the net worth of the operation.
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In other words, the dystopian cyberpunk reality that Iâve been training myself for since I was about 12 is inevitable, and ironically, because I saw this coming about 25 years ago, I will likely prosper. Heh, word. (Sorry, Iâm in a brutally cynical mood at this very moment.)
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It isnât. However, the financial institutions or hedge funds that have bought the bonds have probably used them as collateral on another deal with another dodgy company. Then they used the collateral from that deal to leverage some massive play on the markets, combined with a bond issue of their own (if they are a bank). In order to cover their asses, they have probably done some kind of credit default swap or other dodgy insurance deal with yet another player.
Somewhere in there theyâve suckered some pension funds into the mix, not to mention various mutual funds and other retail investor types. So when Guitar Centre blows up, it will be one of many dominoes collapsing that will expand into a fire big enough that it will REQUIRE yet another bailout by government - and by extension, all the people who actually produce and create in the economy.
This is failure by design. They can play with money and make big returns, and when it fails, as long as it fails big enough - the rest of the citizens will pay for any costs.
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Pretty much.
We were promised Hugo Gernsback.
We feared we were heading towards On the Beach.
We thought maybe weâd get Shockwave Rider.
Looks like we ended up with The Hunger Games.
Thereâs a reason Dystopian and Military are the two go-to sub-genres in SF. Theyâre the world weâve made for ourselves.
And Fantasy is kicking Science Fictionâs butt because the coming reality is pretty damned depressing.
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For your reading pleasure: http://www.rollingstone.com/politics/news/greed-and-debt-the-true-story-of-mitt-romney-and-bain-capital-20120829
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Ericâs series of articles on Guitar Center inspired me to write a blog post. The key insight:
Trevorâs Rule for Running a Great Company: Use profit as a tool to grow the business. Donât use business growth as a tool to obtain profit.
Since the people now running Guitar Center have no particular interest in guitars (or even in centers), any decision which pits improving the music scene against earning more money will fall in favor of the âearn more profit, screw the musiciansâ position. Thatâs what Eric means by âeating the world.â
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