Yes, that is the model. Large short term profits can be made if costs are cut. The idea is that the PE firm loads the target asset with debt, then drastically cuts labor, capital maintenance and other costs. The balance sheet looks good, and profits rise for a few years. The PE firm then sells the asset for profit.
The buyer, and sometimes even taxpayers, are left holding the bag when things start breaking. The PE firm knows exactly what it's doing
>Large short term profits can be made if costs are cut.
What else can a "businessperson" do if they don't have the acumen to build up corporate value at all compared to those who came before and laid the foundations to begin with?
The purpose of the stock exchange was to make it possible for a diverse bunch of investors to come together and fund the growing needs of a growing country.
IOW the type of shareholders that this was designed to be suitable for are those who are actually investing in the registered corporations so those corporations can level up to accomodate unmet demand and grow capabilities to reach a more prosperous stability, thereby providing a fair but lucrative return for the investors over time. As the corporations grow in value so do the shares, naturally.
OTOH once the market has been established, and especially in case it grows faster than the underlying value for a long enough period of time (like longer than one human lifetime, or longer than a single business career[0]), then a sizable amount of "investment" capital can end up manipulating the system to extract established value through their trading[1]. Especially when it comes to things like voting shares and mergers & acquisitions. Probably the longer a corporation has been publicly traded can figure prominently since that can be a corporation living longer than a human lifetime too.
So rather than investing value beneficially, you end up with large chunks of capital actively working to extract value parasitically[2], which is like a double-whammy, and eventually the stock exchange and the market it spawned are not working as intended at all.
Maybe just the opposite.
IOOW with Boeing the value was lost a long time ago with an unfavorable merger, and every stakeholder has been doing without ever since. It's just becoming unbearably impossible to ignore any more.
It just so happens that with an aircraft company, it's not only the shareholders, employees, and customers of Boeing who make up the majority of stakeholders. The flying public (who pays for it all to begin with) participates in far greater numbers and depends on the product aircraft with more of a life-or-death risk factor than the stakeholders who are on the financial receiving end.
And it all comes down to integrity.
Some business operators are still traditionally astute enough to create value where everyone financially involved gets their money's worth.
Others never will be able to accomplish this, and lots of them know who they are from the beginning and have had a lifetime focusing their efforts on ways not to give people their money's worth. Sometimes with the most insidious strategies.
And that's merely from poor integrity, even when ethics are not fully compromised.
Now look what happens when the ethics go out the window too . . .
Well that whooshed by and most people never saw it coming.
[0] where some may rake it in and retire early from a relatively short career.
[1] often including long-ago established value or utility that is now irreplaceable economically or legally.
[2] from anything smaller or less powerful in their path, with who knows what kind of motivation not aligned with the growing needs of a growing mother country.
Yes, the pattern seems to be to quickly transfer value from the company to the PE firm, or directly into the pockets of the PE managers and friends, even if it hollows out the company and leaves it a shriveled mess.
As an example, the PE firm owning our company recently mandated that we switch our tooling from X to a more expensive Y, because Y is owned by the PE firm, and doing so makes the PE firm more money, at the expense of our company. This pattern repeated for multiple solutions we used.
Sometimes the PE firm will literally tear the company apart to sell the pieces, inventory, equipment, etc. The goal is to make money. That might come from making the company stronger and more competitive long-term, but in my experience and observation, that is not how a lot of PE firms approach the goal
Sounds like an aggressive liquidation when all the stock holders suddenly don't want the company to continue anymore and want their money back. Most of the time I thought asset value << market cap though so if someone makes profit it's definitely on the expense of others.
Sounds plausible. I assume they could cobble together a strategy where the company limps along zombie-like while interest rates are very low, then when rates go up they lots of companies go bankrupt simultaneously, a crisis is declared and the public takes on the losses. There are some obvious risks, but the middle managers don't have to worry to much and the big shot callers are presumably secure in their ability to influence politicians.
That was pretty much Silicon Valley Bank as I recall. Very high risk business model; turns out the plan when the bomb exploded was to change the regulations so that someone else held the risk.
SVB’s failure was due to the same trigger but opposite impact. Banks in the US have to hold a percentage of their deposits in something safe and liquid. SVB made a big bet on low interest rates, buying a lot of government debt (safest available), but when interest rates went up the value of those bonds went down ( who’d buy one that paid low interest rate when higher was on offer?).
> You really think banks will be lending to PE deals if the business model is to make the company bankrupt?
Yes, just like banks sold houses to unqualified buyers and packaged them up as overinflated securities to dump on the public. The people authorizing the deals get bonuses now and leave other suckers holding the bag later.
What you said happens various times, especially with the big PE firms, but it’s not the norm.
You really think banks will be lending to PE deals if the business model is to make the company bankrupt?