Okay that was Business Week’s description of the current feeding frenzy of private equity firms stripping assets out of acquired companies. Consider how three gourps collected $1 billion just six months after buying Hertz form Ford for $15 B. with the dividend the trio earned back almost half of the $2.3 B they put up in cash.
You will recall the simplest capital budgeting tool is payback, the cost divided by the returns to determine how long to recover the investment. Well if you can get half your money in six months, who needs to worry about the time value of money, gee it’s there for the taking, let’s take it! You can read the story, at least for now at that hyperlink for the Oct 30 issue of Business Week.
In a somewhat related story, we discussed whether You Tube was worth $1.65 B in stock that Google paid. Well it turns out the total market capitalization (number of shares time share price) went up $5B right after the deal was announced, now that’s a quick payback!
Another stunt is to assume control of the firm and then make a first mortgage loan to the firm. Since it is a first mortgage secured by all the assets, the lender jumps to the top of the creditor list. Then strip cash by paying yourself a big dividend. Then when the firm can’t pay the loan, make the trip to bankruptcy court having cut in line in front of the unsecureds. Bingo, you get all the assets by putting the firm in a postion such that it could not pay the loan. Hello Ethics Class!
DLE
Professor Elam 
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