Tedious Corrections

The process of reading through LBO related articles and then commenting here with long corrections to misconceptions, myths and outright lies has grown so tedious that I am going to start taking a different approach, that of a high school English teacher correcting a paper, as that is the level many of these articles have sunk to.  Specifically, the format you will see below with David Toll's recent piece on peHub.  My additions in underline, deletions in strikethrough and [comments written in the margins in between brackets and in red].

Useless and uninformed Ddebate continues to rage over whether buyout firms are somehow cheating on their deals. [Avoid passive voice.  What debate?  Who is debating?] Are they stealing companies from hapless willing shareholders with access to detailed transaction characteristics in a free and highly transparent market for corporate control? [Interesting thief that pays a premium to the market for what he "steals."] Despite the ample evidence that some of the highest multiples in recent memory are being paid, Aare they colluding on large transactions in a blatant violation of anti-trust laws that don't yet exist but are likely to surface now that the democrats look about ready to get around to crippling the markets, leveling commercially lethal taxes to support ineffective social programs and generally fucking up the country again?  And if not, how else can the enormous profits limited to the top firms of the top quartile so many buyout firms generate be explained other than by the complete failure of the public equity markets to provide frictionless access to capital and the compensation of substantial structural and operational risk by buyout firm investors?

All are interesting questions that will do doubt be answered in time. [Avoid useless transitional sentences like this.  Avoid complimenting yourself for asking "interesting questions," especially when they aren't interesting.]  But to me, the most important question related to the morality, if you will, of buyout firms is whether they are good for the companies that they own. [Morality has no place in the market for corporate control.  Your argument is already lost.] Buyout pros like to talk about the value that they add to their portfolio companies—the new management teams they recruit, the customer leads their advisory boards provide, the resources they provide to outsource operations to India, China or The Philippines. They’re not as eager to talk about the pressures they place on companies because of all the money borrowed to buy them, despite the fact that the incentives created by debt have proven over and over again in scholarly research to improve the efficiency and performance of companies, create investment opportunities and extract previously locked-up value.

Cash flow that previously got plowed back into the company to make new redundant hires, finance unneeded and non-core new product development, or provide an excessive and low-return cash cushion to weather theoretical bad times, instead gets hauled off by the banks, finance companies and institutional investors that hold the company’s debt securities, and loaned out or used as equity investment to other businesses to make new hires, finance new product development or provide a cash cushion to weather bad times. Having once worked at a publishing company that, owing to its poor performance, ended up being owned by a buyout firm, after the existing shareholders were paid a handsome premium, I know the stress that’s added to senior manager lives knowing that having a bad quarter or two could mean a distressed sale or even a bankruptcy filing. Sure, we learned to operate mean and lean; but what leisure could we have enjoyed, what waste and redundancy could we have created if only more could we have accomplished had we had more flexibility?  [Avoid drawing on personal experience to support a case as a single instance is unlikely to be a representative sample.]

A recent study by ratings agency Moody’s Investors Service, Default and Migration Rates for Private Equity-Sponsored Issuers, highlights the negative effects that leverage can have in a very limited subset of cases. No surprise, the ratings agencies often slap companies undergoing leveraged buyouts with downgrades as they grow nervous about the company’s ability to pay off a heavier debt load.

Is the worry unjustified? Not according to the study, [avoid double negatives] which found that companies whose debt was rated Ba (the least risky of the speculative-grade categories, as defined by Moody’s) just prior to being acquired in an LBO have double the default risk of other Ba-rated issuers, hinting that firms already in hoc shouldn't be in LBOs in the first place. Those whose debt was rated B (the next most risky category, after Ba) just prior to being bought in an LBO have a roughly 75% higher default risk than other B-rated issuers.The only silver lining for buyout firms: Companies whose debt is rated Caa to C—in other words, those most likely to default—prior to an LBO actually have a much lower risk of default than other Caa-C-rated companies. That suggests that buyout firms that specialize in turnaround deals often end up resuscitating companies that might otherwise have gone under. [This is pretty thin evidence for this conclusion.  You are also not supporting your argument and have gone way afield of your original premise].

Are buyout firms making great returns? Yes. But at what cost to the portfolio companies? That’s what I want to know. For a copy of the report send me an email at david.toll@thomson.com.

Check out this and other ill-informed and misleading stories from the latest edition of Buyouts Magazine at www.buyoutsnews.com. Subscription required. [You want us to pay for this?  Puh-lease].

All in all unconvincing, plagued by limited support for your conclusion that doesn't actually address the original (silly) premise that buyouts are potentially immoral.  Facts are lacking, half-truths, or just plain wrong and your bias is clear from the first paragraph.  Smacks of agenda-laden sensationalism and appeals to emotion rather than reality.  Might play in your journalism class (if you make it into a decent school) but here it is not going to fly.  I did like your use of punctuation though.]

D+