Thursday, January 13, 2011

MBAs Sure Did Love Coke In The 1980s - The MBA Show Episode 16



While they are away on vacation Miro and Tom dip into the MBA Show archive for this classic episode on Corporate Raiders from the 1980s.



LBO (1981)



(4) Jargon: LBO


LBO: like a regular business, except set to the musical soundtrack of the hit movie wallstreet



Seriously though, a leveraged buy out is where one company takes out a loan and uses that loan to buy another company.



Famouslt used in hostile take overs. Where the management doesn’t want to sell, and so another company. A Raider, takes out a loan so big that they offer the individual shareholders of the company a price they can’t refuse.



And what’s great about this type of play is that once you buy that company, you can take any cash that they have on hand and use it to pay off the loan you took out!



For example:


show business card and then structure of new business with giant debt card underneath.


Returns are multiplied by 10 times! 1% becomes 10%.  10% becomes 100% We CAN”T LOSE!!!  What if we lose money?  [pause]  WE CAN”T LOSE!


* What if we DO lose money?  



I don’t know, what if we quit our jobs and start non-profits?  [pause] hahah


So this shows why you don’t want to sit on a mountain of cash? Because people will buy your company and finance it with that same cash.


But isn’t this irresponsible?


no, irresponsible would be giving huge mortgages to people with no credit, no down-payment, and no job.


that is a rediculous example.  Something like that could bankrupt the entire financial system.  WHat bank would be stupid enough to do that?



I know, what’s on your radar?



A ton of coke.



Well, it is the 80’s
Posted by Tom Rose at 11:09 AM

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