Word: lbo
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While that may be true, even the U.S. tax code is a strong ally of LBO artists. Since the interest on junk bonds and bank loans is tax deductible, companies like RJR Nabisco can borrow at Government expense. Some -- but not all -- of the Treasury's loss can be recouped from capital-gains taxes on the profits of shareholders who sell their stock...
...Nabisco, for example, than the company's $5 billion of outstanding bonds lost 20% of their value. Furious bondholders, including Metropolitan Life and ITT, immediately sued for damages. Declared Metropolitan Life chairman Creedon: "No one in his right mind wants to invest in corporate bonds anymore." In fact, the LBO binge has created a financial innovation called the "poison put," which guarantees bondholders against the risk of buyouts and other unexpected deals that might depress their holdings...
Shareholders can lose out in LBOs even when they sell their stock for a profit. That is because stockholders usually receive far less than executives make when they break up a company and then put it back on the market. LBO critics argue that managers who fatten their wallets in this way are really profiting at the expense of other stockholders. So far, shareholders have brought eleven class-action suits against RJR Nabisco charging executives with acts ranging from "unfair self-dealing" to "not acting in the best interests of the stockholders...
...corporate cannibalism," says Congressman Edward Markey. "We have to ask whether it is in the national interest to allow companies to go so heavily into debt." As chairman of a House subcommittee that covers finance, the Massachusetts Democrat will play a key role in drafting any legislation to curb LBO excesses when Congress reconvenes next year. But lawmakers are uncertain how to limit buyouts, or even if they should...
Even so, the results underscored a common criticism of the motives for buyouts. Richard Thevenet, vice president of Stern Stewart & Co., a Manhattan- based management efficiency consultant, put it bluntly: "Managers have an incentive to underperform before a buyout. Records of dramatic turnarounds after an LBO raise a troubling question. Why were these managers unable to accomplish these feats before the LBO? Shareholders bear all the costs, but not the rewards of the turnaround...