I thought the Remington bankruptcy, due largely to its cheapening of its own product while it was owned by Cerberus, a private equity firm deserved another thread that explains the problem in more detail and asks which companies, especially outdoor companies are committed to quality? It's a shrinking list and I'd truly like to have a list of those companies.
The thing that killed Remington is widespread and getting worse and here's why.
The business of Wall St. that buys out companies it feels are making too little profit by the way they are managed falls under what is called private equity. This is the world of Gordon Gecko from the movie Wall Street.
The way it typically works is that a private equity firm like Cerberus, KKR, Apollo or Blackstone raises a lot of money by promising investors big returns. The sooner they can realize those profits, the more money the buyout fund general partner can raise.
Here's how they do that on companies that are already trading on the stock exchanges.
First, they buy enough of the company's stock to get control. Quickly, they pay themselves back by having the company take on debt, often a lot of debt. So they love to buy companies that have been reluctant to take on debt before. Since debt payments increase the company's expenses and lowers profit, they next do what they had planned to "make the company lean," i.e. efficient.
That means selling off "underperforming" divisions that don't generate much cash, which may be the ones in which management has been investing for future growth. Then they cut costs by laying off employees, by moving production overseas, by lowering the cost of the products in any other way they can, like making the candy bar smaller, replacing metal with plastic, maybe by raising machining tolerances to reject fewer parts. If they cut costs enough, they may even lower prices to get more sales.
The consumer, not knowing what is going on behind the scenes, loves it. "Man, you mean I get can get a Remington for that price? Cool, I'm buying. What a deal!"
Because the company has taken on debt, called "leveraging up," when costs start going down because of these "greater efficiencies" and reported quarterly profits start going up and more importantly, beating expectations, the value of the company in Wall Street's eyes goes up because they are more profitable and that profit is increasing. "They really turned that old company around." The private equity firms then sells the shares they bought for a large profit, having "improved" the company. A lot of the profits go to the partners in the buyout fund and they do it all over again.
That's the worst case. In other cases, they may actually improve truly mismanaged companies. And and a big part of private equity is to buy companies that have not yet issued publicly traded stock like young, innovative tech firms that become the tech giants of tomorrow like Amazon and Facebook. I'm talking about when the firms buy out already publicly traded companies.
Here's what most people don't know and what concerns me - how much of America they own. Amazon is the 2nd biggest employer in the U.S. with 540,000 employees worldwide. But, buyout firm KKR currently owns companies with total employment of 650,000. The only company to have more is WalMart.
Buying out companies is now a $1 trillion industry and has become the majority of what private equity firms do as opposed to taking promising companies public. And because it is so profitable, the money keeps pouring in. Apollo just raised the largest pool of money for doing buyouts ever - $25 billion in just one partnership.
So, expect more products with lowered costs. As a whole, America has turned from how it built it's dominance in industry, by innovation and high quality and narrowed that to one area - technology products. The rest of what we put out is becoming junk.
What companies can you name that are unflinching in their commitment to quality, especially outdoor companies? What companies do you know that are making exceptional products and are not aggressively raising prices?
The thing that killed Remington is widespread and getting worse and here's why.
The business of Wall St. that buys out companies it feels are making too little profit by the way they are managed falls under what is called private equity. This is the world of Gordon Gecko from the movie Wall Street.
The way it typically works is that a private equity firm like Cerberus, KKR, Apollo or Blackstone raises a lot of money by promising investors big returns. The sooner they can realize those profits, the more money the buyout fund general partner can raise.
Here's how they do that on companies that are already trading on the stock exchanges.
First, they buy enough of the company's stock to get control. Quickly, they pay themselves back by having the company take on debt, often a lot of debt. So they love to buy companies that have been reluctant to take on debt before. Since debt payments increase the company's expenses and lowers profit, they next do what they had planned to "make the company lean," i.e. efficient.
That means selling off "underperforming" divisions that don't generate much cash, which may be the ones in which management has been investing for future growth. Then they cut costs by laying off employees, by moving production overseas, by lowering the cost of the products in any other way they can, like making the candy bar smaller, replacing metal with plastic, maybe by raising machining tolerances to reject fewer parts. If they cut costs enough, they may even lower prices to get more sales.
The consumer, not knowing what is going on behind the scenes, loves it. "Man, you mean I get can get a Remington for that price? Cool, I'm buying. What a deal!"
Because the company has taken on debt, called "leveraging up," when costs start going down because of these "greater efficiencies" and reported quarterly profits start going up and more importantly, beating expectations, the value of the company in Wall Street's eyes goes up because they are more profitable and that profit is increasing. "They really turned that old company around." The private equity firms then sells the shares they bought for a large profit, having "improved" the company. A lot of the profits go to the partners in the buyout fund and they do it all over again.
That's the worst case. In other cases, they may actually improve truly mismanaged companies. And and a big part of private equity is to buy companies that have not yet issued publicly traded stock like young, innovative tech firms that become the tech giants of tomorrow like Amazon and Facebook. I'm talking about when the firms buy out already publicly traded companies.
Here's what most people don't know and what concerns me - how much of America they own. Amazon is the 2nd biggest employer in the U.S. with 540,000 employees worldwide. But, buyout firm KKR currently owns companies with total employment of 650,000. The only company to have more is WalMart.
Buying out companies is now a $1 trillion industry and has become the majority of what private equity firms do as opposed to taking promising companies public. And because it is so profitable, the money keeps pouring in. Apollo just raised the largest pool of money for doing buyouts ever - $25 billion in just one partnership.
So, expect more products with lowered costs. As a whole, America has turned from how it built it's dominance in industry, by innovation and high quality and narrowed that to one area - technology products. The rest of what we put out is becoming junk.
What companies can you name that are unflinching in their commitment to quality, especially outdoor companies? What companies do you know that are making exceptional products and are not aggressively raising prices?
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