Quote:
Originally Posted by yray
I make an offer to buy your taxi company which holds taxi and taxi license at 450k and absorb your current debt at 300k. I go to the bank to borrow 450k with the pretext that my profits will pay back that loan by changing my business style (taxi drives non stop, cheaper drivers etc) . Bank agrees and take the taxi and taxi license as guarantee. I do not make enough money and decides to dissolve/ bankrupt the taxi company... thus close shop.
You have to think the corporation or your company is a entity/person that has borrowing power.
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So in Toys R Us' example, are you saying the private equity firms didn't have the initial $6.6 billion to buy all the shares from the stockholders, so they went to the bank to take out a loan? The down payment itself was a small percentage of the $6.6 billion required, so they used Toys R Us as collateral?
I still don't understand how it gets the equity firm any profit. Toys R Us will eventually become bankrupt. The equity firm is still on the hook for the bank loan it took out plus interest. The only way I see how the equity firms would make money is if the process of them cutting employees or freezing wages, the money they somehow saved exceeds the initial loan + interest on the $6.6 billion they borrowed from the bank. So that I guess that money "saved" is their profit?