High Finance

I read somewhere recently that hedge funds buy things up, load them with debt and then do a runner from the failed shell. I have been trying to puzzle out what this might mean.

So I am a hedge fund acting on behalf of some oil or gas rich billionaire who is feeling a bit needy and needs to make some more millions. I spot a company (A) with a good business but sleepy management. I buy up all the shares, but I don't use many of the billionaire millions, a better wheeze being to borrow most of the money needed from the bank (or perhaps some other kind of sucker). I set up a shell company (B) which now owns A and to which all the new debt is assigned. While I own B. As owner of B which owns A, I can instruct A to service the debt incurred in buying A (which sounds a bit unfair, a bit circular, put like that. Doesn't Companies House have something to say about transactions of this sort? Where is nanny?). So A, instead of just paying discretionary dividends when times are good, is now locked into servicing the debt come rain or shine. My idea is that the sleepy management will now wake up and generate a lot more cash than they were, so they will not only be able to service the debt but will also generate a surplus for me and my billionaire. However, they don't quite manage to pull it off and come heavy rain company A goes bust as it can't service the debt and the banks have called it in.

According to this scenario, the original shareholders are OK, they have got their dosh. The banks are not OK as they have got a lot of bad debt. The company and all its stakeholders are not OK as they no longer have anything into which to stick a stake. So we need another winner to balance the books, presumably me as Mr. Hedge Fund. But how have I pulled the trick off?

There seems to be something missing here. More thought needed.

In the meantime I am reminded about the asset strippers of the sixties of the last century. People like Slater Walker (the Walker who subsequently became a cabinet minister (under Mrs. Thatcher) and privy councillor) made a good living out of spotting companies which were sitting on realisable assets worth far more than the dividends being paid. So you buy the company up, close it down, sell the assets and Bob's your uncle. Trouser the dosh. Avert eyes from all the people chucked out of gainful employment.

They were playing a bit rough - but they did have a point. The company was not making good use of its resources. Rather as on a smaller scale, many small companies in the provinces sat on parcels of land and buildings the value of which had grown out of all proportion to the value of their businesses. Proprietors hanging on for reasons of sentiment until their sons and heirs sold up and moved to sunny Spain.