(FINANCE) an initial public offering of stock in a company by a private equity fund that already owns it.
ILLUSTRATION
Suppose we have a company, HCA, that currently a publicly traded corporation. Now, some
people with a lot of money arrange to borrow even more money, buy ALL the stock in HCA, and then turn it into a
private corporation. All of the shares of stock are withdrawn and the company no longer has to publish its financial
data with the SEC.
In theory, the new ownership can totally restructure the management; invest in new assets; divest
old assets; retrain staff; or otherwise refurbish HCA so it does its
job better and more cheaply. After doing this, it sells the new HCA to the public for much more than it paid for it, and everyone comes out a winner.
In practice, PE fund raids HCA to the
tune of $2.5 billion and saddles it with the gigantic finance costs of its own LBO. Investors think they're buying a
set percentage of HCA when they buy shares, but they're really just extending the process of vacuuming cash from the pockets of investors.
MIKE: So I hear that KKR and Bain Capital are selling HCA back to the public. A new IPO, huh?
MARGARET: Avoid it. Ordinary IPO's by companies going public for the first time are doing much better.
MIKE: But that's crazy! It's a sponsored IPO! By KKR and Bain Capital! It's got to be good! They'll still own most of HCA afterward, so they'll do what it takes to make sure the price stays high.
MARGARET: No, they
don't care what the share price does so
long as they get your money out of you. In the meantime, they've looted the company in the most inefficient way possible: using an LBO financed with
junk bonds.
MIKE: Ouch, I guess my head is glad I talked to you about it but my
heart is a greasy stain in the pavement.