Misplaced Pages

#448551

107-815: The cost of debt is lower because interest payments often reduce corporate income tax liability, whereas dividend payments normally do not. This reduced cost of financing allows greater gains to accrue to the equity, and, as a result, the debt serves as a lever to increase the returns to the equity. The term LBO is usually employed when a financial sponsor acquires a company. However, many corporate transactions are partially funded by bank debt, thus effectively also representing an LBO. LBOs can have many different forms such as management buyout (MBO), management buy-in (MBI), secondary buyout and tertiary buyout, among others, and can occur in growth situations, restructuring situations, and insolvencies. LBOs mostly occur in private companies, but can also be employed with public companies (in

214-434: A debt restructuring with its lenders. The financial restructuring might entail that the equity owners inject some more money in the company and the lenders waive parts of their claims. In other situations, the lenders inject new money and assume the equity of the company, with the present equity owners losing their shares and investment. The operations of the company are not affected by the financial restructuring. Nonetheless,

321-479: A fraudulent transfer under U.S. insolvency law if it is determined to be the cause of the acquired firm's failure. The outcome of litigation attacking a leveraged buyout as a fraudulent transfer will generally turn on the financial condition of the target at the time of the transaction – that is, whether the risk of failure was substantial and known at the time of the LBO, or whether subsequent unforeseeable events led to

428-491: A margin of safety . That's what Ben Graham taught us. A hundred years from now they will still be the cornerstones of investing. Buffett worked from 1951 to 1954 at his father's firm, Buffett-Falk & Co., as an investment salesman; from 1954 to 1956 at Graham-Newman Corp. as a securities analyst; from 1956 to 1969 at several investment partnerships as the general partner; and from 1970 as chairman and CEO of Berkshire Hathaway Inc . In 1951, Buffett discovered that Graham

535-470: A $ 35 deduction for the use of his bicycle and watch on his paper route. In 1945, as a high school sophomore, Buffett and a friend spent $ 25 to purchase a used pinball machine, which they placed in the local barber shop . Within months, they owned several machines in three different barber shops across Omaha. They later sold the business to a war veteran for $ 1,200. Buffett's interest in the stock market and investing dated back to his schoolboy days spent in

642-407: A bid of $ 112, a figure they felt certain would enable them to outflank any response by Kravis's team. KKR's final bid of $ 109, while a lower dollar figure, was ultimately accepted by the board of directors of RJR Nabisco. At $ 31.1 billion of transaction value, RJR Nabisco was the largest leveraged buyout in history until the 2007 buyout of TXU Energy by KKR and Texas Pacific Group . In 2006 and 2007,

749-407: A conflict of interest, being interested in a low purchase price personally while at the same time being employed by the owners who obviously have an interest in a high purchase price. Owners usually react to this situation by offering a deal fee to the management team if a certain price threshold is reached. Financial sponsors usually react to this again by offering to compensate the management team for

856-428: A fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5 percent inflation. In his article, " The Superinvestors of Graham-and-Doddsville ", Buffett rebutted the academic efficient-market hypothesis , that beating

963-620: A key reason for the purchase was to diversify Berkshire Hathaway from the financial industry. Measured by market capitalization in the Financial Times Global 500 , Berkshire Hathaway was the eighteenth largest corporation in the world as of June 2009. In 2009, Buffett divested his failed investment in ConocoPhillips , saying to his Berkshire investors, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated

1070-428: A legitimate attempt to take over a company and provided high-yield debt financing of the buyouts. One of the final major buyouts of the 1980s proved to be its most ambitious and marked both a high-water mark and a sign of the beginning of the end of the boom that had begun nearly a decade earlier. In 1989, KKR closed in on a $ 31.1 billion takeover of RJR Nabisco . It was, at that time and for over 17 years following,

1177-644: A loan. In LBOs, the only collateral is the company's assets and cash flows. The financial sponsor can treat their investment as common equity, preferred equity, or other securities. Preferred equity pays dividends and has priority over common equity. In addition to the amount of debt that can be used to fund leveraged buyouts, it is also important to understand the types of companies that private equity firms look for when considering leveraged buyouts. While different firms pursue different strategies, there are some characteristics that hold true across many types of leveraged buyouts: The first leveraged buyout may have been

SECTION 10

#1732772558449

1284-420: A lost deal fee if the purchase price is low. Other mechanisms to handle this problem are earn-outs (purchase price being contingent on reaching certain future profitabilities). There probably are just as many successful MBOs as there are unsuccessful ones. Crucial for the management team at the beginning of the process is the negotiation of the purchase price and the deal structure (including the envy ratio ) and

1391-560: A lot, but people have really changed their habits like I haven't seen". Additionally, Buffett feared that inflation levels that occurred in the 1970s—which led to years of painful stagflation —might re-emerge. In 2009, Buffett invested $ 2.6 billion as a part of Swiss Re 's campaign to raise equity capital. Berkshire Hathaway already owned a 3% stake, with rights to own more than 20%. Also in 2009, Buffett acquired Burlington Northern Santa Fe Corp. for $ 34 billion in cash and stock. Alice Schroeder , author of Snowball , said that

1498-535: A number of leveraged buyout transactions were completed that for the first time surpassed the RJR Nabisco leveraged buyout in terms of nominal purchase price. However, adjusted for inflation, none of the leveraged buyouts of the 2006–2007 period surpassed RJR Nabisco. By the end of the 1980s the excesses of the buyout market were beginning to show, with the bankruptcy of several large buyouts including Robert Campeau 's 1988 buyout of Federated Department Stores ,

1605-493: A number of the same tactics and target the same type of companies as more traditional leveraged buyouts and in many ways could be considered a forerunner of the later private-equity firms. In fact, it is Posner who is often credited with coining the term "leveraged buyout" or "LBO." The leveraged buyout boom of the 1980s was conceived in the 1960s by a number of corporate financiers, most notably Jerome Kohlberg, Jr. and later his protégé Henry Kravis . Working for Bear Stearns at

1712-425: A philanthropist). At 15, Warren made more than $ 175 monthly delivering Washington Post newspapers. In high school, he invested in a business owned by his father and bought a 40-acre farm worked by a tenant farmer. He bought the land when he was 14 years old with $ 1,200 of his savings. By the time he finished college, Buffett had amassed $ 9,800 in savings (about $ 125,000 today). In 1947, Buffett matriculated at

1819-422: A portion of its investment portfolio. 77% of the outstanding shares were turned in. Buffett had reaped a 50 percent return on investment in just two years. In 1962, Buffett became a millionaire with the success of his partnerships, which by then had grown to 11 entities and held in excess of $ 7,178,500, of which over $ 1,025,000 belonged to Buffett. At the start of the year, he merged the various partnerships into

1926-524: A result of his investment success, Buffett is one of the best-known investors in the world. As of October 2024, he had a net worth of $ 147 billion, making him the eighth-richest person in the world . Buffett was born in Omaha, Nebraska . The son of US congressman and businessman Howard Buffett , he developed an interest in business and investing during his youth. He entered the Wharton School of

2033-486: A series of investment partnerships. In 1957, Buffett operated three investment partnerships. By 1959, the total had grown to six partnerships. That year, Buffett met future partner Charlie Munger . In 1961, Buffett revealed that 35% of the partnerships' assets were invested in the Sanborn Map Company . He explained that Sanborn stock sold for only $ 45 per share in 1958, but the company's investment portfolio

2140-408: A share the management team must own after the acquisition in order to qualify as an MBO, as opposed to a normal leveraged buyout in which the management invests together with the financial sponsor. However, in the usual use of the term, an MBO is a situation in which the management team initiates and actively pushes the acquisition. MBO situations often lead management teams into a dilemma as they face

2247-492: A so-called PtP transaction – public-to-private). As financial sponsors increase their returns by employing a very high leverage (i.e., a high ratio of debt to equity ), they have an incentive to employ as much debt as possible to finance an acquisition. This has, in many cases, led to situations in which companies were "over-leveraged", meaning that they did not generate sufficient cash flows to service their debt, which in turn led to insolvency or to debt-to-equity swaps in which

SECTION 20

#1732772558449

2354-571: A stockbroker while taking a Dale Carnegie public speaking course. Using what he learned, he felt confident enough to teach an "Investment Principles" night class at the University of Nebraska-Omaha . The average age of his students was more than twice his own. During this time he also purchased a Sinclair gas station as a side investment but it was unsuccessful. In 1954, Buffett accepted a job at Benjamin Graham 's partnership. His starting salary

2461-557: A subsidiary in a deal that presented difficulties — according to the Rational Walk investment website, "underwriting standards proved to be inadequate", while a "problematic derivatives book" was resolved after numerous years and a significant loss. Gen Re later provided reinsurance after Buffett became involved with Maurice R. Greenberg at AIG in 2002. During a 2005 investigation of an accounting fraud case involving AIG, Gen Re executives became implicated. On March 15, 2005,

2568-517: A supporter of index funds for people who are either not interested in managing their own money or do not have the time. Buffett is skeptical that active management can outperform the market in the long run, and has advised both individual and institutional investors to move their money to low-cost index funds that track broad, diversified stock market indices. Buffett said in one of his letters to shareholders that "when trillions of dollars are managed by Wall Streeters charging high fees, it will usually be

2675-514: A textile manufacturing firm, Berkshire Hathaway, assuming its name to create a diversified holding company . Buffett emerged as the company's chairman and majority shareholder in 1970. In 1978, fellow investor and long-time business associate Charlie Munger joined Buffett as vice-chairman. Since 1970, Buffett has presided as the chairman and largest shareholder of Berkshire Hathaway, one of America's foremost holding companies and world's leading corporate conglomerates . He has been referred to as

2782-620: Is among the first significant leveraged buyout transactions. Similar to the approach employed in the McLean transaction, the use of publicly traded holding companies as investment vehicles to acquire portfolios of investments in corporate assets was a relatively new trend in the 1960s, popularized by the likes of Warren Buffett ( Berkshire Hathaway ) and Victor Posner ( DWG Corporation ), and later adopted by Nelson Peltz ( Triarc ), Saul Steinberg (Reliance Insurance) and Gerry Schwartz ( Onex Corporation ). These investment vehicles would utilize

2889-415: Is an MBI (Management Buy In) in which an external management team acquires the shares. An MBO can occur for a number of reasons; e.g., In most situations, the management team does not have enough money to fund the equity needed for the acquisition (to be combined with bank debt to constitute the purchase price) so that management teams work together with financial sponsors to part-finance the acquisition. For

2996-468: Is doing something that is deeply evil to make money for himself." Buffett's writings include his annual reports and various articles. Buffett is recognized by communicators as a great story-teller, as evidenced by his annual letters to shareholders. He has warned about the pernicious effects of inflation: The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has

3103-400: Is secured with the target company's assets and has lower interest rates. Junior debt has no security interests and higher interest rates. In big purchases, debt and equity can come from more than one party. Banks can also syndicate debt, meaning they sell pieces of the debt to other banks. Seller notes (or vendor loans) can also happen when the seller uses part of the sale to give the purchaser

3210-462: Is to figure out how nobody gets left too far behind. After the difficulties of the economic crisis , Buffett managed to bring its company back to its pre-recession standards: in Q2 2014, Berkshire Hathaway made $ 6.4 billion in net profit, the most it had ever made in a three-month period. On August 14, 2014, the price of Berkshire Hathaway's shares hit $ 200,000 a share for the first time, capitalizing

3317-672: The Buffalo Courier-Express . Both papers lost money until the Courier-Express folded in 1982. In 1979, Berkshire began to acquire stock in ABC . Capital Cities announced a $ 3.5 billion purchase of ABC on March 18, 1985, surprising the media industry, as ABC was four times bigger than Capital Cities at the time. Buffett helped finance the deal in return for a 25% stake in the combined company. The newly merged company, known as Capital Cities/ABC (or CapCities/ABC),

Leveraged buyout - Misplaced Pages Continue

3424-624: The S&;P 500 was "pure chance", by highlighting the results achieved by a number of students of the Graham and Dodd value investing school of thought. In addition to himself, Buffett named Walter J. Schloss , Tom Knapp, Ed Anderson ( Tweedy, Browne LLC ), William J. Ruane ( Sequoia Fund ), Charlie Munger (Buffett's partner at Berkshire), Rick Guerin (Pacific Partners Ltd.), and Stan Perlmeter (Perlmeter Investments). In his November 1999 Fortune article, he warned of investors' unrealistic expectations: Let me summarize what I've been saying about

3531-489: The U.S. Court of Appeals for the Sixth Circuit held that such settlement payments could not be avoided, irrespective of whether they occurred in an LBO of a public or private company. To the extent that public shareholders are protected, insiders and secured lenders become the primary targets of fraudulent transfer actions. Banks have reacted to failed LBOs by requiring a lower debt-to-equity ratio , thus increasing

3638-547: The United States Congress , and after moving with his family to Washington, D.C., Warren finished elementary school, attended Alice Deal Junior High School and graduated from what was then Woodrow Wilson High School in 1947, where his senior yearbook picture reads: "likes math; a future stockbroker". After finishing high school and finding success with his side entrepreneurial and investment ventures, Buffett wanted to skip college to go directly into business but

3745-674: The Washington Post Company . Buffett became close friends with Katharine Graham , who controlled the company and its flagship newspaper and joined its board. In 1974, the SEC opened a formal investigation into Buffett and Berkshire's acquisition of Wesco Financial , due to possible conflict of interest. No charges were brought. In 1977, Berkshire indirectly purchased the Buffalo Evening News for $ 32.5 million. Antitrust charges started, instigated by its rival,

3852-557: The Wharton School of the University of Pennsylvania . He would have preferred to focus on his business ventures, but enrolled due to pressure from his father. Warren studied there for two years and joined the Alpha Sigma Phi fraternity. He then transferred to the University of Nebraska where he graduated with a Bachelor of Science in business administration in 1951. After being rejected by Harvard Business School in

3959-450: The leveraged finance and high-yield debt markets. The markets had been highly robust during the first six months of 2007, with highly issuer friendly developments including PIK and PIK Toggle (interest is " P ayable I n K ind") and covenant light debt widely available to finance large leveraged buyouts. July and August saw a notable slowdown in issuance levels in the high yield and leveraged loan markets with only few issuers accessing

4066-422: The public markets through an initial public offering or ( IPO ) as a means of exiting an investment. Public investors will seek to align their own interests as much as possible with those of the financial sponsor by limiting the financial sponsor's ability to sell shares and managing the use of proceeds from the offering. Various studies have been conducted to evaluate the impact of financial sponsor ownership on

4173-931: The subprime mortgage crisis of 2007 and 2008, part of the Great Recession starting in 2007, that he had allocated capital too early resulting in suboptimal deals. "Buy American. I am." he wrote for an opinion piece published in the New York Times in 2008. Buffett called the downturn in the financial sector that started in 2007 " poetic justice ". Buffett's Berkshire Hathaway suffered a 77% drop in earnings during Q3 2008 and several of his later deals suffered large mark-to-market losses. On September 23, 2008, Berkshire Hathaway acquired 10 percent of perpetual preferred stock of Goldman Sachs . Some of Buffett's put options (European exercise at expiry only) that he wrote (sold) were running at around $ 6.73 billion mark-to-market losses as of late 2008. The scale of

4280-463: The "Oracle" or "Sage" of Omaha by global media as a result of having accumulated a massive fortune derived from his business and investment success. He is noted for his adherence to the principles of value investing, and his frugality despite his wealth. Buffett has pledged to give away 99 percent of his fortune to philanthropic causes, primarily via the Bill & Melinda Gates Foundation . He founded

4387-462: The "skin in the game" for the financial sponsor and reducing the debt burden. Financial sponsor A financial sponsor is a private equity investment firm, particularly a private equity firm that engages in leveraged buyout transactions. In addition to bringing capital to a deal, financial sponsors are expected to bring a combination of capital markets expertise, various important contacts, strategies for operational improvement , and

Leveraged buyout - Misplaced Pages Continue

4494-461: The 1986 buyout of the Revco drug stores, Walter Industries, FEB Trucking and Eaton Leonard. Additionally, the RJR Nabisco deal was showing signs of strain, leading to a recapitalization in 1990 that involved the contribution of $ 1.7 billion of new equity from KKR. Drexel Burnham Lambert was the investment bank most responsible for the boom in private equity during the 1980s due to its leadership in

4601-465: The 1986 buyout of the Revco drug stores. Many LBOs of the boom period 2005–2007 were also financed with too high a debt burden. The failure of the Federated buyout was a result of excessive debt financing, comprising about 97% of the total consideration, which led to large interest payments that exceeded the company's operating cash flow. Often, instead of declaring insolvency, the company negotiates

4708-417: The 2005 fundraising total. The following year, despite the onset of turmoil in the credit markets in the summer, saw yet another record year of fundraising with $ 302 billion of investor commitments to 415 funds. Among the mega-buyouts completed during the 2006 to 2007 boom were: EQ Office , HCA , Alliance Boots and TXU . In July 2007, turmoil that had been affecting the mortgage markets spilled over into

4815-523: The AIG board forced Greenberg to resign from his post as chairman and CEO after New York state regulators claimed that AIG had engaged in questionable transactions and improper accounting. On February 9, 2006, AIG agreed to pay a $ 1.6 billion fine. In 2010, the U.S. government agreed to a $ 92 million settlement with Gen Re, allowing the Berkshire Hathaway subsidiary to avoid prosecution in

4922-433: The AIG case. Gen Re also made a commitment to implement "corporate governance concessions", which required Berkshire Hathaway's chief financial officer to attend General Re's audit committee meetings and mandated the appointment of an independent director. In 2002, Buffett entered in $ 11 billion worth of forward contracts to deliver U.S. dollars against other currencies. By April 2006, his total gain on these contracts

5029-619: The Gibson Greetings investment attracted the attention of the wider media to the nascent boom in leveraged buyouts. Between 1979 and 1989, it was estimated that there were over 2,000 leveraged buyouts valued in excess of $ 250 billion. In the summer of 1984 the LBO was a target for virulent criticism by Paul Volcker , then chairman of the Federal Reserve , by John S.R. Shad , chairman of the U.S. Securities and Exchange Commission , and other senior financiers. The gist of all

5136-481: The Giving Pledge in 2010 with Bill Gates , whereby billionaires pledge to give away at least half of their fortunes. Warren Edward Buffett was born on August 30, 1930 in Omaha, Nebraska , as the second of three children and the only son of Leila (née Stahl) and Congressman Howard Buffett . He began his education at Rose Hill Elementary School. In 1942, his father was elected to the first of four terms in

5243-674: The Treasury Nicholas F. Brady , the U.S. Securities and Exchange Commission (SEC), the New York Stock Exchange , and the Federal Reserve , Drexel Burnham Lambert officially filed for Chapter 11 bankruptcy protection. The combination of decreasing interest rates, loosening lending standards, and regulatory changes for publicly traded companies (specifically the Sarbanes–Oxley Act ) would set

5350-427: The U.S. Federal Reserve to a hedge fund and stated that the bank is generating "$ 80 billion or $ 90 billion a year probably" in revenue for the U.S. government. Buffett also advocated further on the issue of wealth equality in society: We have learned to turn out lots of goods and services, but we haven't learned as well how to have everybody share in the bounty. The obligation of a society as prosperous as ours

5457-574: The University of Pennsylvania in 1947 before graduating from the University of Nebraska at 19. He went on to graduate from Columbia Business School , where he molded his investment philosophy around the concept of value investing pioneered by Benjamin Graham . He attended New York Institute of Finance to focus on his economics background and soon pursued a business career. He later began various business ventures and investment partnerships, including one with Graham. He created Buffett Partnership Ltd. in 1956 and his investment firm eventually acquired

SECTION 50

#1732772558449

5564-644: The company at $ 328 billion. While Buffett had given away much of his stock to charities by this time, he still held 321,000 shares worth $ 64.2 billion. On August 20, 2014, Berkshire Hathaway was fined $ 896,000 for failing to report as required the December 9, 2013 purchase of shares in USG Corporation . A 2023 ProPublica article based on a leak of confidential IRS data alleged that Buffett had made equity trades in his personal portfolio involving companies that Berkshire Hathaway bought or sold during

5671-399: The company had working capital of $ 19 per share. This did not include the value of fixed assets (factory and equipment). Buffett took control of Berkshire Hathaway at a board meeting and named a new president, Ken Chace, to run the company. In 1966, Buffett closed the partnership to new money. He later claimed that the textile business had been his worst trade. He then moved the business into

5778-515: The crisis in debt and equity markets. In 2008, Buffett became the richest person in the world, garnering a total net worth estimated at $ 62 billion by Forbes and at $ 58 billion by Yahoo , dethroning Bill Gates , who had been number one on the Forbes list for 13 consecutive years. In 2009, Gates regained the top position on the Forbes list, with Buffett shifted to second place. Both of

5885-443: The customers' lounge of a regional stock brokerage near his father's own brokerage office. His father took interest in cultivating and educating the young Warren's curiosity surrounding the subject of business and investing, even at one point taking him to visit the New York Stock Exchange when he was 10. At 11, he bought three shares of Cities Service Preferred for himself, and three for his sister Doris Buffett (who also became

5992-466: The denunciations was that top-heavy reversed pyramids of debt were being created and that they would soon crash, destroying assets and jobs. During the 1980s, constituencies within acquired companies and the media ascribed the " corporate raid " label to many private equity investments, particularly those that featured a hostile takeover of the company, perceived asset stripping , major layoffs or other significant corporate restructuring activities. Among

6099-422: The difficulties of knowing when to sell in the company's 2004 annual report: That may seem easy to do when one looks through an always-clean, rear-view mirror. Unfortunately, however, it's the windshield through which investors must peer, and that glass is invariably fogged. In March 2009, Buffett said in a cable television interview that the economy had "fallen off a cliff ... Not only has the economy slowed down

6206-564: The dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $ 40–$ 50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars. The merger with the Burlington Northern Santa Fe Railway ( BNSF ) closed upon BNSF shareholder approval during Q1 of 2010. This deal

6313-411: The equity owners lose control over the business to the lenders. LBOs have become attractive as they usually represent a win–win situation for the financial sponsor and the banks: the financial sponsor can increase the rate of returns on its equity by employing the leverage; banks can make substantially higher margins when supporting the financing of LBOs as compared to usual corporate lending , because

6420-486: The experience of owning leveraged companies. As the owners of the company, financial sponsors rarely manage a company directly and are most active in issues relating to the company's capital structure and balance sheet as well as strategic initiatives including mergers and acquisitions , joint ventures , and management restructurings. The company's CEO and other senior management maintain responsibility for day-to-day operational issues. Various investor classes look to

6527-482: The failure. The analysis historically depended on "dueling" expert witnesses and was notoriously subjective, expensive, and unpredictable. However, courts are increasingly turning toward more objective, market-based measures. In addition, the Bankruptcy Code includes a so-called "safe harbor" provision, preventing bankruptcy trustees from recovering settlement payments to the bought-out shareholders. In 2009,

SECTION 60

#1732772558449

6634-432: The financial restructuring requires significant management attention and may lead to customers losing faith in the company. The inability to repay debt in an LBO can be caused by initial overpricing of the target firm and/or its assets. Over-optimistic forecasts of the revenues of the target company may also lead to financial distress after acquisition. Some courts have found that in certain situations, LBO debt constitutes

6741-399: The financial sponsor to generate value in a company as much as the management or operations of the company. In particular, debt providers are willing to extend credit in the form of bank loans , high-yield debt and mezzanine capital based in part on the reputation of and relationship with the financial sponsor. Additionally, many companies owned by financial sponsors will raise equity in

6848-481: The financial sponsor; and the overall economic environment. Debt volumes of up to 100% of a purchase price have been provided to companies with very stable and secured cash flows, such as real estate portfolios with rental income secured by long-term rental agreements. Typically, debt of 40–60% of the purchase price may be offered. Debt ratios vary significantly among regions and target industries. Debt for an acquisition comes in two types: senior and junior. Senior debt

6955-432: The five years following the agreement, and Buffett also received a 10% dividend (callable within three years). In February 2009, Buffett sold some Procter & Gamble Co. and Johnson & Johnson shares from his personal portfolio. In addition to suggestions of mistiming, the wisdom in keeping some of Berkshire's major holdings, including The Coca-Cola Company, which in 1998 peaked at $ 86, raised questions. Buffett discussed

7062-531: The formation of Kohlberg Kravis Roberts in that year. In January 1982, former U.S. Secretary of the Treasury William E. Simon and a group of investors acquired Gibson Greetings, a producer of greeting cards, for $ 80 million, of which only $ 1 million was rumored to have been contributed by the investors. By mid-1983, just sixteen months after the original deal, Gibson completed a $ 290 million IPO and Simon made approximately $ 66 million. The success of

7169-422: The full extent of the credit situation became obvious as major lenders including Citigroup and UBS AG announced major writedowns due to credit losses. The leveraged finance markets came to a near standstill. As 2007 ended and 2008 began, it was clear that lending standards had tightened and the era of "mega-buyouts" had come to an end. Nevertheless, private equity continues to be a large and active asset class and

7276-653: The instrument at stockholder meetings and other opportunities. His love of the instrument led to the commissioning of two custom Dairy Queen ukuleles by Dave Talsma, one of which was auctioned for charity. In 1952, Buffett married Susan at Dundee Presbyterian Church . The following year, they had their first child, Susan Alice . She was followed by Howard (b. 1954) and Peter (b. 1958). The couple began living separately in 1977, although they remained married until Susan's death in July 2004. Their only daughter Susan lives in Omaha,

7383-613: The insurance sector, and, in 1985, the last of the mills that had been the core business of Berkshire Hathaway was sold. In a second letter, Buffett announced his first investment in a private business — Hochschild, Kohn and Co, a privately owned Baltimore department store. In 1967, Berkshire paid out its first and only dividend of 10 cents. In 1969, Buffett liquidated the partnership and transferred their assets to his partners including shares of Berkshire Hathaway. He lived solely on his salary of $ 50,000 per year and his outside investment income. In 1973, Berkshire began to acquire stock in

7490-406: The interest chargeable is that much higher. Banks can increase their likelihood of being repaid by obtaining collateral or security. The amount of debt that banks are willing to provide to support an LBO varies greatly and depends, among other things, on the quality of the asset to be acquired, including its cash flows, history, growth prospects, and hard assets ; experience and equity supplied by

7597-523: The issuance of high-yield debt . Drexel reached an agreement with the government in which it pleaded nolo contendere (no contest) to six felonies – three counts of stock parking and three counts of stock manipulation . It also agreed to pay a fine of $ 650 million – at the time, the largest fine ever levied under securities laws. Milken left the firm after his own indictment in March 1989. On February 13, 1990, after being advised by United States Secretary of

7704-581: The largest leveraged buyout in history. The event was chronicled in the book (and later the movie) Barbarians at the Gate: The Fall of RJR Nabisco . KKR would eventually prevail in acquiring RJR Nabisco at $ 109 per share, marking a dramatic increase from the original announcement that Shearson Lehman Hutton would take RJR Nabisco private at $ 75 per share. A fierce series of negotiations and horse-trading ensued which pitted KKR against Shearson Lehman Hutton and later Forstmann Little & Co. Many of

7811-477: The major banking players of the day, including Morgan Stanley , Goldman Sachs , Salomon Brothers , and Merrill Lynch were actively involved in advising and financing the parties. After Shearson Lehman 's original bid, KKR quickly introduced a tender offer to obtain RJR Nabisco for $ 90 per share – a price that enabled it to proceed without the approval of RJR Nabisco's management. RJR's management team, working with Shearson Lehman and Salomon Brothers , submitted

7918-430: The management team, the negotiation of the deal with the financial sponsor (i.e., who gets how many shares of the company) is a key value creation lever. Financial sponsors are often sympathetic to MBOs as in these cases they are assured that management believes in the future of the company and has an interest in value creation (as opposed to being solely employed by the company). There are no clear guidelines as to how big

8025-422: The managers who reap outsized profits, not the clients". In 2007, Buffett made a bet with numerous managers that a simple S&P 500 index fund will outperform hedge funds that charge exorbitant fees. By 2017, the index fund was outperforming every hedge fund that made the bet against Buffett. Buffet has a long-standing aversion to using the services of investment banks via Berkshire Hathaway. This dynamic

8132-409: The market. Uncertain market conditions led to a significant widening of yield spreads, which coupled with the typical summer slowdown led many companies and investment banks to put their plans to issue debt on hold until the autumn. However, the expected rebound in the market after Labor Day 2007 did not materialize and the lack of market confidence prevented deals from pricing. By the end of September,

8239-410: The men's values dropped, to $ 40 billion and $ 37 billion respectively—according to Forbes, Buffett lost $ 25 billion over a 12-month period during 2008/2009. In October 2008, the media reported that Buffett had agreed to buy General Electric (GE) preferred stock. The operation included special incentives: he received an option to buy three billion shares of GE stock, at $ 22.25, over

8346-584: The most notable investors to be labeled corporate raiders in the 1980s included Carl Icahn , Victor Posner , Nelson Peltz , Robert M. Bass , T. Boone Pickens , Harold Clark Simmons , Kirk Kerkorian , Sir James Goldsmith , Saul Steinberg and Asher Edelman . Carl Icahn developed a reputation as a ruthless corporate raider after his hostile takeover of TWA in 1985. Many of the corporate raiders were onetime clients of Michael Milken , whose investment banking firm, Drexel Burnham Lambert helped raise blind pools of capital with which corporate raiders could make

8453-452: The move came as a surprise to many investors and observers. During the interview, in which he revealed the investment to the public, Buffett stated that he was impressed by the company's ability to retain corporate clients and said, "I don't know of any large company that really has been as specific on what they intend to do and how they intend to do it as IBM". In May 2012, Buffett's acquisition of Media General, consisting of 63 newspapers in

8560-519: The needle" at Berkshire with newspaper acquisitions, but he anticipates an annual return of 10 percent. The Press of Atlantic City became Berkshire's 30th daily newspaper, following other purchases such as Virginia, U.S.' Roanoke Times and The Tulsa World in Oklahoma, U.S. During a presentation to Georgetown University students in Washington, D.C. , in late September 2013, Buffett compared

8667-399: The performance of IPOs . This private equity or venture capital-related article is a stub . You can help Misplaced Pages by expanding it . Warren Buffett Warren Edward Buffett ( / ˈ b ʌ f ɪ t / BUF -it ; born August 30, 1930) is an American businessman, investor, and philanthropist who currently serves as the chairman and CEO of Berkshire Hathaway . As

8774-404: The potential loss prompted the SEC to demand that Berkshire produce, "a more robust disclosure" of factors used to value the contracts. Buffett also helped Dow Chemical pay for its $ 18.8 billion takeover of Rohm & Haas . He thus became the single largest shareholder in the enlarged group with his Berkshire Hathaway, which provided $ 3 billion, underlining his instrumental role during

8881-415: The private-equity firms, with hundreds of billions of dollars of committed capital from investors are looking to deploy capital in new and different transactions. A special case of a leveraged acquisition is a management buyout (MBO). In an MBO, the incumbent management team (that usually has no or close to no shares in the company) acquires a sizeable portion of the shares of the company. Similar to an MBO

8988-643: The purchase by McLean Industries, Inc. of Pan-Atlantic Steamship Company in January 1955 and Waterman Steamship Corporation in May 1955. Under the terms of that transaction, McLean borrowed $ 42 million and raised an additional $ 7 million through an issue of preferred stock . When the deal closed, $ 20 million of Waterman cash and assets were used to retire $ 20 million of the loan debt. Lewis Cullman's acquisition of Orkin Exterminating Company in 1964

9095-425: The same quarter or the quarter before, raising concerns about conflicts of interest. On three dates between 2009 and 2012, Buffett sold shares of Johnson and Johnson, Walmart, and Wells Fargo, with the sales totaling $ 80 million in value. Although Buffett has not commented, Berkshire Hathaway's Vice Chairman Charlie Munger dismissed the allegations, saying "I don’t think there’s the slightest chance that Warren Buffett

9202-621: The selection of the financial sponsor. A secondary buyout is a form of leveraged buyout where both the buyer and the seller are private-equity firms or financial sponsors (i.e., a leveraged buyout of a company that was acquired through a leveraged buyout). A secondary buyout will often provide a clean break for the selling private-equity firms and its limited partner investors. Historically, given that secondary buyouts were perceived as distressed sales by both seller and buyer, limited partner investors considered them unattractive and largely avoided them. The increase in secondary buyout activity in 2000s

9309-548: The selling firm. Secondary buyouts differ from secondaries or secondary market purchases which typically involve the acquisition of portfolios of private equity assets including limited partnership stakes and direct investments in corporate securities. If a company that was acquired in a secondary buyout gets sold to another financial sponsor, the resulting transaction is called a tertiary buyout. Some LBOs before 2000 have resulted in corporate bankruptcy, such as Robert Campeau 's 1988 buyout of Federated Department Stores and

9416-557: The single entity Buffett Partnership, Ltd., which would be his primary investment vehicle for the remainder of the decade. Buffett invested in and eventually took control of a textile manufacturing company, Berkshire Hathaway . He began buying shares in Berkshire from Seabury Stanton , the owner, whom he later fired. Buffett's partnerships began purchasing shares at $ 7.60 per share. In 1965, when Buffett's partnerships began purchasing Berkshire aggressively, they paid $ 14.86 per share while

9523-530: The south-eastern U.S., was announced. The company was the second news print purchase made by Buffett in one year. Interim publisher James W. Hopson announced on July 18, 2013, that the Press of Atlantic City would be sold to Buffett's BH Media Group by ABARTA, a private holding company based in Pittsburgh , U.S. At the Berkshire shareholders meeting in May 2013, Buffett explained that he did not expect to "move

9630-478: The spring of 1950, Buffett enrolled at Columbia Business School of Columbia University upon learning that Benjamin Graham taught there. He earned a Master of Science in economics from Columbia in 1951. After graduating, Buffett attended the New York Institute of Finance . The basic ideas of investing are to look at stocks as business, use the market's fluctuations to your advantage, and seek

9737-568: The stage for the largest boom the private equity industry had seen. Marked by the buyout of Dex Media in 2002, large multibillion-dollar U.S. buyouts could once again obtain significant high yield debt financing from various banks and larger transactions could be completed. By 2004 and 2005, major buyouts were once again becoming common, including the acquisitions of Toys "R" Us , The Hertz Corporation , Metro-Goldwyn-Mayer and SunGard in 2005. As 2005 ended and 2006 began, new "largest buyout" records were set and surpassed several times with nine of

9844-456: The stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like—anything like—they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate—repeat, aggregate—would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%! Buffett has been

9951-470: The three Bear Stearns bankers would complete a series of buyouts including Stern Metals (1965), Incom (a division of Rockwood International, 1971), Cobblers Industries (1971), and Boren Clay (1973) as well as Thompson Wire, Eagle Motors and Barrows through their investment in Stern Metals. By 1976, tensions had built up between Bear Stearns and Kohlberg, Kravis and Roberts leading to their departure and

10058-471: The time, Kohlberg and Kravis, along with Kravis' cousin George Roberts , began a series of what they described as "bootstrap" investments. Many of the target companies lacked a viable or attractive exit for their founders, as they were too small to be taken public and the founders were reluctant to sell out to competitors: thus, a sale to an outside buyer might prove attractive. In the following years,

10165-451: The top ten buyouts at the end of 2007 having been announced in an 18-month window from the beginning of 2006 through the middle of 2007. In 2006, private-equity firms bought 654 U.S. companies for $ 375 billion, representing 18 times the level of transactions closed in 2003. Additionally, U.S.-based private-equity firms raised $ 215.4 billion in investor commitments to 322 funds, surpassing the previous record set in 2000 by 22% and 33% higher than

10272-465: Was $ 12,000 a year (about $ 136,000 today). There he worked closely with Walter Schloss . Graham was adamant that stock picks should provide a wide margin of safety after weighing the trade-off between their price and their intrinsic value. In 1956, Benjamin Graham retired and closed his partnership. At this time Buffett, who had amassed personal savings over $ 174,000 (about $ 1.95 million today) , decided to return to Omaha, where he would quickly start

10379-512: Was also reported in Barron's , Insider , and Seeking Alpha , among others. In 1949, Buffett developed a crush on a young woman whose boyfriend had a ukulele . In an attempt to compete, he bought one of the instruments and has been playing it ever since. Though the attempt to capture her attention was unsuccessful, his music interest became a key part of his becoming a part of Susan Thompson 's life, and led to their marriage. Buffett often plays

10486-526: Was announced that over the course of the previous eight months, Buffett had bought 64 million shares of International Business Machine Corp (IBM) stock, worth around $ 11 billion. This unanticipated investment raised his stake in the company to around 5.5 percent—the largest stake in IBM alongside that of State Street Global Advisors . Buffett had said on numerous prior occasions that he would not invest in technology because he did not fully understand it, so

10593-410: Was driven in large part by an increase in capital available for the leveraged buyouts. Often, selling private-equity firms pursue a secondary buyout for a number of reasons: Often, secondary buyouts have been successful if the investment has reached an age where it is necessary or desirable to sell rather than hold the investment further or where the investment had already generated significant value for

10700-474: Was forced to sell some stations due to Federal Communications Commission ownership rules. The two companies also owned several radio stations in the same markets. In 1987, Berkshire Hathaway purchased a 12% stake in Salomon Inc., making it the largest shareholder and Buffett a director. In 1990, a scandal involving John Gutfreund (former CEO of Salomon Brothers ) surfaced. A rogue trader , Paul Mozer,

10807-672: Was given Federal Reserve approval to buy back Berkshire's preferred stock in Goldman. Buffett had been reluctant to give up the stock, which averaged $ 1.4 million in dividends per day, saying: I'm going to be the Osama bin Laden of capitalism. I'm on my way to an unknown destination in Asia where I'm going to look for a cave. If the U.S. Armed forces can't find Osama bin Laden in 10 years, let Goldman Sachs try to find me. In November 2011, it

10914-713: Was on the board of GEICO insurance. Taking a train to Washington, D.C., on a Saturday, he knocked on the door of GEICO's headquarters until a janitor admitted him. There he met Lorimer Davidson, GEICO's vice president, and the two discussed the insurance business for hours, and Buffett made his first purchase of GEICO stock. Davidson would eventually become Buffett's lifelong friend and a lasting influence, and would later recall that he found Buffett to be an "extraordinary man" after only fifteen minutes. Buffett wanted to work on Wall Street but both his father and Ben Graham urged him not to. He offered to work for Graham for free, but Graham refused. Buffett returned to Omaha and worked as

11021-508: Was over $ 2 billion. Buffett announced in June 2006 that he would gradually give away 85% of his Berkshire holdings to five foundations in annual gifts of stock, starting in July 2006—the largest contribution going to the Bill and Melinda Gates Foundation . In 2007, in a letter to shareholders, Buffett announced that he was looking for a younger successor, or perhaps successors, to run his investment business. Buffett ran into criticism during

11128-661: Was overruled by his father. Buffett showcased an interest in business and investing at a young age. He was inspired by a book he borrowed from the Omaha public library at age seven, One Thousand Ways to Make $ 1000 . Much of Buffett's early childhood years were enlivened with entrepreneurial ventures. In one of his first business ventures, Buffett sold chewing gum, Coca-Cola , and weekly magazines door to door . He worked in his grandfather's grocery store. While still in high school, he made money delivering newspapers, selling golf balls and stamps, and detailing cars, among other means. On his first income tax return in 1944, Buffett took

11235-608: Was submitting bids in excess of what was allowed by Treasury rules. When this was brought to Gutfreund's attention, he did not immediately suspend the rogue trader. Gutfreund left the company in August 1991. Buffett became chairman of Salomon until the crisis passed. In 1988, Buffett began buying The Coca-Cola Company stock, eventually purchasing up to 7% of the company for $ 1.02 billion. It would turn out to be one of Berkshire's most lucrative investments and one which it still holds. In 1998 Buffett acquired General Re (Gen Re) as

11342-462: Was valued at approximately $ 44 billion (with $ 10 billion of outstanding BNSF debt) and represented an increase of the previously existing stake of 22%. In June 2010, Buffett defended the credit-rating agencies for their role in the US financial crisis, claiming: Very, very few people could appreciate the bubble . That's the nature of bubbles—they're mass delusions. On March 18, 2011, Goldman Sachs

11449-420: Was worth $ 65 per share. This meant that Sanborn's map business was being valued at "minus $ 20". Buffett eventually purchased 23% of the company's outstanding shares as an activist investor , obtaining a seat for himself on the board of directors, and allied with other dissatisfied shareholders to control 44% of the shares. To avoid a proxy fight , the board offered to repurchase shares at fair value, paying with

#448551