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Brian Callaci
@brian_callaci
As Larry Summers (yes that Larry Summers) explained decades ago, the PE model can be profitable, despite its destructiveness, because of redistribution to shareholders through the breaking of implicit contracts with other stakeholders
The image is a scanned or digital copy of an academic working paper titled 'Breach of Trust in Hostile Takeovers' by Andrei Shleifer and Lawrence H. Summers, dated August 1987, with a DOI and paper number visible. It features a formal layout with black text on a white background, including the authors' names, paper details, and the opening paragraph discussing hostile takeovers and efficiency gains. The post text by Brian Callaci references Larry Summers (co-author) and connects the paper's content to private equity models, highlighting redistribution to shareholders via broken implicit contracts, adding context to the paper's relevance in modern finance discussions. No platform watermarks are present.
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Jeremiah Johnson 🌐
@JeremiahDJohns
So there's a persistent idea floating around that goes like "Private equity firms buy up good companies and then run them into the ground, and this is a huge and persistent problem". This confuses me: why would they buy companies just to ruin them? Wouldn't they lose money? PE
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Brian Callaci
@brian_callaci
Sometimes this behavior (asset stripping, strategic bankruptcy, abrogating collective bargaining agreements, raiding pension funds, etc.) is merely harmful. Sometimes, it actually does destroy the portfolio firm.
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Glenn
@GlennLuk
1. Most PE in recent decades are not “hostile takeover” deals 2. Is PE as a structure any different from public stock ownership with regards to redistributing value from stakeholders to equity holders?
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Neel Master
@neel_master
They taught us the PE raider model in business school very clearly. You buy a firm, load it with debt, and then file bankruptcy if it doesn't work and pay yourself first. Or something like that. But it was presented as a way to basically make money with no risk.
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Brian Callaci
@brian_callaci
I almost think it's better to talk about the activity (LBOs) rather than the firms that specialize in it (PE). There's some PE firms that just focus on buying out mid-sized family firms, allowing founders to cash out while professionalizing the leadership. Seems fine to me.
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Armen
@BabyAlchian
Most PE activity isn’t hostile takeovers. I’m skeptical that paper has much to do with contemporary PE. I also don’t think PE is harmful on average.
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the aeroplane
@toaeroplano
Thank you for this. What do we mean exactly by the term stakeholders? People in managerial positions in the company? By shareholders I assume that we mean owners of capital in the company.
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dialect.ch
@ChDialect
A large lever for value creation is shutting down activities with little profit. It is common for companies to have parts that destroy value, for the company and thus for society as a whole. It is also common for companies to fail to bring their actual pearls to other markets.
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