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Sloan Sessions: Buyouts get creative

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Bob Moon: The days of the brainless mega-buyout are soooooo 2007. So says Fortune magazine’s Editor-at-Large Allan Sloan. But even though it’s true that the credit squeeze is making it considerably harder to borrow money, he’s discovered that these days, “doing the deal” just takes being creative. Well, in some cases, we’re talking very creative. Good morning, Allan.

Allan Sloan: Good morning, Bob.

Moon: So, with all the problems we’ve been hearing about the credit squeeze for several months now, is the day of the mega-buyout over?

Sloan: The day of the mega-buyout is suspended, but the firms who have a lot of things to do and a lot of money to invest are now doing a business buying loans and their own buyouts at a discount from the bank that made the loan.

Moon: I’m confused. How does that work?

Sloan: OK. it goes like this: Let’s say you had gotten a mortgage from Sloan Savings & Loan on your house and, I hate to say this, but you’re a broadcaster, you are not the world’s greatest credit. Nothing personal. (Moon laughs) So, what happens is I have to take a loss on this loan. I really don’t want it on my books anymore. Someone comes and says, you know, Moon’s worth 90 cents on the dollar. I say, OK, and what I do is I then lend him money to buy the loan at 90 cents on the dollar. The buyout firms are buying at a discount the loans and the buyouts that they did, and the banks are lending them the money to do it.

Moon: Hold on. Hold on here, just a second. Doesn’t this become so circular after a while that it just stacks problems on top of problems?

Sloan: Well, it depends for whom. You know, if you’re the buyout firm — we invented a term for it at Fortune we call it double-cropping. I sense you’re clearly a man of the fields, right? That’s when you get two crops out of the same field in the same season. So, first you do the buyout and then buy the loan from the bank at a discount, borrowing heavily for most of the purchase price from the bank.

Moon: Conventional wisdom says that these leveraged buyouts help whip companies into shape, and that sort of thing. But are they having any trouble now with some of these buyouts that they’ve already made?

Sloan: Well, they’re having trouble with some of these buyouts, because some of them weren’t done well and they borrowed too much money. And, if you don’t mind, I would like to dissent from the idea that, you know, piling debt on a company is necessarily a good thing. I mean sometimes it is, sometimes it’s not. But the only people it’s a magical tonic for are the people who do the deals, because they get a ton of money if the deals work out badly; they get paid pounds of money if the deals work out badly.

Moon: OK, Alan Sloan is Senior Editor-at-Large at Fortune magazine. Thanks for joining us.

Sloan: Take care.

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