This point (I put it in italics) should be discussed more:
At the time, then-Boeing executive Alan Mulally said selling the factory to a private-equity firm would let Boeing focus on final assembly, where it could add the most value to its airplanes.
By now I think we’ve learned that products made in factories owned by PE firms should carry warning labels. They are proactively anti-quality organizations, focused on extracting the maximum cash out in the short term at the cost of long term value.
You could say the same about publicity traded companies.
It all depends on who is in charge... And unfortunately self-serving people tend to reach the top more easily in both scenarios. You don't get Dan Price's very often (relatively).
In public companies, there is more public information, but that doesn't stop a company from doing "bad" things of the short term stock movement is good enough.
Look at all the merger promises that are broken. They all know what they are doing. Uphold the promise a year, then it's to late to undo the merger when you start to ignore the promise.
Can also look at all the fines companies get for willfully breaking laws (or treading the line).. (fine < profits)? success!
I think the PE companies have a specifically pathological and parasitic business model. There is more info about public companies and the majority of them don't suffer from the things you mention (which are real phenomena), and when they occur in the majority they do more from incompetence than malice. (I'm not talking about microcap companies).
The PE model is: - buy company with debt. - after purchase company assumes the debt (pays off PE company) and pays further fees to acquirer - company therefore cannot make a profit, cuts staff which cuts output over time - company goes bankrupt
This is the canonical business model from the big PE companies like Bain (Romney), KKR, Blackstone, CVC, Carlyle, etc.
Something does not add up. Banks would not lend to PE firms of they would all then go on to default.
You're completely right that it does not add up. PE detractors really need to be able to explain how this observation fits in with their analysis.
It's been explained multiple times in this thread.
tl;dr: the "observation" is made-up and false.
Somehow I haven't been able to find an explanation that I find convincing.
Given how many people explained the same thing, that lack of understanding may be more attributable to you than to everyone else.
In any case, I and several others were able to find many, so it's okay that you weren't. Sometimes a person who has made up their mind and doesn't want to change it, ignores anything that might, and further effort committed to them is just a lost cause.
Thanks for the reassuring words. Can you point to an explanation you find convincing?
I would need to first see proof that the "observation" that banks would go bankrupt is true in the first place.
I don't see any evidence it is, so the "observation" seems made up, and thus there is nothing to explain. It's possible you misunderstand how the process works.
The observation wasn't that the banks would go bankrupt. The observation was that if the practice was reliably so destructive to the value of the purchased businesses that the loans couldn't be repaid (including interest), the banks would stop choosing to make loans for that purpose. I think that observation is probably true. I also think that there are possible ways to accommodate that observation while preserving the main thrust (or perhaps even the entirety) of the criticisms, but I don't know which of those match reality (if any) or to what degree.
> The observation was that if the practice was reliably so destructive to the value of the purchased businesses that the loans couldn't be repaid...
That is the observation which is false. Nobody claimed that would happen to the extent that the bank loans couldn't be repaid, with interest and fees. I'm not sure where you got that idea. The value destruction comes from the fact that the company is destroyed in the process, and even though the banks got more than they would have if they kept the company alive, the total value is less.
tl;dr: banks are willing to tolerate the company value going down as long as they make money, which they do, because they, like the private equity firms, are effectively transferring value from the company accounts into their accounts.
The bit you quoted is not the observation (as I understood it); the observation is the whole conditional "if A then B". "A is false" is one of the ways the observation can be true.
A in this case doesn't appear to be true, making the "if A then B" discussion a distraction at best and disingenuous at worst.
Based on your lack of response to the substance of my post, I take it you understand and agree with that part, and your quibbles are purely semantic.
My concern was that it sounded to Tom like people were disputing "if A then B", rather than disputing B by negating A, and that people were therefore talking past each other.
I wasn't weighing in on that part in the first place. I don't dispute or endorse what you've said, but (if you care) do readily acknowledge that it is of the correct structure to address "the observation" if they in fact match reality. I said at the start that I don't know whether that's the case.
I was weighing in on the semantics because it seemed to me like a semantic mismatch was leading to misunderstanding and increasing hostility, and I hoped I could help clarify.
But the PE firm owns the company. Why shouldn't it transfer money from the company accounts to its own accounts? That's called "paying a dividend".
Thanks, yes, that's a good summary. I think if the original claim was that the PE business model is pathological and parasitic because it is (economic) value-destroying then the claim must be false. Other financial stakeholders wouldn't participate, because they would make an economic loss.
If the claim is that it is pathological and parasitic because it leaves employees and customers worse off that's another argument, and I could see myself agreeing, but it's a value judgement, not a financial or economic one. In principle there's nothing that PE can't do that owner-operators can't also do. The objection is to the outcome, not the means they use to get the outcome.
There's potentially room for value to be destroyed while still enough is extracted to pay off the debts.
As others have got at, in bankruptcy owners (of any sort) get paid last; debt gets paid first. Borrowing to pay the owners makes "wind down the company" more attractive by letting the relevant decision-makers cut in line. Outside of PE you see a similar dynamic with funding stock buybacks with debt.
Right, but in both cases you have to pay out of retained earnings. You can't "pay out using borrowed money"! You can borrow to get more cash on hand, and then pay out, but that's not the same thing: dividends are never allowed to take the equity in the company below zero. Dividends are always paid out of profits that have already been realised, and either kept as cash/investments or put into capital.
(Having said that I'm not a corporate accountant so I'm open to correction, but no one has posted any technical details about this matter that make me think I'm mistaken, yet.)
This bit I don't understand. It reads like a criticism, but what's wrong with winding down a company that's not deploying its capital as efficiently as it could be? (Wrong economically/financially, that is; I've already explained that I'm in sympathy with the effect on customers and workers.)
Do you mean you would need to see proof that the observation is correct before you can link evidence that it's incorrect? If so that seems somewhat difficult to achieve.
It seems weirder to ask for proof the observation is false before it's proven that it wasn't made up in the first place.
Again, who said banks would go bankrupt?
This is the first time in the thread that "banks going bankrupt" has been mentioned by anyone.
Very well: who said the loans extended by the banks would be defaulted on?
"Bankrupt" by definition means unable to pay one's debts, doesn't it? Perhaps there's another definition I am unaware of, so that may have been an invalid assumption on my part. But if that wasn't gumby's original point, then what was? Which precise aspect of PE is pathological and parasitic? Assuming the company can pay off all its debts, what exactly has gone wrong (wrong economically/financially; I've already explained I'm sympathetic to other stakeholders like customers and workers).
https://news.ycombinator.com/item?id=38987576
The companies have to refinance their debt perpetually to avoid default, which is where the banks make money. Also, that debt will then be repackaged and sold to others, so the banks won't be the bag holders.
That's just begging the question. Why are the "others" buying?
It’s syndicated. The initial lenders make money off of a variety of tax and other schemes.
That's missing a lot of steps... Like how to profit by not being paid back for the money you loaned!
the business goes bankrupt and the bank is ahead of customers and employees in line for who gets paid first.
So the scheme is to get in debt to unsophisticated lenders (employees and customers), take the money out, and finally default?
It’s siphoned off the acquisition target
The initial lenders aren't idiots. This is a multi-billion dollar business. They sell the obligation to another sucker, who will often bundle it with a bunch of other debt (good or bad) and sell it to institutional investors.
Your 401k in 2008 or whatever had some shitty balanced fund that held 0.5% of assets in some toxic shit like Sears/K-Mart for the "high yield" portion of the fixed income component. So you make some money on government, agency and Apple/Exxon bonds, and get a high yield on K-Mart that goes poof a year later.
Please explain these mysterious tax schemes you’re hinting at…
Banks get their money back. Debt is second in line (after taxes) in bankruptcy.
The model of most PE firms is to buy a company and sell it for a higher price later.
What you said happens various times, especially with the big PE firms, but it’s not the norm.
You really think banks will be lending to PE deals if the business model is to make the company bankrupt?
Yes, that is the model. Large short term profits can be made if costs are cut. The idea is that the PE firm loads the target asset with debt, then drastically cuts labor, capital maintenance and other costs. The balance sheet looks good, and profits rise for a few years. The PE firm then sells the asset for profit.
The buyer, and sometimes even taxpayers, are left holding the bag when things start breaking. The PE firm knows exactly what it's doing
Thames Water is the classic example:
https://www.dailymail.co.uk/news/article-12245021/Thames-Wat...
The large PE asset management firms don't need the banks to lend them money.. they have more than enough capital to fund their investments.
What else can a "businessperson" do if they don't have the acumen to build up corporate value at all compared to those who came before and laid the foundations to begin with?
The purpose of the stock exchange was to make it possible for a diverse bunch of investors to come together and fund the growing needs of a growing country.
IOW the type of shareholders that this was designed to be suitable for are those who are actually investing in the registered corporations so those corporations can level up to accomodate unmet demand and grow capabilities to reach a more prosperous stability, thereby providing a fair but lucrative return for the investors over time. As the corporations grow in value so do the shares, naturally.
OTOH once the market has been established, and especially in case it grows faster than the underlying value for a long enough period of time (like longer than one human lifetime, or longer than a single business career[0]), then a sizable amount of "investment" capital can end up manipulating the system to extract established value through their trading[1]. Especially when it comes to things like voting shares and mergers & acquisitions. Probably the longer a corporation has been publicly traded can figure prominently since that can be a corporation living longer than a human lifetime too.
So rather than investing value beneficially, you end up with large chunks of capital actively working to extract value parasitically[2], which is like a double-whammy, and eventually the stock exchange and the market it spawned are not working as intended at all.
Maybe just the opposite.
IOOW with Boeing the value was lost a long time ago with an unfavorable merger, and every stakeholder has been doing without ever since. It's just becoming unbearably impossible to ignore any more.
It just so happens that with an aircraft company, it's not only the shareholders, employees, and customers of Boeing who make up the majority of stakeholders. The flying public (who pays for it all to begin with) participates in far greater numbers and depends on the product aircraft with more of a life-or-death risk factor than the stakeholders who are on the financial receiving end.
And it all comes down to integrity.
Some business operators are still traditionally astute enough to create value where everyone financially involved gets their money's worth.
Others never will be able to accomplish this, and lots of them know who they are from the beginning and have had a lifetime focusing their efforts on ways not to give people their money's worth. Sometimes with the most insidious strategies.
And that's merely from poor integrity, even when ethics are not fully compromised.
Now look what happens when the ethics go out the window too . . .
Well that whooshed by and most people never saw it coming.
[0] where some may rake it in and retire early from a relatively short career.
[1] often including long-ago established value or utility that is now irreplaceable economically or legally.
[2] from anything smaller or less powerful in their path, with who knows what kind of motivation not aligned with the growing needs of a growing mother country.
Yes, the pattern seems to be to quickly transfer value from the company to the PE firm, or directly into the pockets of the PE managers and friends, even if it hollows out the company and leaves it a shriveled mess.
As an example, the PE firm owning our company recently mandated that we switch our tooling from X to a more expensive Y, because Y is owned by the PE firm, and doing so makes the PE firm more money, at the expense of our company. This pattern repeated for multiple solutions we used.
Sometimes the PE firm will literally tear the company apart to sell the pieces, inventory, equipment, etc. The goal is to make money. That might come from making the company stronger and more competitive long-term, but in my experience and observation, that is not how a lot of PE firms approach the goal
Sounds like an aggressive liquidation when all the stock holders suddenly don't want the company to continue anymore and want their money back. Most of the time I thought asset value << market cap though so if someone makes profit it's definitely on the expense of others.
> You really think banks will be lending to PE deals if the business model is to make the company bankrupt?
Yes, just like banks sold houses to unqualified buyers and packaged them up as overinflated securities to dump on the public. The people authorizing the deals get bonuses now and leave other suckers holding the bag later.
Sounds plausible. I assume they could cobble together a strategy where the company limps along zombie-like while interest rates are very low, then when rates go up they lots of companies go bankrupt simultaneously, a crisis is declared and the public takes on the losses. There are some obvious risks, but the middle managers don't have to worry to much and the big shot callers are presumably secure in their ability to influence politicians.
That was pretty much Silicon Valley Bank as I recall. Very high risk business model; turns out the plan when the bomb exploded was to change the regulations so that someone else held the risk.
Sure, as long as they get their money back before bankruptcy occurs.
-edit- I realized that part of it is that you are conflating "the big PE firms" and "all of PE". I guess the TL:DR of my comment is: don't' do that. The big firms are not all of PE and you should probably avoid ascribing what they do to all of PE as a category. Ok, the rest is my original comment.
You just can't generalize like that. My step dad was brought on as the CEO of a small Ag manufacturing company when it was acquired by a PE firm. He is an engineer. He's been in charge now for close to 10 years. He has developed new products, invested in procedures and protocols, and in general focused on an increase in quality and repeatability of procedures while bringing new products into development. He cares deeply about the company (and has in fact tried at least once to buy it from the PE firm)
This might very well be a non-central example (I certainly don't have industry wide stats to argue either way), but the point is that there is nothing inherent to PE that means companies have to be cut to the bone and stripped for parts. Yes, it absolutely can and does happen, but it's not because it's PE that's doing it.
I'm fully willing to believe that the big PE firms that everyone thinks of when they make statements like yours have exactly the track record you claim. But it's not because they are PE. Smaller PE firms like the one my step dad works for is proof-by-existence that responsible PE is not an oxymoron.
PE is notorious for buying firms with debt and then driving them into bankruptcy by loading them with that debt. It’s the only thing they’re notable for. They’ve essentially killed all traditional US brick and mortar retail — it wasn’t Amazon alone; it was crushing debt load and/or profits siphoned off to the PE firm instead of reinvesting in the business.
If you don’t want your stepdad associated with those monsters, find a different term to describe his work.
This is just way out of touch. How do you think Elon raised funds for buying Twitter? PE is the only way to fundraise outside of going public.
You can, you know, just sell bonds in the traditional way, which IIRC is how he did it and is why banks are in a hole.
He did saddle Twitter with an unsustainable level of debt as well.
The whole Twitter debacle isn't an example of PE being good for anything, you know.
Well it’s true there’s a spectrum: venture capital is a tiny corner (really just a pimple) of the private equity space. But there are tiny PE buyout funds doing the same — look at Bending Spoons who is discussed on HN for how they manage acquisitions like Evernote.
How does your comment square with fact that it was Boeing, a publicly listed company, that decided to outsource its manufacturing in order to reduce costs and liability and knowingly sacrificing quality?
Oh boy do I have bad news for you.
https://www.seattletimes.com/business/seattle-celebrity-ceo-...
Appreciate the additional info. I do find it interesting that the Seattle Times has basically no positive coverage of Dan Price, despite numerous accounts I've read of prosperity from the change. That said, there is likely merit in the complaints, and it's good to remember that there are often two sides to stories.
I wonder if we’ll ever get the guts to outlaw PE somehow, or at least make it so unprofitable it’s very rare.
Nothing good ever seems to come from it, despite their claims.
PE is just a type of company that participates in the act of buying and selling businesses.
You can't outlaw buying and selling businesses. You can't outlaw people working together to buy companies with financing.
Yes, there are a lot of PE horror stories, but there are also 100X more invisible private equity style buyups that you never hear or think about because nothing is going wrong.
Many of them actually improve when they roll up the company. My local eye doctor was bought out by a PE firm. They came in and installed all new diagnostic equipment that was standardized across their locations. They now nail my prescription on the first try and it's faster than ever before. The service is also more streamlined. This is the kind of thing that nobody ever thinks twice about, but it happens all over the place.
> You can't outlaw buying and selling businesses.
Sure you can, and I'll argue that we should.
Competition is the only thing that keeps businesses honest, and acquisition is the antithesis of competition. Shut it down and force companies to compete rather than for the richest to snap up their competitors, and to force startups to dream of sustainability rather than a fat exit.
You haven't thought about how bizarre this would be. All growth and declines would have to be organic, so rather than the obvious winner just buying the market loser and cutting 20% of staff, the loser would bleed-out over years. Companies also couldn't sell divisions they're not interested in, so rather than finding someone who cares, they'd have to go through the motions to not lose money while letting it slowly die. It'd be a lot of zombie companies.
I'm not necessarily onboard with what OP was proposing, but as a counterpoint to your hypothetical, what is stopping those losing businesses from simply closing rather than just bleeding out until death? The way this is phrased makes it sound like a company is obligated (required?) to slowly wither and die.
They'll close once they start losing money, but that might be drawn-out, and since you can't sell, the incentive is to draw it out as long as you can.
I don't know if this is something that is prevented by our current system. This is more or less what GM was doing before the 2008 bankruptcy (The vague story I remember from the time was that they knew they had to get rid of money losers like Pontiac and Oldsmobile, but decided dealing w/ the dealerships wasn't worth it)
That really makes no sense at all. That would mean you can't sell your stake in any company which not only makes IPOs, and having a stock market in general, impossible, it would also kill VC funding of start-ups. The only thing that would still be possible is bootstrapping your own company, because you also cannot get any bank loans as using the company as collateral is impossible. This idea is a guaranteed way of completely destroying your economy.
it is probably easier to just put limits on the kind of ownership that is possible. like, a worker-owned business can't really do this kind of thing
So companies should live and die with the founder? Or only be able to be transferred to their heirs? That's going to be amazingly unstable compared to a system that allows businesses to change ownership.
All new equipment and better service is great for you. There are serious disadvantages for your eye doctor though: he no longer enjoys the autonomy and freedom of his own medical practice. Lack of autonomy is a major cause of insatisfaction in medicine. Hopefully he got some fat stacks of cash to compensate for that. As a society though, nothing compensates for the fact we're approaching the fabled "you'll own nothing" future.
It's also early days - see in 10 years whether they're still doing a good job, or if they cut costs to the bone to preserve profitability.
Outlawing PE would be incredibly difficult. Instead we should focus on punishing individual executives, board members, and even share holders that cause harm from cutting costs. It could be a criminal case, or even a culture of directly naming, shaming, and tracking people so that they can't get involved in another company without the share price instantly tanking.
It would also be an incredibly bad idea.
As usual, the underlying issue is a lack of government regulation and enforcement (and thus the fault of the people). And, frankly, most people don't care about these problems because they're abstract (to them) and the price of goods on the local multinational corporation's shelves are what they really care about.
I personally spend an awful lot of time being careful about what I buy and who I buy it from. Most people even if they have the resources to do so and spend 2x-5x the low price will just refuse to do any research in the first place.
There a lot of people willing to trash a company for $20 who won’t care.
I feel a lot of similar recommendations on HN are to ask the left hand to slap the right or even slap the mouth that feeds them.
The point is, they don't care about us. We are just clogs on a machines and we are one type of resources just like coal and iron.
The only way to struck fear is by some collective methods but then everyone got spooked by "Socialism", so the whole thing becomes a perfect loop for the aristocratics.
Why would a law preventing the purchase of a struggling company through raising large amounts of debt which is immediately stuck on their books so that they those same investors can immediately sell everything of value for profit off the scraps leaving a dead shell of a company that has to fire all their employees a bad thing?
If things are so bad just let the company go bankrupt and sell off their assets. If things are recoverable then PE isn’t going to help because they’re going to put on too much debt.
It doesn’t make anything better. It doesn’t fix the companies that are too far gone. It doesn’t fix the companies that could still be saved. All it does is make the investors a bunch of money at the expense of everyone else.
I don't think it will be effective. The root cause is not PE, but human nature: greed, complacency, myopia, and etc. We can outlaw PE, but Boeing can simply invent another way to maximize their profit at the cost of product quality. It looks to me the only cure is to encourage competitors, so that long before Boeing becomes this rotting organization, their talented employees can join another competitor to beat the shit of Boeing. Unfortunately there's so much regulatory capture and intertwined interests between Boeing and governments that I don't think we will see any meaningful competition for years to come.
I wasn’t thinking of Boeing specifically. Plenty of companies that seem like they should have been able to survive, at some scale, were destroyed by PE. Like Toys R Us.
It makes a lot of rich people more rich at the expense of workers and retail investors. I don't think you'll ever be able to get rid of it.
One solution is to make sure the owners pay the social costs of company destruction.
Don't let them avoid pension commitments - force them to pay decent redundancy or support employees in finding new jobs.
Stop them splitting off liabilities and then having that part go bankrupt etc etc.
Ended the carried interest deduction would be low hanging fruit if we want to discourage purely rent-seeking financial behavior.
Would be nice. I think the main fix would be making sure that debt used to buy companies can never be transferred to the company purchased. I understand that money is fungible, but accounting is often there to deal with the most egregious abuses of fungibility. It would at least make leveraged buyouts much more expensive. Especially since now, the purchased company needs to maintain some kind of profitability over several years to be able to service this debt. Oh, and make it so the purchased company cannot borrow money for several years after purchase. If the purchaser wants to borrow money and infuse it into the company that's fine. I know there's still all kinds of accounting shenanigans that can be played to payout to PE purchasers, but that'd be a good first step I think.
Perhaps it's the one common feature of air travel (safety & reliability) that they may start playing with to "reduce costs" elsewhere. Imagining two flights from L.A. to Vegas, one on an Airbus that costs $100, and one on a Boeing that's $5 but you have to sign a waiver going onboard.
It's perfectly possible that that cost difference is massively exaggerated. It might well just be 95$ vs 100$. But if you don't have the information that one is far more risky, then you always pick the 95$ option, don't you?
Air travellers by and large choose their travel based on price. If a subset started paying a premium for Airbuses, the market would sort them and remain relatively equally profitable for those flying Boeings.
Outside of veblen goods, aren't most consumer choices driven by price?
I have never flown top tier air travel, but even the best experience is somewhere on the scale of cattle-car-in-the-sky. It is a necessary evil to get me to somewhere in a way that is faster than driving. Paying a premium has rapidly diminishing returns when you are stuck in a shared space with the public.
I don't see it that way. I see it as a necessary evil to get me somewhere in a way that is much, much, much faster than a ship.
To varying degrees. Air travel is a product where cost dominates more than with other services.
This is most Americans. I personally find lay-flat seats worth the premium from time to time, though not always.
I decided about 10 years ago I'm willing to pay the premium for economy plus seats (more leg room). I don't fly often enough for the market to notice me, but when I fly I notice that those seats do sell out faster, if nothing else I can still pay extra for those seats. I can also pay extra for first class - however the premium is high enough that I cannot afford it despite wanting to.
Given how quickly Delta's Comfort+ seats sell, I'd be surprised if they don't install more of those. Given their brand, a row or two of Basic Economy (for e.g. college students), a small main, a healthy Comfort+ and a solid front cabin might be the play.
I wonder if they're selling out or being consumed as upgrades? Domestically, I almost always buy an economy ticket on Delta and get upgraded to Comfort+ within 15 minutes of buying the ticket. That means the bus routes (between hubs) probably have a lot of these Skymiles high-tier members taking up the seats without charge.
That data, which I'm sure Delta has and looks at, could strongly influence how many overall rows of seating to remove in order to fit more rows of Comfort+.
The only signal that was surfaced on many sites was cost, it's not surprising that it is the only thing flyers look at.
Make $/inch-of-floor-space prominent and easy to compare in flight listings and you might see something different happen.
"The market would work if only consumers had perfect information, and infinite capacity to analyze it"
I'd pay $5 more for a ticket on a better airplane, but not $50. Unsure where I'd draw the line
I can see Ryanair going for this!
They are all Boeing.
No. Please do your research.
Mostly Boeing? Sure.
All Ryanair-branded flights are on a single type rating, the 737. They do have Lears for parts and personnel transfer and acquired a subsidiary, Lauda, which exclusively fly A320s.
But if you book Ryanair, you'll board a 737.
Hopefully it doesn't come to this. Something I really like about the airline industry is it doesn't compete on safety.
Falcon 9 is also produced by a PE firm and it is very reliable. German Mittelstand corporations are often family-owned for generations, and they are known for high-quality products.
As in everything, humans and their motivations cannot be ignored. Firms are conglomerates of people, and it matters which people are on the top.
Are you calling SpaceX a PE firm or am I missing something?
https://en.wikipedia.org/wiki/Falcon_9
Maybe I understand the term wrong, but I was under the impression that PE means "not publicly traded, in private hands". Which is what SpaceX is.
To demonstrate that I'm not an economist: PE is a more specific than just private company. Boeing sold its Wichita division to an "investment firm". An investment firm is essentially a company that buys and sells companies. Typically they're focused on short-term profits to juice the stock price before it's sold.
Spirit was created and sold to the investment firm (Onex) in 2006, and Onex turned around and sold its the last of its stake in Spirit in 2014. Onex got over $3 billion for their initial $375 million stake in Spirit. The cost, as we're rediscovering, is that quality of Spirit's product went to shit and the long-term viability of Spirit is in question.
If it was so bad why did people pay so much more for Spirit stock in 2014?
Fact that it sold for more doesn't mean it was in good shape. There are many potential reasons why people would pay more, even if Spirit was in bad shape.
It is somewhat depressing that when you accidentally make a comment that attracts a lot of downvotes, you can't even delete it and have to watch them rolling.
The truth is that by a literal definition of the words private equity, SpaceX does qualify. All private companies are equity that is private. But when people use the _phrase_ private equity, they're referring to people who are specifically starting with a pot of money and then shopping around for companies they think they can flip for a profit, often with the normal trappings of private equity, for example, `carry` and particular tax and business strategies (debt, etc). So because SpaceX was started by a founder with an actual mission and grown from zero, and because their goal is primarily to build rockets and not make a quick buck, most would simply call it a 'private company' to avoid confusion.
Thete's a big difference between a private firm and a private equity firm.
Private firm - no public trading of stocks.
Private equity - a business model created by syndicates that borrow money to buy companies, saddle the companies with that borrowing, demand a quick return (-> layoffs, selloffs, and wage cuts), then bankrupt the company when all the value and productivity have been extracted.
Crucially the money which is never repaid is not borne by the banks that put that money up front, they chop it up and sell it off with other things so nobody even knows who loses the money.
It's the sub prime mortgage thing all over again
https://en.m.wikipedia.org/wiki/Private_equity_firm
I just get hung up on being an airplane company that doesn't manufacture the plane. How is that possibly not a core competency for the design and manufacture of airplanes?
It’s a matter of degree. Are they supposed to run a chip fab to make all the chips that go into their plane?
That said, fuselages do seem to be a core aspect of making planes!
Given the chip shortages of the past few years maybe they should have. For that matter given how often perfectly good chips go obsolete maybe they should just so they don't have to spend $$$ redesigning a perfectly good circuit.
AMD and Apple don’t run chip fabs and Boeing will.. People in here will literally argue any point no matter how stupid
What others do is not relevant. Intel does run their own chip fabs. There are pros and cons. How they fall out can be different for different actors. Boeing can probably accept the compromise that they are forever locked on an older process that can't scale to 500mhz.
That's not an apt comparison.
Lots of people and companies use identical chips. Only boeing uses boeing airplane bodies.
Funnily enough, one of the major avionics vendor (Honeywell), while they no longer own fabs, they do design their own CPUs for use in aircraft (a licensed version of AMD29050)
The trick is figuring out what is a core competency and what should not be. Boeing should obviously not make the light bulbs in their planes. Should they make the engines? How about the seats or carpet? What about the plastic bezels in the cockpit? At that point is something a thing they should do in house and when is it something to outsource? There is no easy answer, and often the best answer changes over time.
Spirit in particular just feel like financial engineering bullshit. From a quick google, in 2020, the 730 max accounted for more than 50% of Spirit's annual revenue. I struggle to understand how it's good for Boeing or Boeing's customers for T Rowe Price and Vanguard to own a supplier like that.
What is the difference between a division and an independent company? Eventually you reach a point where head of a division and CEO have about the same responsibilities so why not spin them off - by doing this the CEO doesn't have to exercise as much oversight on the operations of that division/supplier. The supplier can diversify a bit too which means if you have a downturn the suppler may have enough other business to survive while if they were in house they wouldn't look for that and thus make your financials worse when they are already nearing bankruptcy. It is very common for companies to exists where they have one major customer that is all or almost all of their business.
What is right is a very complex question that can never be answered with 100% confidence. However your simplistic analysis isn't helpful in figuring this out.
I'd say basically the same thing but from a different perspective. Outsourcing is used to simplify management, as it allows companies to shift away from building quality organizations into the easier task of using coersion towards external organizations to drive down cost and avoid any liability due to loss of quality. Outsourcing is a cheat code for managers, and one which invariably causes serious harm to the company while shielding any decision-making exec from being held liable for nuking the company.
OK I posted that spinning off a portion of your manufacturing is bad, but I think your statement overstates the issue. Ford used to be so vertically integrated that they raised sheep for the wool in their seats! It makes sense to buy bearings from companies that specialize in the metallurgy and precision of good bearings. Focus on what you’re good at and what really makes the difference to your customer.
I once visited a home generator factory in India. They bought billets of aluminium and copper and manually machined the two stroke engines, drew the wire and made the generators, and so on. They hadn't updated their design since the 80s. If they’d sourced the engine from an engine company and the generator from a generator company the two could have advanced separately based on the demands of a larger customer base.
I was addressing the statement of "(...) selling the factory to a private-equity firm would let Boeing focus on final assembly (...)", which corresponds to outsourcing manufacturing of everything and anything used in a plane, up until the last step of the manufacturing process.
It's one thing to leverage existing third-party products in your own product line. It's an entirely different thing to aim for an Ikea-like approach of buying everything and just put the thing together once you get all the parts.
But this is not just PE - this is the Jack Welch school of business. Ascend to the top of the company, attach to it like a parasite, and suck it dry over time.
Short to mid term, "woah, the stock is going up, this guy is a genius!"
Until there is no more company left to juice the shares with buybacks. This is how the GE engineering culture was destroyed as well.
Private Equity is like that, only much accelerated. There is no pretense of "management".
I was there when Mulally was and people already knew what a horse’s ass he was.
Most of this is his fault, and the board who hired him.
Source? The data I’ve seen don’t show quality differences based on ownership model except when there is family ownership.