Mar 15

I consider myself a capitalist. As Larry Kudlow states on his CNBC show,”We believe that free market capitalism is the best path to prosperity!” And yet, there are times that I see certain situations that make me wonder if the system isn’t broken. Which leads me to ask the question, if something is legal, does that automatically make it right?

Let’s look at one deal that deserves a bit of discussion. The takeover of Domino’s pizza chain by Bain Capital. Here is the timeline for this series of events:

  • 1998 – Bain Capital buys Domino’s for $1.1 billion. $725 million is borrowed against the company, with Bain investing $385 million of their own cash.
  • 2003 – Bain refinances the debt, pulling out an additional $188 million to pay out to its investors. Domino’s debt is now nearly $1 billion.
  • 2004 – Domino’s is taken public by Bain. Bain retains 79% of the company,  and receives $108 million for the 21% sold to the public
  • 2010 – Bain sells out and over a 12 year period makes over 500% on their investment. Domino’s is saddled with a debt load with interest equal to half the company’s income.

I bring this up as an example of what seems to be a typical leveraged buy out. There’s always more to the story, but the common theme among the leveraged buyout I’ve studied are twofold, a lot of money is made in comparison to the amount invested, and the newly public company is left with a debt load that puts it at risk for bankruptcy for years to come.

In the end, the Domino’s franchises have increased and more people employed over the period, so on a positive note it wasn’t case of firing people and reorganizing. Nonetheless, I’m hard pressed to understand how these deals are shining examples of capitalism.

 

written by Joe \\ tags: ,