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Comment by credit_guy | Hacker News Reader

Haha, I'll give that serious consideration.

Now, I read that NY Times article, and I guess the crucial sentence that you are referring to is

  To do the deal, Mr. Musk, the world’s richest man, loaded about $13 billion in debt on the company, which had not turned a profit for eight of the past 10 years.

Now, I'm not privy to the deal's details, but since you appear to be more informed, maybe you can clarify something for me.

How could Musk load with debt a company that he did not own yet? Legally, how does this work? In the end someone has to sign a piece of paper. Can I sign a piece of paper making you owe some money to someone else?

I can see how this could work. The then shareholders decided (indirectly via the board of directors) to borrow the cool $12.7 BN so Musk can use his own money and that debt to buy them all out at twice the fair market price. But then was it Musk who loaded Twitter with debt, or the outgoing directors?

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You go to a bank and tell it "I would like to buy this company. It has assets worth $N, which could be put up as collateral for a loan of $(.60 x N)." The bank says "Yes, those assets are worth that much. We will sign a contract with you where we will give you $(.60 x N) and in return, once you successfully purchase the company and it is your property, those assets will act as collateral for that loan."

You take the loan (and probably some other money, since by definition the loan is less than the total value of the company's assets), and you go buy the company. You now own the company, therefore you own the assets, therefore you can use them as collateral, and so: the debt that was yours is now on the company's books. You bought out the company with extra leverage provided by the assets you were acquiring: leveraged buyout.

It tends to fail; LBOs tend to target companies that are struggling somehow, and loading an already-struggling company with a shit load of debt frequently results in a bankruptcy. You're probably familiar with companies that dies this way. (My favorite example for fellow millennials is Toys'R'Us.) If you find this troubling: you are correct. But you have forgotten the really important thing: you (or, in most LBOs, a bunch of private equity ghouls) have gotten very wealthy killing a company, and isn't that reward enough?

So let me recap: you (Musk) get a loan ($12.7 BN) from banks, with the idea that the company you buy will be used as a collateral. Before the sale is closed, you can't put it on the company's balance sheet, because you don't own it. But after that you can.

Wait a second. It's true that Musk now owns the company, but transactions between the company and its (sole) owner are still at arm's length, arent's they?

As a pure coincidence, today I received in the mail the bankruptcy ruling for a preschool that went bust and where we have paid $3000 in advance to enroll our daughter. The judge ruled we'll get $1400. But during the lawsuit it transpired that the owner gave himself a nice loan of more than $100k. He had to give the money back (I don't know all the details, although I can find out; I think he settled for a somewhat smaller amount).

Maybe I'm naive, but I think that should happen with larger companies too. Just because you are the sole owner of a company does not mean the company can just lend you money on whatever terms you decide. It's the ultimate conflict of interests.

On the other hand, if the prior shareholders cooperated with Musk, I can see how the debt could be on Twitter's books. But then, it's them who saddled the company with debt, isn't it?

Please read up on the concept of Leveraged Buyouts (LBOs), which were a thing since the 70s and 80s. Private equity LBOs have been a thing precisely because of credit available from banks. Last I checked, PE firms such as KKR are still prosperous, in spite of conducting an LBO of similar scale (RJR Nabisco), after saddling the company with extremely high amounts of debt (for the 80s).

And please don't drive the discussion to tangents and anecdata, even though your analogy is flawed.

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