Behind the financial maneuvering at Hostess • Hacker News Board

Re: Behind the financial maneuvering at Hostess

#31

Post by yummyfajitas » Mon, Dec 12, 2016, 1:10 PM UTC

owyn wrote: post #16

yummyfajitas wrote: post #13

Earlier quoted context omitted.

As an alternative, perhaps Hostess could have paid their employees with $10/hour worth of equity and no cash. Would that have made you happier? I suspect the workers would not have liked it. They preferred cash to illiquid equity in a questionable company, and received it.

That's not a realistic choice, so it's not a compelling argument. The workers in this case don't "prefer" cash, it is the only option. However, if there was a basic income in this country, I think workers in a situation could indeed make that choice. If it was $10 basic wage + $10 equity OR + $10 wage now there's something to discuss because that's a more interesting trade off. (((edit to clarify based on comments: y…

I'm confused why you are bringing up a basic income. I might also bring up a basic job guarantee, open borders or other random political proposals, but that's just derailing the conversation.

I agree that Hostess probably didn't offer equity. However, if it did, do you think more than a tiny number of workers would have chosen equity over cash?

Workers don't get upside if the stock does well for the same reason they don't get downside when the stock tanks. They are more risk averse and have a stronger desire for liquidity; as a result they are paid cash which satisfies their preferences.

Out of all the things that make you unhappy, which things do you think wouldn't have happened if private equity allowed Hostess to die? From what I can tell, 100% of the workers would have been laid off, the pension still would have gone bankrupt and the union would no longer exist.

Re: Behind the financial maneuvering at Hostess

#32

Post by Retric » Mon, Dec 12, 2016, 3:48 PM UTC

lambertsimnel wrote: post #30

Retric wrote: post #19

Earlier quoted context omitted.

If the owners want to realize those future cash flows they can sell. Leverage unlike sale forces otherwise healthy companies into bankruptcy. The advantage is you can leverage more than the value of a company and then extract it without selling. PS: Remember you can profit from preforming a useful economic function, or fraud making profit a poor yardstick for anything else.

While I'm familiar with the idea that healthy companies can be so leveraged for quick profits that they go out of business, I don't understand the mechanism. Is the idea that such over-leveraged companies cease to be otherwise healthy before they go out of business? If so, why? Is the management worse while they are over-leveraged? Is it a matter of market conditions worsening? Why would an otherwise healthy company…

Profits fluctuate.

If a company generates -1 to 10 billion per year and has 2 billion cash on hand and assets worth 5 billion, they can handle several bad years and will tend to be profitable and very stable. If someone then says they can probably make debt payments of 5 billion a year then they might be able to do that for a while, but it will eventually cause them to fail.

The important consideration is you have already made back your investment at this point so the owners don't care. In fact if the company fails that suggests you succeeded in extracting more money than it was worth.

Re: Behind the financial maneuvering at Hostess

#33

Post by anarazel » Mon, Dec 12, 2016, 11:50 PM UTC

lambertsimnel wrote: post #30

Retric wrote: post #19

Earlier quoted context omitted.

If the owners want to realize those future cash flows they can sell. Leverage unlike sale forces otherwise healthy companies into bankruptcy. The advantage is you can leverage more than the value of a company and then extract it without selling. PS: Remember you can profit from preforming a useful economic function, or fraud making profit a poor yardstick for anything else.

While I'm familiar with the idea that healthy companies can be so leveraged for quick profits that they go out of business, I don't understand the mechanism. Is the idea that such over-leveraged companies cease to be otherwise healthy before they go out of business? If so, why? Is the management worse while they are over-leveraged? Is it a matter of market conditions worsening? Why would an otherwise healthy company…

> While I'm familiar with the idea that healthy companies can be so leveraged for quick profits that they go out of business, I don't understand the mechanism. Is the idea that such over-leveraged companies cease to be otherwise healthy before they go out of business? If so, why? Is the management worse while they are over-leveraged? Is it a matter of market conditions worsening?

While debt servicing you have less liquidity. That liquidity might be required to react to changes in the market / stay competitive. So the long term health of the company is likely going to be impacted some.

EDIT: embarrassing typo

Re: Behind the financial maneuvering at Hostess

#34

Post by anarazel » Mon, Dec 12, 2016, 11:52 PM UTC

harryh wrote: post #14

anarazel wrote: post #12

Earlier quoted context omitted.

Well, in Germany (I've had a business there before moving to the US, that's why I know some about it), you're free to milk "your" company, but if you end up going into bankruptcy you'll likely be hold at least partially liable to the money you took out of the company, even if it's some form of limited liability company. So essentially, yes, to the banks. Not if all works out, but in the cases it doesn't. To my knowle…

Banks in the US are free to demand personal liability that goes beyond the company if they feel the risk demands it. Of course, it's a free market, so if some banks are willing to make the loan without doing that they'll probably win the business instead.

That doesn't help previous creditors (including say employees, landlords, suppliers, etc), which now have to deal with a massively over-leveraged company, which is more likely to go out of business.

Re: Behind the financial maneuvering at Hostess

#35

Post by lambertsimnel » Tue, Dec 13, 2016, 12:02 AM UTC

Retric wrote: post #32

lambertsimnel wrote: post #30

Earlier quoted context omitted.

While I'm familiar with the idea that healthy companies can be so leveraged for quick profits that they go out of business, I don't understand the mechanism. Is the idea that such over-leveraged companies cease to be otherwise healthy before they go out of business? If so, why? Is the management worse while they are over-leveraged? Is it a matter of market conditions worsening? Why would an otherwise healthy company…

Profits fluctuate. If a company generates -1 to 10 billion per year and has 2 billion cash on hand and assets worth 5 billion, they can handle several bad years and will tend to be profitable and very stable. If someone then says they can probably make debt payments of 5 billion a year then they might be able to do that for a while, but it will eventually cause them to fail. The important consideration is you have al…

I thoroughly agree with your 1st & 3rd paragraphs, but the situation described in your 2nd paragraph sounds like one in which the lenders are irresponsible, whereas the owners of the borrower alone seem to usually be blamed.

Re: Behind the financial maneuvering at Hostess

#36

Post by Retric » Tue, Dec 13, 2016, 4:20 PM UTC

lambertsimnel wrote: post #35

Retric wrote: post #32

Earlier quoted context omitted.

Profits fluctuate. If a company generates -1 to 10 billion per year and has 2 billion cash on hand and assets worth 5 billion, they can handle several bad years and will tend to be profitable and very stable. If someone then says they can probably make debt payments of 5 billion a year then they might be able to do that for a while, but it will eventually cause them to fail. The important consideration is you have al…

I thoroughly agree with your 1st & 3rd paragraphs, but the situation described in your 2nd paragraph sounds like one in which the lenders are irresponsible, whereas the owners of the borrower alone seem to usually be blamed.

The second paragraph was exaggerated for effect. However, companies are not limited to bank loans, so it may be the bond market taking on these risks. Further, there is an information asymmetry with loans so a company may be cyclical in nature yet look really good over the last five+ years.