Q: What’s a leveraged
buyout?
A: A leveraged buyout
(LBO) is when a company is bought out by another entity (or entities), using a
lot of debt.
Private-equity investors
are typically involved, borrowing gobs of money without using much of their
own, and often using the acquiree’s assets as collateral. (Read More on Facebook
Page)
The acquired company is
generally taken private (i.e., it will not trade publicly on the stock market),
only to go public again after some changes have been made (such as layoffs, the
selling of assets, or dividend increases or decreases).
While some LBOs are
executed by members of management, others are hostile, executed by outsiders
and not welcomed by their targets.
Many LBOs don’t end well
for the company or its shareholders (there are substantial interest payments
due, after all), though the acquirers often do well. (Read More Articles)
Q: What’s a golden
parachute?
A: A golden parachute is
when a company gives a hefty payout to a departing CEO or top executive.
It’s often required via a
clause in the exec’s contract, and can be triggered if the company is sold or
the exec is dismissed.
Many are quite generous
and might even seem reasonable given the performance of the executive and the
company.
But others are rather
outlandish, and sometimes go to folks who haven’t done stellar jobs or been in
their positions long.
A classic example is Bob
Nardelli, who left Home Depot after an unimpressive six years with a reward
that topped $200 million.
Golden parachutes can
involve a large cash payout, a generous severance package, stock options and
all kinds of perks, such as continued travel allowances, health-care coverage
and more.
As you might imagine,
shareholders don’t love golden parachutes.
Dear Fool: A certain stock
I owned in the mid-1990s spent much of a year bouncing between $23 and $31 per
share, while not paying any dividends.
My mutual-fund
representative said that I should sell the stock and buy more of a mutual fund
I was invested in — which he, conveniently, sold. I did, and shortly after, the
stock started climbing, hitting $100 within about two years.
That advice cost me
$8,000, but the guy made his 5 percent commission.
The Fool responds: Ouch.
There are lots of lessons here, such as how important patience can be for
investors.
If you still believed in
the company’s long-term growth prospects and found it to be healthy, hanging on
would have been reasonable. Even the best stocks can falter for a while.
The commission you paid is
a reminder that many financial professionals have conflicts of interest and may
not be serving you well.
It’s worth asking an
advice giver how he’s compensated and if he will reap a commission.
Try to research investment
options on your own and make your own decisions. Put your money in your best,
most promising ideas.
Your parents and
grandparents may have invested in General Electric (NYSE: GE), and you should
consider it, too.
For starters, it offers a
dividend that recently yielded 3.3 percent, and it has paid a dividend every
quarter since 1899.
General Electric’s
operational diversification and its ability to adapt to changing times have
kept it going over many decades.
It’s a huge conglomerate,
offering turbines, light bulbs, medical-imaging equipment, locomotives, home
appliances, financial services, jet engines and much more.
It’s spinning off its
retail-finance business and becoming more of an energy company, with oil and
gas now its fourth-largest revenue generator. Its industrial businesses are
gaining momentum.
In late April, General Electric
offered about $13 billion for the power business of French industrial giant
Alstom.
With its whopping order
backlog of $245 billion, General Electric has a promising future.
It can be hard for such a
huge company to be nimble, but it has been thinking outside the box, investing
in alternative energies such as wind power, partnering with smaller companies
on new technologies, and sponsoring competitions to develop innovative
solutions.
No comments:
Post a Comment