LBO: Ultimate Employee Fraud

If you are old enough to remember what is LBO it means you were born in the 1950s or 60s! LBO is a short form of Leveraged By Out. Here a set of employees would get together and decide to buy out the shareholders. Then they would take the company public and make their $ 1 million into $ 122 million. And there would be applause all around.

Let us see how this could work today. One has to set up a business (ok let us say retail), create a hype and make it look big. Open many, many shops……and then let it almost fail. Who funded you..well the shareholders of the parent company which paid for everything!

Having run the company aground or close to it make an offer to the shareholders. Goldman Sachs will structure a deal if you are in the US. Enough of the Investment Bankers have an Indian office, so one of them will do it for you.

So you tell the shareholders that the ‘takeover price’ of Rs. 14 is the best. If the Board (God Forbid!) asks for a cometitive bid, you know how to organize don’t you? So that done, take over the company.

Then close down 43 stores, sack people who talk of shareholders, corporate governance, etc. Reward yourself for correcting all the mistakes which were deliberately done earlier. Voila! the P/e goes up. Take esop. Take more esop. Do an ADR, GDR, change auditors. Split the shares! Get a private equity guy to evaluate a 12% stake sale. Do the placement. Sell get out.

Start all over again. Then speak at a conference by the regulator on why equity penetration in India is low. They all applaud. They applauded at your IPO. They applauded at your buy back offer. They are applauding now.

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One Response to “LBO: Ultimate Employee Fraud”

  1. Dr Mohammed Ali Khan on August 26th, 2009 at 9:16 pm

    Which recent event are you speaking about Subra?
    I thought subhishika was a sunk boat… Or is it something else?

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