Wednesday, January 16, 2008

Shareholders vs. Bondholders

I start most of my classes off discussing the Nexus of Contracts and how the different stakeholder groups have different incentives which lead to fights and conflicts. This may be the most celar-cut example I have seen in a while.

Which Buyout Firms Were Quickest to Cash Out? - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:
"Most shareholders like dividends — just ask a Citigroup investor — but creditors generally aren’t big fans. This is especially true of the “special” dividends that private equity firms like to pay to themselves, sometimes just a few months after a leveraged buyout is complete. This sudden outflow of cash can be deeply annoying to bondholders worried about the quality of their debt, which is why Moody’s Investors Service decided to examine which private equity firms tend to be quickest on the draw when it comes to dividends.

The study, called “Private Equity: Tracking the Largest Sponsors,” offers a numerical measure of what has largely been a matter of anecdote and reputation until now."

Fascinating. Talk about a Bondholder-Shareholder conflict. This is the epitome of it. What a great example that will definitely be used in my classes!

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