Is a leveraged buyout a legitimate form of creative destruction?

[Klukie]

I have been reading up on Bain Capital and it's practices of leveraged buyouts and how they ascribe to the theory of creative destruction, but the whole thing has left me a bit confused. My interpretation of creative destruction...The new must always replace (via venture capitalism) the old in order to maintain economic growth. Any thoughts?

[TreasonousBastard]

1. I wouldn't say so...

I always thought of creative destruction as the automobile putting buggy whip makers out of business while building gasoline and tire business from whole cloth. Kinda like how we now have tablets and smart phones hurting the PC industry and wired telephones. New technology creating new businesses that put older ones to pasture.

Bain doesn't seem that big on venture capitalism (i.e. financing new ventures) but buys existing businesses claiming to be able to run them better. Their leveraged buyouts can do that, but load the companies with new debt, often putting them out of business. The point of a leveraged buyout is to put up very little of your own money. Say you buy a company for $1 million and later sell it for $2 million. if you paid the full mill in cash you doubled your money. If you put up $100,000 and borrowed the rest, you increased your initial investment 20 times if the company you bought is responsible for paying back the $900,000 you borrowed.

This is how the really big money is made.

OTOH, true "vulture capital" firms buy undervalued businesses specifically to break them up and sell the parts.

[Klukie]

3. That is exactly how I see it...

then why does Bain link itself to the theory?

[TreasonousBastard]

6. Most likely just spin, PR, and good ol' American bullshit. n/t

[bemildred]

2. "Creative destruction" is an oxymoron.

There is no guarantee, not even any good reason, to assume that what is destroyed will be replaced with something better, something here, something that offers a good job to anyone.

[saras]

4. Nope, and "creative destruction" should be left to the Discordians

Creative destruction means that if you are part of a functioning community, and I have the political power, I can destroy some crucial part of your community, and you will spend time, effort, and money repairing it. If I have the political power, I can also ensure that I get to collect a good portion of that time, effort and money. In the best case (for me), the only thing you can fix your broken community with is a service that you have to pay me for forever.

"The new must always replace the old"? WTF is THAT supposed to mean? It's about as useful as "haste makes waste", which is NOT an argument for reducing freeway speed limits to 20mph.

Leveraged economic transactions are, I think, inappropriate in the general case, and should be outlawed or severely regulated, along with the underlying assumptions that it's acceptable for a corporation to seek to harm another directly instead of working for its own success.

[Klukie]

5. I am not advocating anything so calm down.....

I am simply trying to understand it. That is why I asked for thoughts. After reading about the origin of the theory...Shumpeter...Marx...I didn't understand how Bain Capital could use the theory as their economic model since they are mainly in the business of leveraged buyouts.