Kmart & Sears Essay
Kmart, Sears and ESL: How a Hedge Fund Became one of the World’s Largest Retailers
1. Describe recent trends in the hedge fund and private equity industry and the growing overlap between the two.
A: Hedge funds, historically, were more interested in the buying and short selling of defaulted or near-default bonds within a few weeks or months. This strategy was more of a short-term, exit-focused strategy. Now, however, some hedge funds are becoming more interested in the restructuring and long-term controlling of attractive assets. Hedge funds’ stakes in these companies are then transformed into equity from the arising new entity. Private equity is split up into Venture Capital and Leveraged Buyout funds, with a little made up of mezzanine funds. LBO companies buy publicly traded companies that are experiencing inefficiencies from costly regulation of being publicly traded and the incentives of managers and shareholders. The growing overlap is correlated between the LBO side of private equity and the more recent trend in hedge funds of acquiring large stakes in mature, failing companies in order to have a longer-term return.
2. Analyze different issues surrounding a purchase by a financial or strategic buyer and their respective strengths and weaknesses.
A: Financial buyers, like Warren Buffett for example, have the cash readily available in the instance of a company’s bankruptcy. Because the funds are readily available early on, usually financial buyers found themselves able to acquire distressed assets and/or companies at the most attractive prices. A drawback or weakness associated with financial buyers is the lack of expertise or even flexibility, as is the case for mutual fund managers or pension plans. Strategic buyers, on the other hand, are able to create synergies through buying out distressed assets or companies if they have the cash readily available. This is usually not the case, and what ends up happening is that financial buyers get
1. Describe recent trends in the hedge fund and private equity industry and the growing overlap between the two.
A: Hedge funds, historically, were more interested in the buying and short selling of defaulted or near-default bonds within a few weeks or months. This strategy was more of a short-term, exit-focused strategy. Now, however, some hedge funds are becoming more interested in the restructuring and long-term controlling of attractive assets. Hedge funds’ stakes in these companies are then transformed into equity from the arising new entity. Private equity is split up into Venture Capital and Leveraged Buyout funds, with a little made up of mezzanine funds. LBO companies buy publicly traded companies that are experiencing inefficiencies from costly regulation of being publicly traded and the incentives of managers and shareholders. The growing overlap is correlated between the LBO side of private equity and the more recent trend in hedge funds of acquiring large stakes in mature, failing companies in order to have a longer-term return.
2. Analyze different issues surrounding a purchase by a financial or strategic buyer and their respective strengths and weaknesses.
A: Financial buyers, like Warren Buffett for example, have the cash readily available in the instance of a company’s bankruptcy. Because the funds are readily available early on, usually financial buyers found themselves able to acquire distressed assets and/or companies at the most attractive prices. A drawback or weakness associated with financial buyers is the lack of expertise or even flexibility, as is the case for mutual fund managers or pension plans. Strategic buyers, on the other hand, are able to create synergies through buying out distressed assets or companies if they have the cash readily available. This is usually not the case, and what ends up happening is that financial buyers get