New York Times - Hinckley Story

[Soundbounder]

Debt Trips Up Hinckley

http://www.nytimes.com/2009/10/10/bu...nckley.html?hp

This was in the New York Times over the weekend.

[lorenzo b]

Very interesting, a classic tale of a family firm positioning their finances to cash out after a lifetime of work, and how new debt incurred in good times can cripple a company when things get tight. Then throw in the local Maine employees who had good work all these years and now feel helpless.

[gonesail]

quote: management shared the pain with employees by taking a 50% pay cut .. that's all I need to hear to help me understand the caliber of leaders at Hinckley. they have a good product and hopefully they can survive the tough times and destructive layoffs.

[TaoJones]

Originally Posted by gonesail

quote: management shared the pain with employees by taking a 50% pay cut .. that's all I need to hear to help me understand the caliber of leaders at Hinckley. they have a good product and hopefully they can survive the tough times and destructive layoffs.

The problem with that is that it occurred under the original Hinckley family management, gonesail. When they sold the business, it had only $1 million of debt. It is the two subsequent ownership interests that have leveraged the business into the sorry state it is now.

Sadly, it will probably take bankruptcy and forced liquidation for the firm to, possibly, land back in the hands of the Hinckleys. If they can take over the firm once again, without the back-breaking burden of the staggering debt, then Hinckley Yachts and the local economy might recover.

TaoJones

[lorenzo b]

“We never leveraged up the company,” Mr. Hinckley said. “We paid down loans. When we sold the company, it had just $1 million in debt.” Bain Willard Companies, a Boston-based private equity firm, was the first buyer, 12 years ago. It paid about $20 million, equal to about one year in sales, putting down about 25 percent in cash and borrowing the rest, according to several people with knowledge of the negotiations.

I beg to differ; When the Hickleys sold the firm for 20 million with only one million in debt, the Hinckleys walked away with 19 million in cash leaving the new owners with approx 15 million in debt to service. Those owner evidently rolled one more time for 40 million, or about 30 million in debt to service.
Both the Hinckleys and the first buyers seem to have done quite nicely for themselves.
The second set of buyers got stuck along with their bank.
The Hinckleys may or may not return to take over control, but I don't see them giving back the 19 million, nor should they.
My only point is that it was the Hinckleys that were the first to turn the firm into a pile of cash to run with, leaving it in a sorry state.

[Cheechako]

Not a huge pile of cash for how many years they had the company really.....

[sck5]

lorenzo

Nobody forced the buyers to execute the deal as a leveraged buyout. The Hinckleys cant be blamed for how the buyers financed their purchase, any more than I care how the people who buy my house come up with the money. If they borrow more than they can afford and then go belly up, it isnt MY fault as the seller. It is the same with the buyers of Hinckley - They either paid too much (again, not the Hinckley family's fault) or they borrowed too much to pile on to the company. Again, not the family's fault.

[TaoJones]

Originally Posted by lorenzo b

“We never leveraged up the company,” Mr. Hinckley said. “We paid down loans. When we sold the company, it had just $1 million in debt.” Bain Willard Companies, a Boston-based private equity firm, was the first buyer, 12 years ago. It paid about $20 million, equal to about one year in sales, putting down about 25 percent in cash and borrowing the rest, according to several people with knowledge of the negotiations.

I beg to differ; When the Hickleys sold the firm for 20 million with only one million in debt, the Hinckleys walked away with 19 million in cash leaving the new owners with approx 15 million in debt to service. Those owner evidently rolled one more time for 40 million, or about 30 million in debt to service.
Both the Hinckleys and the first buyers seem to have done quite nicely for themselves.
The second set of buyers got stuck along with their bank.
The Hinckleys may or may not return to take over control, but I don't see them giving back the 19 million, nor should they.
My only point is that it was the Hinckleys were the first to turn the firm into a pile of cash to run with.

You miss the point, I think, Lorenzo. Gonesail was lauding Hinckley Yachts management for taking a 50% reduction in salary for the good of the company and the employees, but that was when the Hinckleys still owned the company, a long time ago. The employees were asked to take a 10% cut, which they agreed to do, and when things improved, the Hinckleys made their employees whole; i.e. they paid them in full the wages the employees had voluntarily ceded.

That the two subsequent private equity firms that bought Hinckley Yachts have over-burdened the company with heavy debt is not the fault or concern of the Hinckley family. But, inasmuch as no return to profitability is anticipated in the short- or even intermediate-term, I submit that bankruptcy is the likely outcome.

Should bankruptcy occur, the Hinckleys may wish to make a bid on the company's assets with a small percentage of their $20million. If they do, and they are the winning bidder, I think that bodes well for the return to prosperity of Hinckley Yachts, as well as the local Southwest Harbor, Maine economy.

TaoJones

[lorenzo b]

What I'm saying is it's not correct to blame the new buyers and portray the Hinckleys as the wise old man on the hill.
My rule of thumb; Follow the money

[TaoJones]

Originally Posted by lorenzo b

What I'm saying is it's not correct to blame the new buyers and portray the Hinckleys as the wise old man on the hill.
My rule of thumb; Follow the money

If a private equity buyer over-leverages the company he bought with his eyes wide open, and after having performed due diligence, presumably, how is that anyone's fault other than that private equity buyer? And if his lender also went into the transaction with his eyes wide open, how is his loss anyone's responsibility but his own?

TaoJones

[lorenzo b]

Alright, let me take you by the nose and lead you through this.
We will follow the money.
Mr X has a company that has been around for some time now and he wants to retire and get out of the game. What does he want? He wants money. Does he want to sell to a party that will continue the firm and look after his longtime employees? Sure, as long as they are the highest bidders. Does he want to set up an employee owned entity through a local bank to help the local economy? Sure, as long as they are the highest bidders. Does he want to sell to Genghis Khan? Sure, as long as he is the highest bidder. Is he going to take 2 dollars less to be a nice guy?
Along comes Mr. Khan, a private equity specialist, looking for opportunities to make money for his investors. He sees a private family firm that in his opinion is ineptly run and could be cleaned up and resold for a nice profit. He puts down 5 mil, borrows 15 mil from a bank that knows and trusts his judgement, cleans up the firm, and resells it for 40 mil, thereby taking 5 mil and turning it into 25 mil. Mr. Khan is very, very good at what he does.
Along comes Mr. Notsogood. He buys the firm for 40 mil and gets screwed, his bank gets screwed, the employees get screwed, and the town gets screwed.
Who's to blame?
Mr. x is ahead 19 mil.
Mr. Khan is ahead 20 mil.

[Soundbounder]

Lorenzo;
Both private equity firms buried the company in debt. And the second one got caught holding the bag when the economy tanked.
IMO, neither of these private equity firms had the long term interest of the company in mind. And the higher ups still walk away with large profits regardless of how poorly the company performs.
It was certainly not a very sustainable way to run an established, successful company.

[td1]

I'm having a bit of trouble following the logic that the Hinckley family is in some way to blame for a private equity firm, 2 owners removed from the Hinckley's ownership of the company, racking up too much debt and facing bankruptcy. If you sell your home, the person you sold it to sells it to someone else, and that owner happens to not be able to pay the mortgage (through poor money management or just bad luck), would it be your fault that the house is foreclosed upon?

[Hiracer]

Originally Posted by lorenzo b

Alright, let me take you by the nose and lead you through this.
We will follow the money.
Mr X has a company that has been around for some time now and he wants to retire and get out of the game. What does he want? He wants money. Does he want to sell to a party that will continue the firm and look after his longtime employees? Sure, as long as they are the highest bidders. Does he want to set up an employee owned entity through a local bank to help the local economy? Sure, as long as they are the highest bidders. Does he want to sell to Genghis Khan? Sure, as long as he is the highest bidder. Is he going to take 2 dollars less to be a nice guy?
Along comes Mr. Khan, a private equity specialist, looking for opportunities to make money for his investors. He sees a private family firm that in his opinion is ineptly run and could be cleaned up and resold for a nice profit. He puts down 5 mil, borrows 15 mil from a bank that knows and trusts his judgement, cleans up the firm, and resells it for 40 mil, thereby taking 5 mil and turning it into 25 mil. Mr. Khan is very, very good at what he does.
Along comes Mr. Notsogood. He buys the firm for 40 mil and gets screwed, his bank gets screwed, the employees get screwed, and the town gets screwed.
Who's to blame?
Mr. x is ahead 19 mil.
Mr. Khan is ahead 20 mil.

People screw themselves when they pay too much for a business. It doesn't matter if the purchase proceeds were borrowed or out-of-pocket. To blame the seller for selling at the best price they could get is misplacing blame.

It's the buyer who screwed up, and how they got the money to buy is a redd herring. If it was out-of-pocket funds, they traded one asset for another that was less in value. If it was borrowed funds, they did the exact same thing, but now have lender who made the same dumb mistake with them.

If the purchased company went down in value after the purchase because of a change in market conditions, well, again how is that the seller's fault?

[TaoJones]

Originally Posted by lorenzo b

Alright, let me take you by the nose and lead you through this.
We will follow the money.
Mr X has a company that has been around for some time now and he wants to retire and get out of the game. What does he want? He wants money. Does he want to sell to a party that will continue the firm and look after his longtime employees? Sure, as long as they are the highest bidders. Does he want to set up an employee owned entity through a local bank to help the local economy? Sure, as long as they are the highest bidders. Does he want to sell to Genghis Khan? Sure, as long as he is the highest bidder. Is he going to take 2 dollars less to be a nice guy?
Along comes Mr. Khan, a private equity specialist, looking for opportunities to make money for his investors. He sees a private family firm that in his opinion is ineptly run and could be cleaned up and resold for a nice profit. He puts down 5 mil, borrows 15 mil from a bank that knows and trusts his judgement, cleans up the firm, and resells it for 40 mil, thereby taking 5 mil and turning it into 25 mil. Mr. Khan is very, very good at what he does.
Along comes Mr. Notsogood. He buys the firm for 40 mil and gets screwed, his bank gets screwed, the employees get screwed, and the town gets screwed.
Who's to blame?
Mr. x is ahead 19 mil.
Mr. Khan is ahead 20 mil.

I've been in the game for a long time, lorenzo b, so you can keep your condescending comments to yourself.

The essence of your argument is that Capitalism is evil. Because the seller of an item wants the most he can get for whatever he's selling, instead of taking a haircut so that some nebulous higher social good (determined by whom?) is given top priority, he is the bad guy in your way of looking at it. I disagree wholeheartedly.

Did the first buyer pay too much when he agreed to pay $20million for the company? Well, obviously not, because he leveraged his $5million capital investment into a $20million profit. And even if the "right" thing for Mr. Hinckley to have done, in your view, was to sell it for much less - say, $10million - that would have changed nothing, subsequently, except that the private equity buyer would have made $10million more when he sold to The Greater Fool for $40million.

Clearly, you are determined to find fault with the Hinckleys for having sold the company for $20million. You want to hold the original owner responsible for starting the avalanche of debt.

Nonsense.

You just bought an old shrimp boat and converted it to pleasure use. If it turns out that you've bought a white elephant, and can never recoup anywhere near what you have invested, are you going to blame the party you purchased the vessel from for your lack of foresight?

TaoJones