Monday, June 1, 2015

FinMin Varoufakis' New Plan

Now this is interesting! FinMin Varoufakis announced, according to this article, a new plan for Greece's return to borrowing from markets: "The plan called for the issue of a low-interest, 30-year loan from the European Stability Mechanism (ESM) to replace the debt currently held by the European Central Bank (ECB), while simultaneously restructuring the rest of Greece's debt."

Prior to the January election, I had quite a few email exchanges with Varoufakis. He seemed to be interested in my opinion on this, that or the other. On his first day as Finance Minister, I wrote to him the following: 

"Repay all debt over 60% with a new bond with a minimum maturity of 50 years, a rate adjustable to a very low base so that the real cost of interest is close to zero (or zero) and an interest moratorium for 20 years. Close the deal ASAP and get on to work on all the other things which are much more important for Greece’s (and SYRIZA’s!) future than a haircut which will be followed by another haircut in the future. The key is to REGULARIZE the debt issue so that it doesn’t pop up every few months and distracts from real work." 

What's the difference between the two? Well, contrary to Varoufakis who now proposes to only take care of the ECB debt and restructure the rest, I proposed that the ENTIRE debt over the Maastricht level of 60% of GDP should be restructured (in other words: most of Greece's debt owed to official creditors). Also, Varoufakis talks about 30 years whereas I talked about 50 years. And I included a generous grace period whereas Varoufakis does not.

The critial issue is debt service. Or put differently, how much of an annual primary surplus should Greece be required to have. The government has carved the 1,5% of GDP in stone, so let's work with that.

GDP was 179 BEUR in 2014 (see page 9 of this report) and 1,5% of that would be 2,7 BEUR. However, linking a state expense to GDP is a questionable approach, in my opinion, because GDP does not have a direct correlation with the government's revenue base. Thus, I had suggested to link the interest burden to government revenues (out of which interest has to be paid).

In 2014, the Greek state recorded 50 BEUR in ordinary budget net revenue before tax refunds and privatization proceeds (see page 2 of this report). 2,7 BEUR (the 1,5% of GDP) would have been equivalent to 5,5% of such ordinary budget net revenue. Thus, by committing to allocate 5,5% of ordinary budget net revenue, an amount equal to 1,5% of GDP would have resulted with the benefit going forward that actual tax revenues would determine the interest expense burden instead of GDP statistics. 

A good deal for creditors because ordinary budget net revenue (the base for the interest allocation) should increase as the economy improves and tax reform becomes more effective. And a good deal for Greece, too, because having to allocate only 5,5% of ordinary budget net revenue to interest expense is really an unusually low figure. Initially, the resulting interest amount would probably only cover interest for private creditors but, as things improve, it would also provide interest income to the restructured official lenders.

Which conditions should the Institutions impose for such a restructuring? Really only one: not to assume any further sovereign debt without the Institutions' explicit approval. Non-compliance with this condition should be made an event of default.

There is only one small problem. To achieve a restructuring as outlined above, as Varoufakis now proposes, would have required a negotiating strategy diametrically opposed to the one which Varoufakis pursued from day 1. Instead of attempting to divide and conquer, one would have had to build partnerships based on trust and personal bonds based on confidence. 

Do I think that the Institutions (which were then still called Troika) would have gone along with such a restructuring? That depends. Partnerships based on trust and personal bonds based on confidence alone would certainly not have done the trick. 

First of all, the Thessaloniki Program (which had called for 11 BEUR for certain new expenses to be financed by 12 BEUR of totally uncertain new revenues) would have had to be adapted into a credible longer-term economic development plan for the Greek economy. A plan not for a year or two but, instead, for at least one generation. My favorite would have been the McKinsey Plan of 2011 but SYRIZA had totally rejected it at the time. That, however, does not free SYRIZA from the responsibility to develop its own equivalent of such a plan. Back in January of this year, Varoufakis fully agreed with me that such a plan was desperately needed and he said that the preparation of such a plan would be one of his highest priorities. I have not seen such a plan todate.

Secondly, Greece should have proposed to make the EU Task Force for Greece the central catalyst of all reform efforts. Of course, the Task Force should have been renamed into something like "The Greek Task Force with EU Support" and put under the direct responsibility of the Prime Minister.

And that's about it.

I firmly believe that, in the context of trustful partnerships and bonds of personal confidence, the above two strategies would have been sufficient basis for an overall agreement on the debt. That, to me, would have been a New Deal for Greece! (and not the repeated 'kicking the can down the road').


  1. Why is it, that the
    thoroughly correct analysis of a problem acoompanied with
    provision of a clearcut and most appropriate solution
    OBVIOUSLY is not what polticians are looking for?
    Not only in Greece, that is (to be fair)...

  2. "Do I think that the Institutions (which were then still called Troika) would have gone along with such a restructuring? That depends. Partnerships based on trust and personal bonds based on confidence alone would certainly not have done the trick. "

    Ask Samaras on that. He is still weeping over the 2 Eurogroup's written promices of debt restructuring upon achieving primary surplus.

    1. First a correction: the Eurogroup's commitment to a debt restructuring was subject to the completion of the Fifth Review, which is not completed as of today. The same goes for the disbursement of the 7,2 BEUR.

      And now I turn the question around: do you think that Samaras was the kind of person who could build partnerships based on trust and personal bonds based on confidence? His political track record suggests the opposite.

      If Samaras had supported Papandreou instead of torpedoing him brutally, things might have developed differently. In those days, Samaras alienated just about all his European conservative friends by not yielding to their significant pressure to be reasonable. And as soon as Samaras had a primary surplus, he started to be cocky, both domestically and internationally. He went ahead with bond issues in the markets which I don't believe were in the interest of the Eurogroup. Just like Tsipras made unfulfillable campaign promises, Samaras made an unfulfillable demand as head of government: exit from the program. He went to see Merkel to tell her that even though his ambassador had warned him that the time was not ripe for that. As soon as Samaras saw his domestic support declining (for his own fault), he started playing games with the Eurogroup. And many more similar things.

      As recent as the fall of 2014, the Eurogroup signalled again preparedness for debt relief after the completion of the Fifth Review (not a haircut but extending maturities and lowering interest rates). They offered Samaras a 6-month extension of the program. Samaras went for 2 months, knowing that this would be a wonderful trap for Tsipras. All I can say about Samaras' conduct beginning in the fall: absolutely reckless. Tsipras undoubtedly owes quite a few votes to this recklessness.

      Yes, the Eurogroup (particularly Germany) left Samaras out in the cold but you have to ask yourself what might have happened that Merkel did that to her Greek colleague of the same party orientation.

    2. One more observation: my impression is that Tsipras' potential for building partnerships based on trust and personal bonds based on confidence is greater than that of Samaras.

    3. Mr. Kastner,

      I won't disagree with you that Samaras while in opposition played the old school rivarly with PASOK, although he did vote for some laws. Tsipras voted nothing. Samaras is, after all, part of a group of politicians that has learnt to play this way during his political career and old habbits die hard. The bad thing is, Tsipras has learnt the same game.

      I will disagree with you though, on his relations with the Europeans once he became PM. You don't have to believe me, just search all the praises by Juncker, Merkel, Schauble, and Klaus Regling. Find one about Tsipras... Up to June 2014. June 2014 is turning point, because you may remember that Samaras just lost the euro-elections to Tsipras.

      I will also give another view of the story, alternative to yours. Samaras' relations with Europeans, as well as Stournaras' or Hardouvelis' were infinetely better than what Tsipras' and Varoufakis' is. I don't think i have to bring articles to compare.If the Europeans wanted to give a minimum support to Samaras, they could have thrown him any bone. At least 2 ND former ministers, already since summer were saying that the troika was unusually aggressive. Merkel could have at least given a "warm" media support to Samaras.That Samaras went to Germany despite the ambassador telling that it wasn't the time, isn't much of an argument. It was never the right time for Samaras. Earlier, there were the German elections so it wasn't a good time, because Merkel didn't want to go to the ballots with Samaras banging at her door and making public requests about debt. Unfortunately, Samaras in December was facing his own electoral problem, so when did you expect him to go ask? AFTER the elections? Samaras went to Berlin, with the following objectives:
      - Support so that the troika accepted to include some tax reliefs in 2015 budget.
      - Support to open negotiations on debt restructuring (a public statement from Merkel in the joint press conference will give bonus points to Samaras, because last time, he got as reply "Germans wouldn't like that", from Merkel.
      - The consensus of the german goverment for the IMF to leave the program at the end of the year.

      He got this:

      The consensus in New Democracy, is that the Europeans, ever since June 2014 (where Samaras lost to Tsipras), considered Samaras finished and that Tsipras would follow suit with Papandreou and Samaras: "once PM, he will abbandon this leftist rhetoric and continue quietly the troika program". So Samaras became unimportant. It is certainly a plausible explanation in absense of a better alternative.

      To be continued...

    4. ---Continues here:

      Speaking fof euro decisions, i also remind you this:
      Exclusive - Euro zone backs ESM credit line for Greece after bailout exit

      Samaras didn't just say "I will get out of the memorandum". He said "i will secure an ECCL line, to which i will be tapping if needed". And everyone in Greece knew that he would need it, so they voted Tsirpas that instead was proposing the "real" exit from memorandum... Reckless you say? Well, reckless but with with EU approval. It was Samaras' attempt to disguise a memorandum as a non memorandum. Bad financially, but politically, the least reckless alternative against and opponent that had won him already by saying he would "tear the memorandum to pieces".

      Tsipras certainly has the potential for building partnerships, because he knows how to blackmail. When you are dangerous, creditors fear you and lower their demands. With Tsipras, the troika already lowered the target for primary deficit, despite the entire northern european press releasing venomous articles every day on the negotiating tactics of minister Varoufakis. We can now call this "better partership building", just like minister Varoufakis prefers calling the troika, "the institutions"...

      Samaras didn't lose votes to Tsipras because of the ECCL. Samaras lost votes to Tsipras, because the people saw that behind the ECCL there was always a memorandum and because Tsipras was promicing the end of it.

      My confidence on Tsipras on his "bond creation" is even greater than yours. I have twice in the past assured Mr. Trickler and you, back in spring in the first interim agreement and now again, that there would be no Grexit, because Tsipras knows how to put pressure (some would call it blackmail). Sometimes, this builds agreements too. Many can steam over minister Varoufakis, but there is a lot of money and interests in the table, enough to create smiles and creative relationships, even with minister Varoufakis. Because such is the way of life and of politics.

    5. And an addendum, on how impossible deals, end up in lovely relationships.

      - Tsipras is threatening the Europeans with self-destruction. Samaras never attempted this. This is why Tsipras will get lower targets for primary surplus.

      - Europeans reply. I will quote the greek foreign minister Kotzias on german radio WBR:

      "Everyday they tell us: you are lost, you are dead, you don't exist, we don't care for you, in Europe everything flows well without you. They are pressures that can be condensed into a phrase of either you sign or you die".

      And this is why Tsipras will build a better partership. Because, he steps on their toes. Samaras tried to be rewarded for being a "good student". Unfortunately, he should have followed the greek proverb "even the Saints need threatening". Now that Saints from both sides threaten each other, both they will get part of their deal. Unlike Samaras... Good partnership tactics? Let's call them that. The important in politics, is the result. Tsipras will be able to say to people that he got better terms. Germany will be able to tell her voters that the once indomitable Tsipras signed a memorandum. The Spaniard and Portuguese goverment will be able to point to their own leftist parties and show to their voters in the elections of autumn, that just like Tsipras had to compromise, the same holds for their own rebel leftists. One happy family again.
      Relationships between politicians have high and lows according to the circumstances.

    6. I agree Mr. Kastner,

      But a question, how do you know if Varoufakis made your suggestion and it was simply rejected? As it seems as of late anything (supposedly) being suggested by our side is rejected immediately. The agrement is coming and from my expectations it will be a the same what our debtors wanted originally, only a time lapse has happened. In the meantime, from my understanding it will be even a more harsh program.

      Viva La Austerity.



    7. Ah, i forgot to comment on something else:

      "If Samaras had supported Papandreou instead of torpedoing him brutally, things might have developed differently. "

      If Samaras had supported Papandreou, Tsipras would have become Prime minister at the place of Samaras,is my answer. Papandreou had a very strong majority in parliament, after winning the elections with 44%. Contrary to Samaras, he didn't have to actually govern together with eternal enemies. He started with the huge majority of greek media behind him. But when you have to do heavy cuts in very short period of time, combined with an inefficient cabinet and a PM lost in his own world talking all the time about "green development" as the answer to the crisis, there isn't anything that can save you. George Papandreou, appointed as FinMin, George Papakonstantinou, a man with no previous experience, that lost each and every one of the program targets by a good margin. He also appointed as ministers a team of his gym friends, turning even his party against him.
      From a political point of view, having Samaras, support this goverment, with the left combined with Golden Dawn organizing sieges of the parliament on daily basis and promicing punishment of the old political system, exit from the memorandum and various paradises, would be political suicide. It would appear even more what has turned to be the image later: "The two old parties, combined, defending their interests against the rest. The traitors united against the new forces of change". The next 2 parties to joust for the goverment would be SYRIZA vs Golden Dawn.

      You know how the SYRIZA voters call PASOK and ND after the Samaras goverment where PASOK had to support ND? "Pasokonoudou". Had Samaras sided with PASOK early, the result would be that "Pasokonoudou" would have lost the elections much earlier.
      And before you say that "SYRIZA may have done better", let me tell you this: There is no way that SYRIZA would ever, under any circumstances, accept to continue a program that would make the population lose 33% of income. Already last week, Tsipras passed his compromise policy by just 11 votes in SYRIZA's general party assembly, with Lafazanis in favour of drachma getting 44% of the votes. Greece would have simply returned to drachma. SYRIZA can now stay in the euro, only because, the great devaluation was done by others, so that they don't have to stain their own hands in blood.

  3. You should ask him money for your plans.
    If he uses them.
    I am surprised about his searching for a contact and asking you questions, (this is not the first time that you write about it), as if he takes you serious.
    IF he would take you serious, he should not only agree with you, or later showing that he uses your plan(s), changed though in his way, as if HE created it, and WORKED.

    I consider the Greek FinMin as a not reliable person, lost in his own ill mental world, not able to be a politician: it is not enough to create wonderful theories.
    NOTHING is based on practical experience.
    NOTHING proves that he can be taken serious, that he has political and economical insight, and takes the full responsibility for what he is: the Greek FinMin. He behaves as a film star, a blogger, a correspondent, a rebel, but not as where he gets his money for.

    When reading this post I could not believe my eyes. After all what you published, Herr Klaus, I was convinced that you were a very wise man, next to being a highly intelligent man, knowing where he is talking about.

    Here I read words that say to me that you are wise, intelligent, but that people who do not deserve it, misuse you for exactly that.

    Varoufakis has not done anything that contradicts that. He misuses you, as he misuses all people. If not with "mis":
    using people is despicable as well.

    Nobody can understand him. Not even when he explains it with a long speech, article, interview, or post. It is chaos in the stream of words and sentences. All get lost in the chaos, hypnotized by the beautiful words, smashed down because of the length, an avalanche, convinced finally he spoke excellent, understanding though: no. It is the composition of rare words, poetical words, it is literature, all that makes it sound excellent, not what the language pretends to express.
    It is empty.

    Einstein: "If you can't explain it simply, you don't understand it well enough."
    And so it is, Herr Varoufakis.
    And that is why you search for answers at Herr Kastner's address.
    To pretend later it is all yours?
    Good that this blog is here. Now we can all prove where you got your info.
    Invite Herr Kastner and his wife in your nice Plaka penthouse.
    For a nice dinner. Play some nice music on that beautiful shining piano. I am sure though that you cannot play one single simple piece of music.
    Glamour. All is glitter and glamour.

    You are the professor that belongs in the downward pyramid where I spoke about yesterday, and it was you Herr Varoufakis, next to a lot of others, who I had in my mind in that metaphorical view on universities and their professors.

  4. Klaus, your technically brilliant analysis lacks the primordial analysis of the psychological question of how to build trust in such a scenario.

    If I were in the shoes of the troika I would remember that

    a) The whole problem started with a Greek government embellishing the books to become member of the Euro group.

    b) Stability of the Greek political system has decreased towards zero, so you never will know who sits at the other side of the table tomorrow or next week.

    c) Syriza until November has promoted Grexit and after election done everything to destroy confidence.

    d) The Greek soul, mentality and habituality goes towards proud autonomy, not cooperation...

    Especially the last point makes me believe that future reforms will be slow, by trial and error and most probably governed not by any government but by the hard facts of international economy.

    (These points should not be taken as arrogant conviction, I do like the county and it's population)

    In case you disagree I would be glad to read your specific arguments.


    1. a) correct
      b) agree
      c) am not sure that all of SYRIZA did; certainly Tsipras had become quite mellow by the time of his Thessaloniki speech in September
      d) tend to agree

      It's hard to disagree with you on the last point. Almost 200 years of history seem to confirm it. But then - hope dies last...

    2. One more point. When Tsipras first visited Merkel, he said at the press conference: "Neither are the Greeks lazy louts NOR ARE THE GERMANS TO BLAME FOR GREECE'S ILLS". Perhaps one day he will have the courage to tell this to his compatriots.

  5. A hero is an ordinary individual who finds the strength to persevere and endure in spite of overwhelming obstacles. See the link below for more info.


  6. Pharmathen was sold. &0% to BC... google translate


    1. This is very disappointing news for me!

      I know BC Partners. They are actually among the more serious private equity investors. BUT: private equity investors are private equity investors. The buy companies to sell them again later. In the meantime, they dress the company up for the next wedding. That's not meant to be critical. It's just the business model of private equity investors and one ought to know that.

      I would very much like to know why the owners sold the majority of their company. Just to make a killing? Or have they given up on Greece?

    2. The owners will stay on and continue the management of pharmathen. And will continue in the same successful manner as in the past. There is simply just a "big brother" to back them. IMPO. You put it quite well on what BC is but i do not necessarily see it as a bad thing. If pharmathen is also bought by watson or teva down the line it is not necessarily bad for the greeks working in the R&D and development or factories. I see it as bigger opportunitties for investment in those sectors to increase in Greece. I am hopeful.

      If it was to buy out the knowledge for future use then i will be quite disapointed.


    3. add... there are also other things which i believe it is a strong action. The owner is looking for growth and to become a player in the pharma industry. I wouldn't call it a sell out but an opportunity for growth and collaboration with the big boys. Heavy investment has been made in generics and new patent technologies where there is without a doubt a huge opportunity.

      Behind the seens i believe larger pharma's wanted to buy them or collaborate or grow with them on these new product ideas which i can not divuldge, which are game changers in pharma world. But due to the Greek instablity i believe larger pharma companies do not want to take that risk. Hence the investment group which can allow leverage to take a risk and after stabalization of the greek economy and political spectrum, a pharma co will come.

      There are also some other hypotheses as to why i believe this a positive acquisition, but i can not mention them here and now.

      In a nut shell, katsos is a very hard worker, down to earth, family orientated and has concern for all his employees. Meanwhile he is extremely driven and goal orientated. His sale is not for personal monetary gain, but growth. Ofcourse he will profit from this growth but it is not for the wrong reasons in my opinion.

      I believe him and the company to be an example for greece. And although inside it may bother one that the company is not "greek," when it is the greeks, running it from top to down, and success continue and game changers come, it is not bad to be an international company based in Greece.


    4. 1 of 2
      P/E firms like BC are limited-time shareholders. Typically no more than 5 years. They then sell; to whom? In all likelihood to another P/E firm.

      EBITDA (earnings before interest, taxes and depreciation) is the critical number because it determines the target's valuation. There are well-established 'multiples' for each industry which determine the value but the multiples vary with overall economic conditions. Conservative multiples would be 3x-5x, but I have seen aggressive multiples up to 10x. The multiple is what's being negotiated between buyer and seller. Suppose the shareholders got away with a multiple of 5x.

      EBITDA was 46 MEUR in 2013 (a long time ago but the most recent figures). A 5x multiple would value the company at 230 MEUR and BC would pay 151 MEUR or 70% thereof for its share.

      BC wants to sell its share within 5 years. Thus, they have to do one of two things or a combination of both: (a) drive up the multiple (which is hard to do because the market determines it) or (b) increase the EBITDA.

      Typically, they pursue a growth strategy which should increase sales and EBITDA. That's the good part. The bad part is that all of that is financed with debt, debt which is put on the company's books (and not on the buyer's).

      Typically, the entire 151 MEUR is financed with debt which means that Pharmaten now has that much more debt (it already has 50 MEUR of debt) and interest expense. Depending on the interest rate, that could quickly become an annual interest expense of close to 10 MEUR. Those are 10 MEUR of company cash which have to be used for debt service instead of perhaps building a new plant.

      The amount of purchase price which exceeds Pharmaten's book value is booked as an 'intangible goodwill'. Such goodwill represents nothing other than expected future earnings. A conservative analyst would deduct goodwill from the equity. Pharmaten already has 42 MEUR goodwill which will increase by at least 100 MEUR. Say we have 150 MEUR goodwill at the end of this excercise. Substracting that goodwill from 100 MEUR in book equity, you have a negative equity of 50 MEUR.

      In short, Pharmaten - like any other company after a buy-out - will be extremely highly leveraged. Leverage drives managements to perform. Not only will there be growth strategies but there will also be the famous 'efficiency-increasing measures'. You can imagine what that is.

    5. 2 of 2
      As you can imagine, a company that was used to family management will now be required to produce weekly and monthly financial reports which show that the EBITDA is rising. I have seen many formerly most solid family companies which lost their entire corporate culture in the process.

      Suppose BC sells after 5 years based on a valuation (EBITDA times x) of, say, 400 MEUR, which could easily happen after 5 years of P/E management. Then the entire above-described leveraging process starts anew only that the levels are now much higher. And so forth.

      Where does this end? Oftentimes, its end after the 3rd or 4th buyer with an insolvency. The lucky ones are eventually sold to a 'strategic partner' and they become a division of a large company. That can be a positive situation. Sometimes they manage an exit via the stock exchange and that can be positive, too. But all the others will eventually end up in insolvency after their substance has been milked by P/E firms several times.

      All P/E partnerships with former owners start like marriages: extreme happiness all around (after all, BC bought a terrific company and the owners made a ton of money). These relationships normally turn sour when the owners see that something happens to 'their' company which they don't like.

      Expect a lot of positive news in the near future. A great compliment for Pharmaten's success; for a Greek company; perhaps even for Greece as a country. Through BC's resources, Pharmaten will be able to do things which it could never have done alone. What matters, though, is what happens in 5 years from now. Let's revisit the subject then.

      BTW, I could give you a list of former family owners who have become mega rich thanks to P/E firms but who ended up in depressions about the fate of 'their' company.

    6. Thanks for the great feedback Mr. Kastner,

      It is always good too know more knowledge of positive and negative aspects of such information. As always your are short and too the point and very clear.

      It concerns me on many levels as i have associates their and i am truly concerned and proud of our few but possibly prosperous shooting starts.

      My suggestions to my associates is that the goal orientation will increase by 200% based simply on the facts you layed out above. If things are going just average then indeed efficiencies are needed to be brought in. Something which i seek everyday.

      On the other hand i still remain hopefully that it is only a stepping stone. BC sees an opportunity and will sell at a profit. And i am sure and hopeful the family closed a deal which helps further investment mainly in research, which equates to the EBIT growth. As it is a key component of the company. Generics are the core but the new tech drugs they are coming up with and patent pendings are game changers. I understand what you are saying about types of BC companies, but i see them more as a preping stage before Pharmthen is sold to a large group.

      Long term my concern is the positions held in greece. Good R&D managers researchers can be uprooted and brought to different facilities, but services and factory even if gleamingly new are always 1st to sacrifice when part of a large group and the numbers don't add up.

      Over all though i am hopful though. If you don't have hope, might as well dig a grave and jump in.

      You have become my conscience in some sense on many things.

      Thanks Always,


    7. Mr. Kastner,

      One question. Lets say for discussion purposes the figure you mention the owners got 150meur. A more conservative figure 100meur.

      Owning 30% of the company, do such agreement allow the old owners or part share holder re pump funds within the company? I mean if an investment needs to be made but it affects bottom line and BC is against such a large invstment, does the smaller shareholder have the authority to use personal wealth to make the investment into the company? Or does this change the percentages of ownership?


    8. You are right that a P/E firm is always a stepping stone. A stepping stone with a maximum lifetime of 5 years.

      You are also right that R&D is the key issue. The benefit of a P/E firm is that they cannot move the R&D elsewhere.

      As I said, if the final destination is a strategic investor, say Novartis, the whole things is making sense. It could well be that the owners had planned that from the start. In other words, if they sold to Novartis today, they would get a price of x. If they put in between a P/E firm as a turbo for the company's growth, they will eventually get x plus a lot on their share. The downside of a strategic investor like Novartis is that they DO have the option of transferring R&D elsewhere.

      Some P/E firms (not BC) really milk the target from the start. They look at the target's EBITDA and ask how much debt they can raise with that. If they don't need that debt for investments, they pay it out as a special dividend. Many times such a P/E firm has recouped the little equity which they invested within a few months.

      There is not one single P/E deal which does not begin with great visions. How the P/E firm will open new opportunities for the target; how they will make the target a global player; etc.

      I once financed a first-round buy-out (personnel leasing) which put 40 MEUR debt on the books of a company which had no debt before. We thought that was pretty leveraged but doable. Within 2 years, round 2 took place. Barclays P/E put 250 MEUR debt on the books. I stayed away from that convinced that it would end up as a disaster for Barclays. Again within 2-3 years, Barclays sold at 800 MEUR to a strategic investor. Mind you, the company's business had not changed very much during those years. No one could ever figure out why the strategic partner would have paid so much even though everybody agreed that it was way too much.

      Regarding your question.

      What minority owners can and cannot do is determined at two levels. First, and most importantly, it is corporate law. In Austria, for example, 25% plus 1 share give minority owners a veto right in important decisions. Within corporate law, it depends on the agreement between buyer and seller. You can rest assured that no P/E firm will dish out 150 MEUR without making sure that they have the fullest control which corporate law allows them.

      The decision to make an investment is a corporate decision. If the minority owner cannot convince the majority owner of an investment, he can offer all the money in the world. If the majority owner does not agree, he will carry the day.

      Which brings me to the most critical issue. As long as the old owners and BC see eye to eye and share the mission, things can go really well for both sides. As soon as there is a divergence of views, things can get dirty. For example, if BC were to later sell to a cut-throat P/E firm simply because they offered the highest price (which would lead to a milking of the company), there is nothing the old owners can do. Even if Novartis had the second best offer.

    9. Addendum: there IS something which the old owners can do. They can cry all the way to the bank...

    10. Thanks once again and wow!


  7. @ H. Trickler
    a) Correct but history.
    b) Correct but history.
    c) Correct but history.
    d) Correct and relevant. Syriza have succeeded so well in destroying confidence that I consider anybody who is willing to negotiate with them naive. They will promise anything to get more money. Contrary to you I don't think their plan A is to leave the EZ (EU), it is to remain an annually adjusted cost on the EU budget. Plan B is to get as much money out of the EZ as they can before they leave, until now they have been successful. In all fairness, these plans are valid for most Greek parties. Therefore, please do not send money to any Greek government or government controlled institution.