Explain the impact of private equity firm acquisition of manufacturing and retail firms.
Post your Initial response to the Discussion question. This posting should be at least 250 words. Respond to at least 2 other students’ responses. Your primary posting can end with a “tag- line” or a related question of your own.
REPLY – 1 (nagaraju lingampally)
Private equity firms can be described as a company specializing in financial activities, funding businesses and acquiring companies that are not listed publicly in The Marketplace. Such companies fund businesses that are not traded publicly by supplying them with financial resources to improve their operations and sometimes by firms that fail, run them and bring them back to their operating strength and from there they can decide to sell the firms for benefit. Such companies purchasing manufacturing and retail firms have an influence on the newly acquired business. The impact of buying from them a manufacturing firm can vary from the effect they have when acquiring a retail company. This is because a manufacturing company is concerned with bulk distributors while the retail company is working with the individual customer on the marketplace.
Because of their investment capacity, these firms can run and bring manufacturing companies to a higher return point when a private equity firm acquires a manufacturing company. A strong asset base allows private equity firms to engage in purchases of raw materials, while increasing the efficiency of the production business. After a manufacturing company has been acquired by a private equity firm, it becomes the duty of private equity firms to ensure that the manufacturing company gets the best out of the brand’s position, thereby using their financial resources to promote such a manufacturing entity, thereby raising awareness of the presence of such a manufacturing entity.
“Bloom, N., Sadun, R., & Van Reenen, J. (2015). Do private equity-owned firms have better management practices?. American Economic Review, 105(5), 442-46.”
“Cao, X., Chan, K., & Kahle, K. (2018). Risk and performance of bonds sponsored by private equity firms. Journal of Banking & Finance, 93, 41-53.”
REPLY – 2 (vinod kumar nomula)
Private Equity Acquisition in Manufacturing and Retail Firms
Private equity firms are involved in buying controlling shares of public or private companies with the hope of using its controlling position to restructure the company and thereby increasing its value and later selling them to other companies in an effort to attain profit from the transaction or taking them public. In order to achieve this, the private equity firms lend money from banking institutions or other lenders and add more from its own to ensure that it is able to attain a majority stake in the shares of a company. Private equity can invest in retail and instead of creating profits incur losses in the operations and thereby leading to the closure of the retail companies in the long run (Bernstein, Lerner, Sorensen, & Strömberg, 2016).
Already struggling retail firms have been complicated through the efforts and the role that is played by private equity firms following the fact that private equity management of retail companies may play a major role in catalyzing them towards bankruptcy in that the management change may have even more negative and diverse impacts on the organizations that before.
Private equity firms also contribute to the downfall of retailers in that it acquires their debt obligation through a Leveraged Buyout and thereby collecting dividends from the company on the basis of those obligations in addition to charging the company fees for the services that are offered by the private equity management. In response, the retail company in efforts to minimize the debts is forced to close some of its stores, decrease inventory, terminate leases and even reduce on its labor force (DePamphilis, 2019).
Private equity also impacts greatly on the performance of manufacturing firms in terms of profitability margins.
Bernstein, S., Lerner, J., Sorensen, M., & Strömberg, P. (2016). Private equity and industry performance. Management Science, 63(4), 1198-1213.
DePamphilis, D. (2019). Mergers, acquisitions, and other restructuring activities. Academic Press.
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