Decades ago, the mafia had a scam called the “bust-out.” They’d target a small business — the corner store, a machine shop, a soda distributor. After intimidating the owner into handing it over for a pittance, they’d order as much inventory as the suppliers would put on credit. They’d stop paying lenders, max out bank lines, demand customer pre-payments: in short, they’d extract as much cash as possible, as quickly as they could. Then one weekend they’d strip the premises of every last item that might be sold elsewhere — stock, fixtures, furniture, anything — and disappear.
The business was ruined, the owner penniless or bankrupt or worse, and the gang? They’d swept up all the cash … and were ready to do it again.
The comparison is not far-fetched. A private-equity group borrows a vast sum of money, buys a struggling company and squeezes operations as hard as they can. “Rationalizing” can involve layoffs, steep pension cuts, loan defaults, supplier hardball — anything to free up a dollar. When they’re done, the PE investors pay themselves a huge dividend, often financed by more borrowing. Then, like the mafiya, they sell off what’s left and disappear.Now that seems almost quaint. Today, it’s called a workout, not a bust-out, and the operators are private equity firms, not the Cosa Nostra. The amounts involved are hundreds of millions of dollars. And best of all, it’s completely legal.