Not All Buyouts Are Super Wonderful

I got lots of feedback on yesterday’s post about removing the moral hazard from private equity.

Many of you argued strong counterpoints, but I was puzzled by the most prevalent comment. It went something like this: Had the Mervyn’s buyout not happened, the company simply would have failed earlier. Therefore, the buyout was still good for Mervyn’s.

Pardon me while I pull you out of your buyout bubble and slap you silly.

Yes, it is possible that Mervyn’s would have failed sans buyout. But it’s also possible that former owner Target would have turned things around on its own, or that different buyers would have been successful where Sun and Cerberus failed. It’s also possible that the buyout was actually a negative event for Mervyn’s, due either to operational mismanagement by the buyout firms (yes, that has been known to happen) or due to the split structure.

We just don’t know, and my argument doesn’t pretend to.