As I read about new debt (Ford’s planned $18 billion), secondary stock offerings (usually to financial institutions), and acquisitions of operating businesses by leveraged buy-out artists, only one thought now goes through my mind – where does the money come from to pay back the debt and the interest – or the return the new owners want for their investment?
I used to feel confident that management had a plan to reduce overhead, get rid of redundant operations, improve purchasing power and otherwise increase the net profits of the business so there would be more cash to handle the new demands – but I was wrong. Certainly these expense cuts happen to some degree but for the most part raising prices is the first action taken to generate the additional money.
Now sometimes the market will absorb the price increase and sometimes it won’t. When the market won’t (as in the auto business) thanks to competitive products then the managers of the business are under pressure to find other ways to improve profits.
The lenders won’t excuse the debt and the new owners won’t sit still (for very long) waiting for a return on their money. Management either performs, or is replaced… or the bank forecloses on its loans and forces a bankruptcy … or the new owners strip off the assets and otherwise liquidate the business.
So when we debate why the United States is no longer a strong manufacturing country, why we have to outsource jobs to low wage paying countries, why our middle class is disappearing, lets think about why Toyota and Honda can “outsource” jobs (and entire manufacturing plants) to the US.
Sure I’ve read the arguments about how Ford and GM pay higher wages because of old union contracts and how the newcomers are not saddled with thousands of non-productive pensioners and an older work force which costs more in health care benefits – but I think there’s more to the problem that that.
Could it be that Toyota and Honda and others like them – don’t sell equity or sell out or refinance – they keep the money in their checkbooks that would otherwise go to pay off new debt, or new owners. Sure they raise prices, but never under pressure and they keep gaining market share while they do it.
And what do such companies do with the money? They reinvest in their businesses. They improve their operations with better equipment and systems. They invest heavily in R & D to find out what their customers need and want. And they analyze how they will be better able to compete as the availability of resources changes, as the market changes.
I’m all for making a profit – on my time, on my knowledge, and on my investments. I sold businesses and refinanced assets (hey- it’s tax deferred money), and I never gave it a second’s thought when I raised prices to handle the increased debt. I wanted the new cash from the loan AND I wanted the business to pay off the new debt. It’s the American way!
But now I’m more aware that in the overall scheme of things – when anybody sells a business for a handsome profit or takes on new debt, the new owners will raise prices and / or find ways to cut costs. Either or both will make it more difficult for those who need those products to buy them (squeezes the middle class) and that some who worked for the previous owners will lose their jobs to somebody in another country that may not have our kids and grandkids’ best interests at heart.
How should we do business – take the long-term approach and try to keep costs down, or refinance, anticipating that there will always be someone to buy us out? There are no easy answers.
If you live in Michigan you will have one answer. If you live in a “hot” growth area, you will have another. But keep in mind that businesses and places go through cycles and trying to time the market -any market is a fools’ game. Andrew Carnegie made more money than he could give away by holding and building. Bill Gates made more money than he can give away by holding and building, and Warren Buffett made more money than he can give away (he’s even got Bill helping him) by holding and building.
