The Motley Fool: Every Sunday, Useful Tips on Investing| Financial Blog Corliss Group
Q: What’s a leveraged buyout?
A: A leveraged buyout (LBO) is when a company is bought out by another entity (or entities), using a lot of debt.
Private-equity investors are typically involved, borrowing gobs of money without using much of their own, and often using the acquiree’s assets as collateral.
The acquired company is generally taken private (i.e., it will not trade publicly on the stock market), only to go public again after some changes have been made (such as layoffs, the selling of assets, or dividend increases or decreases).
While some LBOs are executed by members of management, others are hostile, executed by outsiders and not welcomed by their targets.
Many LBOs don’t end well for the company or its shareholders (there are substantial interest payments due, after all), though the acquirers often do well.
Q: What’s a golden parachute?
A: A golden parachute is when a company gives a hefty payout to a departing CEO or top executive.
It’s often required via a clause in the exec’s contract, and can be triggered if the company is sold or the exec is dismissed.
Many are quite generous and might even seem reasonable given the performance of the executive and the company.
But others are rather outlandish, and sometimes go to folks who haven’t done stellar jobs or been in their positions long.
A classic example is Bob Nardelli, who left Home Depot after an unimpressive six years with a reward that topped $200 million.
Golden parachutes can involve a large cash payout, a generous severance package, stock options and all kinds of perks, such as continued travel allowances, health-care coverage and more.
As you might imagine, shareholders don’t love golden parachutes.
Dear Fool: A certain stock I owned in the mid-1990s spent much of a year bouncing between $23 and $31 per share, while not paying any dividends.
My mutual-fund representative said that I should sell the stock and buy more of a mutual fund I was invested in — which he, conveniently, sold. I did, and shortly after, the stock started climbing, hitting $100 within about two years.
That advice cost me $8,000, but the guy made his 5 percent commission.
The Fool responds: Ouch. There are lots of lessons here, such as how important patience can be for investors.
If you still believed in the company’s long-term growth prospects and found it to be healthy, hanging on would have been reasonable. Even the best stocks can falter for a while.
The commission you paid is a reminder that many financial professionals have conflicts of interest and may not be serving you well.
It’s worth asking an advice giver how he’s compensated and if he will reap a commission.
Try to research investment options on your own and make your own decisions. Put your money in your best, most promising ideas.
Your parents and grandparents may have invested in General Electric (NYSE: GE), and you should consider it, too.
For starters, it offers a dividend that recently yielded 3.3 percent, and it has paid a dividend every quarter since 1899.
General Electric’s operational diversification and its ability to adapt to changing times have kept it going over many decades.
It’s a huge conglomerate, offering turbines, light bulbs, medical-imaging equipment, locomotives, home appliances, financial services, jet engines and much more.
It’s spinning off its retail-finance business and becoming more of an energy company, with oil and gas now its fourth-largest revenue generator. Its industrial businesses are gaining momentum.
In late April, General Electric offered about $13 billion for the power business of French industrial giant Alstom.
With its whopping order backlog of $245 billion, General Electric has a promising future.
It can be hard for such a huge company to be nimble, but it has been thinking outside the box, investing in alternative energies such as wind power, partnering with smaller companies on new technologies, and sponsoring competitions to develop innovative solutions.