Barbarians at the Gate: The Fall of RJR Nabisco is a 1989 book about the leveraged buyout of RJR Nabisco, according to Wikipedia. In the 80s KKR was the PE firm who bought RJR Nabisco via LBO. It was a $25 Billion deal in the 1980s!!
There is some similarity between the 80s and today. PE firms have “helped” companies go from public to private – best example is Dell. In the process, the company takes on a heap of debt. To pay that debt back, the company will try to go public again in a 3 to 5 year time frame.
When a Private Equity firm gives a company money, there is an unspoken deal that the PE firm will – in some way – get a return on that investment in a 3 to 5 year time frame.
In the UCaaS space, investors have waited 10 years to get paid back. Fuze is a great example. Fuze investors put in almost $500M but sold it to 8×8 for $250M to just exit. WE are seeing this with the Mitel deal. The investors were tired of waiting for a return, so took the best deal they could get – it so happened to be $675M from RNG.
Upstack, Bluewave, Bridgepoint, Lightyear, Telarus, Avant, AppSmart and the rest have signed deals totaling $650M or so from investors (mainly PE firms). That is $650M in debt that will need to be paid back.
Even if we think about it as a mortgage with a 15% interest rate, a $10M mortgage with 10% interest has a monthly payment of $108K for 15 years. Just to give some idea of the money we are talking about.
A broker/agency/TSB has 3 possible revenue streams: commissions, MDF and resale. If they choose to white label or resell circuits (like AT&T APEX program). The margin on resale can be a lot better than commissions. Reselling Google, Dropbox and Microsoft licenses is a better margin than 10% on cable modems.
So consider that Dell was able to IPO to pay off its PE. RJR Nabisco fell apart. Usually a lot of debt during a recession leaves a company without a way to navigate the poor economic waters.
A lot of companies in the IT/telecom space have been acquired by PE – PGi, TPX, Datto, and many more. How many are doing well?
History has a tendency to repeat itself.
Don’t let the Barbarians get your commissions.