Re: HOMESTEAD: Ray Carey's Democratic Capitalism

[John Médaille <john@medaille.com>]

At 03:55 PM 7/27/2005 -0400, Norman G. Kurland wrote:
>Below is a footnote to a paper that will appear in the next edition of 
>Employee Stock Ownership Plans by Smiley, Gilbert and Binns, published by 
>Warren, Gorham and Lamont.  This case is living proof that a leveraged 
>buyout can be achieved entirely on market terms.  Here the buyout was 
>achieved by a loan from Equitable Bank in Baltimore at market interest 
>rates.  It works.
>
>Norm Kurland
>4.      The closest pure credit Kelsonian model in the United States of 
>which I am aware is the 1975 leveraged buyout of 100% worker-owned 
>Mid-South Building Supply headquartered in Springfield, Virginia from its 
>original owner at an appraised fair market value, with all buyout funds 
>supplied by a single commercial bank.  No worker put up any money, and the 
>loan was paid off in full in 7 years out of profits.  The company has 
>expended to 8 branches with over 300 full-time workers throughout the 
>region, and the appraised value of the company s shares as of December 31, 
>2004 allocated among the workers is almost triple the original buyout price.

A number of points here. One, either the company was undervalued OR the new 
owners operated it at a much higher efficiency than the old owner. No one 
does an LBO unless he thinks he can extract more value than the current 
owners can--else the LBO wouldn't make economic sense. IOW, the new owners 
have to perceive that the property has more value than the price offered. 
That's what makes an equities market: buyers perceive more long term value 
than sellers. Sometimes they are right, and sometimes they are wrong. But 
the real question is not with the one company, but with the economy. If the 
previous owner get fair-market value, than he could convert it to a claim 
on some other company, and nothing would really change. To deny this is to 
deny that the market is Pareto optimal. Which may be true, but if it is, 
there are a host of other problems which crop up. Further, your example is 
less impressive than it looks. What it says is that in 29 years, the value 
of the firm tripled. Given the growth and inflation rates over that 29 year 
period, this is not remarkable performance by any means.

Any more Kelsonian successes since 1975?


John C. Médaille

"A dead thing can go with the stream...
but only a living thing can go against it."
         -G. K. Chesterton
http://www.medaille.com/distributivism.htm
john@medaille.com

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