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Tuesday, 13 Jun 2006
We had a 10 am meeting today to discuss the formation of this new company that we, well, intend to form. The meeting comprises of me, my colleauges S. and W., the head of investments E. and our Investment Guru, Mr. L., the man, the legend, and a few other insignificant nodding heads. Mr. L. is the resident genius, and everyone listens to everything he has to say in awe and make sure that it gets implemented immedietly without questioning. Questioning, as my co-workers will tell you- would imply that you are either someone who doesn't understand our business, in which case you are a moron and will be treated as such, or it would imply that you think that you know better than the resident Guru, which would also make you a moron, albeit a conceited one, and you will be treated as such. There must be something wrong with my e-mail, cause I never got that memo. Hell, I never seem to get any of these memos that are common knowledge to anyone but me. But nevermind that, this is how the meeting went:
E.: As You all know, we are here to discuss the forming of the xxx company and how we intend to finance it. This will be a "brain-storming" session, so please feel free to contribute any ideas you might have. As the old saying goes, there are no stupid ideas.
Me:(whispering) Only stupid people!
S.: shhhhhhh.
L.: If you guys don't mind, I would like to present what I think about how we should go ahead with this. Just try to follow me here, ok?
E.: Of course sir! It would be a pleasure!
Me:(hissing) Kaskouss! (pussy/ass-kisser)
(S. hits me under the table with his foot)
L.: So here is what I think. I think we should form this company ourselves, and then form a fund and get the fund to buy the company. After we do that, we buy the fund ourselves!
Me: huh?
E.: Brilliant!
W.: Very good idea!
L.: Please allow me to continue! After we buy the fund and are in control of the fund, we should go and create another fund to buy us and the that fund out, and thus control us, the fund and the new company!
E.: Wow.
W.: Fantastic thinking!
Me: Wait, hold on, what?
S. (gritting his teeth): Sam, don't interrupt mr. L. now. let him finish!
Me: Wait, hold on, I am sorry to interrupt you sir, but I am a little confused here. Can you explain something to me?
L.: (slightly astonished) Sure. How can one learn without asking questions?
Me: Ok, I am glad you see it this way (S. hits my leg with his foot again). So, just so I can understand this: We are going to form this new company, but then we will create this fund that will buy it from us?
L.: Yes!
Me: But then we will buy the whole fund and own it afterwards, making us the owners again, right?
L.: Exactly!
Me: And then we will have this other fund come along and buy us and the other fund and the newly formed company?
L.: You are right thus far!
Me: Ok, well, then who will own this other fund that will effectively own us?
L.: We will!
Me: Oh, so we are going to own the fund that will buy us after we buy the other fund we created and to which we sold this new company that we intend to form?
L.: Absolutely! 100% correct! Is that all?
Me: Yeah..well..wait, no. One last question: Why?
(shocked silence and looks of indignation and silent hate are sent my way)
L.: (looking at me as if I had 3 heads) Why?
Me: Yeah. Why?
L.: What do you mean why?
Me: Well, why are we going to sell the company we are funding to a fund we are creating that we will later on buy so that this other fund that we will also own gets to buy us and the other fund that we created that we bought after it bought the company we created?
E.: Nevermind him Mr. L., he is not as experienced as you are in these financial matters. Naturally he can't get the logic behind this plan!
L.: Well, actually, I haven't really figured out the logic behind it either. I was just throwing out ideas here, you know, brainstorming and going with the flow!
E.: Oh! Ok!
L.: Does this answer your question Sam?
Me: Oh yeah. It all makes perfect sense now!
L.: Ok, then I guess we will go on with that plan then. E. , you are the one who will handle the setting up of the fund that…..
I will never get promoted in this company!
sigh….
June 13th, 2006 at 10:50 am
“E.: Nevermind him Mr. L., he is not as experienced as you are in these financial matters. Naturally he can’t get the logic behind this plan!”
That must be it!
June 13th, 2006 at 10:56 am
Man, I still don’t understand the point of creating a company to sell, buy and resell to youself.
June 13th, 2006 at 11:09 am
I love morning coffee with S.M.!!
June 13th, 2006 at 11:12 am
Actually, it makes perfect sense. Because you are increasing your assets everytime and making a paper profit on the transaction.
Also, I am assuming that the company is a financial company (Insurance, broker etc) and therefore you would be reducing your overall EBITA
If the company is not financial then its an asset depreciation issue
Anyway, it would be illegal anywhere except in egypt where the central bank rules would allow you to buy yourself out if the majority of shareholders in the two funds are not the same…
And no, I am not L
June 13th, 2006 at 11:21 am
Ok Herlcok, I will bite. How exactly does setting up dummy funds to buy you and the dummy fund you created to buy the company you actually wanna create lower your EBITA if the goal is making paper-profit on the transaction?
June 13th, 2006 at 11:42 am
I am not an expert in financial matters, but I guess the experience of Mr L is the knowledge of some of the many loopholes in the Egyptian laws that would generate some profit from this strange transactions.
June 13th, 2006 at 12:48 pm
Amgad,
Sometimes I wonder how they actually make any profit
June 13th, 2006 at 4:22 pm
I got this in an e-mail from a guy who only wants himself identified as “hamako”:
Lowering your EBITA is not a good thing for valuation purposes
Herlock. Most companies are typically valued using a multiple of
underwritten EBITDA, lowering your EBITA does not help. SM, L’s
explaination may be different, but I work in leveraged finanace and I
know that setting up a fund of funds of funds (whew) has the benefit
of incresing your borrowing capacity. Typically, the holdco (fund
that’s buying the fund) could be levered up way more than the opco
(company xxx) since it would have the more ’secured’ debt if you may.
Also, the partners would want to distance themselves as far away as
possible from the opco if anything goes wrong (litigation, bankruptcy
etc..) . If the company being setup is a financial institution, it
will definately need to borrow funds (int. tax shields, investment
capacity), therefore the above explaination could apply.
-Hamako
I love my readers. I don’t think I say that enough!
June 13th, 2006 at 6:27 pm
“setting up a fund of funds of funds (whew) has the benefit
of increasing your borrowing capacity. ”
Is that because it proves to the lenders that you are clever at financial tricks, and so may be a good risk to lend to - or at least that you are “one of them”?
June 13th, 2006 at 7:19 pm
Wheeew, shit now this is one bad brain twister… I’m minoring in Finance and I don’t have much of a clue on what you guys are talking about.
June 13th, 2006 at 9:04 pm
It’s Enron all over again.
Okay, bad example. That’s not what Enron did. They were much more creative.
Does the Mideast just stomp the creativity out of people, or what?
June 13th, 2006 at 11:20 pm
I have escaped the corporate firewall…Thanks for posting my comment SM.
Don Cox,
because the fund that you’re setting up would have more assets managed under its name thus giving it a bigger borrowing base. No clever tricks there, its actually the lenders who come up with these structures.
-Hamako
June 14th, 2006 at 2:02 am
The fact that you question “why” should concern you. Why is a lowly sandmonkey in on this transaction? Why? Because your ego tells you that you deserve it. But, when the dust settles, the state will have their reason to arrest you – for financial mismanagement, not for your political blog.
June 14th, 2006 at 11:40 am
It increases your assets not borrowing power. Fund of funds as the guy in the emailc alles it is a hedging technique for the participants and a way to increase assets for organizations.
Borrowing power is completely different and hasnothing to do with this. The only way I can see it increasing your borrowing power is if your asset base is too low for you to get additional financing. But usually borrowing power, as a financial institution, is linked to your credit ranting, profit, revenue, cash on hand, assets and so much more
June 14th, 2006 at 4:38 pm
I just skipped reading all the comments wrote, and straight to the point after reading the meeting you had. This is illegal you realize that, well I don’t know about laws in Egypt since I haven’t been here long enough to read or even care for it, but I am sure what Mr. L is doing isn’t exactly ethical let alone legal. It’s almost described as a self-invested pyramid scheme.
Oh well.
June 14th, 2006 at 6:26 pm
If you become part of this, yer gonna get screwed by Mr. L
June 17th, 2006 at 3:09 am
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