Damage Control: Leveraged Buyouts and Hostile Takeovers

A couple of weeks ago we talked about the first Damage Control series and suits against foreign governments. The second Damage Control series begins with the news that Damage Control’s joint owners (Wilson Fisk and Tony Stark) have sold the company to Carlton Co.  This leads to a somewhat complicated series of corporate financial maneuverings that deserve a closer look.

I. The Leveraged Buyout

Later, in issue 4 we learn the details of the buyout.  It turns out that Carlton Co. didn’t buy Damage Control outright.  Instead, it paid two-thirds of the price in cash and the other third via a loan from Wilson Fisk himself.  Partially debt-financing the purchase of a company is called a leveraged buyout.  Although the leveraged buyout originated in the 1950s, they became very popular among the ‘corporate raiders‘ of the 1980s, which probably inspired this storyline.

You may have noticed that it’s a little weird that Fisk would loan the money needed to buy out his own company.  And sure enough, Fisk was up to no good.  The loan was apparently at a high interest rate, and simply maintaining the payments was killing Carlton.  It’s likely that Fisk’s plan was to reap profitable interest payments until Carlton defaulted, then take the rest of Carlton’s interest in Damage Control, which was likely used as collateral on the loan.  Thus, Fisk would make a tidy sum and ends up with complete control of the company.

Luckily, the former Chief of Operations, Ms. Hoag, has hatched a plan with agents of SHIELD to save the company: a ‘hostile takeover.’

II. The ‘Hostile Takeover’

I put the term in quotes because it’s not really a hostile takeover, although that’s what the characters call it.  A hostile takeover can really only happen to a publicly traded company, which can’t directly control whom its shares are sold to.  In this case, Carlton Co. agreed to the sale of Damage Control to Hoag.  So how did that work?

Basically it was a mirror of the original acquisition.  Hoag apparently received a sum of money from the original sale, though news of the sale was a surprise to her, suggesting she may have been a non-voting shareholder.  Anyway, Hoag uses the money as collateral for a loan from SHIELD for the entire buyout price, which SHIELD will hide in its helicarrier appropriation budget.  So Hoag offered to buy Damage Control ‘at cost’ with SHIELD’s money, allowing Carlton Co. to pay off its debt to Fisk.  Admittedly, that means effectively wasting $438 million in interest payments, but it’s better than facing the wrath of the Kingpin.

(Side note: assuming the story occurred in real time, Carlton owned Damage Control for 4 months in late 1989-early 1990, at which time high yield (aka ‘junk’) bond rates were in the upper teens.  Assuming a rate of 17%, we can deduce that Fisk loaned Carlton about $7.7 billion, which would value Damage Control at $23 billion, or $37.8 billion adjusted for inflation.  That’s not necessarily utterly ridiculous given the size and frequency of their repair projects, but just for comparison, KBR, one of the largest construction companies in the United States, has a market cap of ‘just’ $3.6 billion.)

There’s a couple of mentions of the SEC during all of these plans, but I’m not sure it’s relevant, since Carlton and Damage Control seem to be private companies.  There’s no mention of shareholder meetings, stock prices, etc, throughout all of this.  Furthermore, Damage Control is taken public during Civil War.  It’s possible it was taken private in the interim, but I doubt it.

If the target company in either acquisition had been public, then the buyer would have had to file a Schedule 13D with the SEC within 10 days of a purchase of 5% or more of the target company.  In order to get enough shareholders to sell a controlling stake in the company, the buyer would probably have had to make a tender offer at a significant premium.  I’m not an expert on securities law, but I don’t think anything that went on here would have raised any eyebrows at the SEC.  The biggest issue is probably SHIELD (at the time a US government UN agency) getting into the loan business in a big way.  And just imagine how expensive the SHIELD helicarrier must be if a $23 billion loan could be hidden in the appropriations budget!

III. Conclusion

Although the writers play things a little fast and loose with the terminology, this series has a pretty good take on the leveraged buyout tactics used by private equity companies.  By the way, if you want to pick up the older Damage Control comics, you might skip the third series (the one after this one) unless you like your comics seriously goofy.

15 responses to “Damage Control: Leveraged Buyouts and Hostile Takeovers

  1. Issue 4, page 4, panel 3, Fury talks about “fork[ing] over nearly a billion dollars”. Yeah, it kind of doesn’t add up, but I guess makes it more believable at least.

    • Ah I missed that detail. Well, I suppose it’s possible that Fisk was charging something like 130% interest or that the events in the storyline actually took place over more than 4 months, but both are pretty questionable.

  2. By the time SHIELD’s incarnation at that point was shut down, they already had a multiple-Helicarrier fleet. Also, Nick Fury, Agent of SHIELD v.2 # 7 explicitly established that that particular incarnation was operating under a UN charter.

    What that meant for their legal ability to help finance Mrs. Hoag’s rescue scheme, I don’t know.

    • That’s as may be, but they specifically talk about hiding it in the budget for the new helicarrier, so I guess they were buying another one.

      I was wrong about the US/UN issue, but that only makes it worse, I would think, since even more governments would be scrutinizing SHIELD’s budget.

      • And those other governments – particular the rest of the permanent five on the UN Security Council – would likely be even crankier about keeping something like an Inspector-General or some other “watchdog”-type office on SHIELD’s case after the first reorganization post-Deltite Scandal as depicted in Nick Fury vs. SHIELD

    • James Pollock

      Are they hiding it in the acquisition budget or the operations budget? One’s a capital account, and one’s an expenses account. Putting things that aren’t capital into capital accounts and things that aren’t expenses into expenses accounts can create tax implications (in private businesses, anyway.)

  3. Tanks typically cost about $5 million; stealth fighters, on the order of $150 million. This suggests a back-of-the-envelope factor of about 30 times for cost increase to make non-flying gizmo fly and stealthy. Nimitz-class naval carriers run circa $5 billion; ergo, about $150 billion to make a Helicarrier. Which leaves room for hiding a $23B loan as about a 15% cost overrun — likely to raise some eyebrows, but not an atypical level on military hardware contracts.

    Contrariwise, there’s a note here that Marvel Canon has one of the genius engineers saying (circa 2007) that they’re only about $9B apiece. Frankly, that seems pretty ludicrous; I think the only explanation is “unreliable (character) narrator”, and that Levine misheard (and then repeated) “nine” when the actual bill was “ninety”. Even then, it must have been the price for one of the much older models.

    • We can’t safely extrapolate based on that, especially since there are many different reasons for the price differences, but I agree that nine billion dollars is ridiculously low for something that complex and sure to use specialized parts that would require special permission from the U.S. just to use (which would create all sorts of problems when it comes time for maintenance or resale). A more realistic one would be somewhere be at least over a hundred billion. The best explanation is simply that comic book writers aren’t military contractors.

      • …er, last I looked, 150 billion was over 100 billion?

      • I meant for a used one. Considering that the know-how to build and maintain one of these helicarriers probably is restricted to a very small number of people in an even smaller number of nations I’d say a used one would be a bargain at a hundred billion. A new one would be much more expensive. Of course the market would be equally small, only S.H.I.E.L.D., the U.K., China and India would likely be in the market for one.

      • No, they’re not. Some of the freelance writers available to Marvel are either more thorough in their research, better-connected in who knows them or both. But military contractors they’ve never been.

  4. 17% interest on a loan (or, as the comments seem to indicate, as much 130%!)?? Sounds like the Kingpin is in violation of usury laws (which prohibit charging an interest rate of greater than 16%). If that was the case, the whole loan contract could have been voided for being illegal, which probably would have caused the entire sale to be reversed as well and everything would have reverted back to Stark and Fisk.

    For a group named “Damage Control” they certainly seemed to miss the easy solution 😉

    • James Pollock

      Depends on where the loan was made, and under what circumstances, as not all states even HAVE usury restrictions, and the ones that do vary widely. Tax refund anticipation loans, for example, carry ridiculously high annualized percentage rates, and payday loans run typically over 100% annualized. Credit cards, most of which seem to be issued under South Dakota law lately, often have variable rates tied to the prime rate, but a look at my credit card agreement shows that the highest penalty rate (following 3 missed payments) capped at 26%.

      In general, the interest rate charged in large corporate leveraged buyouts falls outside usury law anyway, on the theory that the people who go into these deals are A) skilled businessmen, B) assisted by counsel, C) and accountants, D) provided with information, that allows them to make their own decisions as to whether an interest rate is too high.

  5. This storyline was probably meant as a parody/reference to Cadence/Marvel’s tribulations during the ’80s and early ’90s, which I believe involved a leveraged buyout and hostile takeover involving Ron Perelman and Carl Ichann.

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