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.