When Best Products Co. declared bankruptcy for the second time and shut its doors forever recently, the usual suspects got the blame: fierce retail competition, flat consumer income, flat consumer spending.
But Best, whose demise put 10,000 people out of work, got an extra shove down the retail trash chute.
Nine years ago, leveraged buyout firm Adler & Shaykin acquired the catalog showroom chain for $1.1 billion -- more than 90 percent of it borrowed. The resulting mortgage payments were impossible for Best to meet; analysis by Baltimore's Alex. Brown & Sons for a bankruptcy court showed later that the buyout terms should have set off alarms all along Wall Street.
Best downsized, reorganized, recapitalized and tried to make a go of it, but it never recovered.
Neither did hundreds of other firms. Buoyed by a strong economy and a sea of "junk bond" financing, LBO artists wrecked the balance sheets of companies from coast to coast, gave the 1980s decade its reputation for greed, and financed college tuition for the children of countless bankruptcy attorneys.
Now, as if to celebrate the 10th anniversary of LBOs' "Barbarians at the Gate" golden age, investors are laying the tinder for another explosion of high-debt deals.
LBO funds are newly flush with cash, some of it from usual sources such as pension managers and other institutions, some of it from new players such as banks and rich families.
"There certainly has been a lot of money raised," said Jamie McDonald, a principal for Alex. Brown who works with East Coast buyout firms. "By some estimates, there is something like $50 billion in uninvested buyout-fund capital out there right now."
Assuming that's true, she said, "you're talking about $200 billion of buying power."
That's almost 10 times the value of the biggest buyout deals ever, such as the notorious $26 billion takeover of RJR-Nabisco in 1989.
The only thing holding back a flood of LBO deals is the rich stock market; managers are reluctant to buy in at today's high corporate prices.
But many analysts say that a recession or a market decline of, say, 20 percent would undam a torrent of leveraged buyouts, placing the technique again on the country's political agenda, perhaps putting American companies at risk.
"A lot of buyout firms are praying for a correction in the market," said Kopin Tan, editor of Buyouts, a weekly newsletter.
