Debt as the Engine, Company Pays Its Own Ransom

“The high interest costs incurred are paid by the acquired company. This can happen, for example, by the private equity firm creating a company that takes out a loan to buy a target, and once the purchase is completed, the acquired and acquiring companies are merged. Then the debt ends up with the acquired company, and its profits go to pay interest. In practice, the new company is paid for with its own money, since only a small part of the purchase price comes from the fund that investors have contributed to.”

“Debt interest arises because the owners create a structure where all the costs of a company purchase as well as the loans are transferred to the acquired company. Hasse takes as an example a purchase with a loan of five billion kronor. For simplicity’s sake, let’s say it’s financed by a single bank, in reality it is usually several types of credits.”