Petsmart: a case study in private equity buyouts

Hello. My name's Michael McDonald. Today we're going to be talking about PetSmart: A case in private equity buyouts.

Private equity markets are some of the most significant but misunderstood markets in the world today. Essentially, private equity markets are venues where non-publicly traded equity and debt securities are managed, bought, sold, et cetera. In these markets, we have firms that invest in and manage private equity investments. These firms are called private equity firms. This is distinct from the investments that these firms make. So we have a private equity firm, let's say, Blackstone, as an example. They buy and sell portfolio companies and manage these portfolio companies. Blackstone would be referred to as a private equity firm. The companies they buy and sell within their investments, those are called portfolio companies. It's important to understand the distinction or none of what we're going to talk about from here on out, will make much sense. So these private equity firms, they're generally buying publicly traded companies in their entirety and then they take these companies private, turn them into a portfolio company. The goal in doing this kind of a buyout, that is taking these publicly traded companies and taking them private, is to improve the value in the company, that is, the private equity firm is trying to make money. They do that, they earn money by improving on a business and then reselling it in the future. Generally, what this means is that they have some sort of target public company that they think is being mismanaged in some way. There's an opportunity to improve its operations. Sometimes that can be simply making fundamental changes to management. One of the most common practices is also levering up a portfolio company. We'll talk about that in a second.