Using cash from the rich cigarette operations, they retired the debt and pocketed the rest. This celebrated deal, the subject of the book Barbarians at the Gate and a movie by the same name, is how most people understand Wall Street' s leveraged buyout firms. In health care, many managed care companies are attracting the attention of the same leveraged buyout shops that brokered extravagant transactions such as Nabisco. But health care deals are unlikely to have the same destructive effects. They may even inspire management teams to clean up the industry's worst abuses.
Leveraged buyouts fulfill a useful role.
They keep management honest. When a stock price fails to reflect a company's true value, it's often because a business is poorly run or management teams have failed to inspire investors. It's in these cases that a firm becomes easy prey for buyouts. This has been particularly true among HMOs, where consolidation has cut competition and most HMOs have shuttered operations in unprofitable markets. After executing too many frivolous mergers, formerly haughty HMOs are phasing out operations, scaling back expansion plans and cutting costs.