Unsalted Pasta, or Legalized Looting

It's a Monday, and start of the work week. Here's a thought on business in America.

You may have seen the article about a hedge fund ripping on Olive Garden over breadsticks and salted pasta. The real story is sadder. Basically, the hedge fund wants to loot Olive Garden for a short-term gain.

The looting process is simple and legal. Basically, the hedge fund splits Olive Garden into two companies - one that owns the buildings and another that runs the restaurants. The operating company then pays rent to the building company, and the building company uses the cash generated to pay investors a hefty dividend.

This works fine if the operating company is making good money. The problem is if (when) there is an economic downturn. The first thing people do when money is tight is eat out less, meaning less money for the operating company. But the rents don't go down. In short, the added overhead of paying rent can drag the company into bankruptcy. (The linked articles give examples.)

This should be a reminder to my libertarian friends - business people do not make rational, long-term decisions.