leverage

Leverage

by Paul Niquette

Adapted from 101 Words I Don't Use

Engraving below is from Mechanics Magazine London, 1824

Give me a place to stand on, and I will move the Earth.
-- Archimedes of Syracuse c.287 BC-c.212BC

leverage noun: 1. the mechanical advantage gained by being in a position to use a lever 2. competitive advantage (variously derived from proprietary technology, trade secrets, patents, market share); 3. political power (expoiting name recognition, campaign war chest, vote-trading); 4. investing with borrowed money as a way to amplify potential gains (at the risk of greater losses).

hat could possibly be wrong with using the word leverage?

In its literal meaning (Sense 1), nothing. You have your 'load', your 'effort', and your 'fulcrum'. Neat. Oh, well, the word has become a bit shopworn through careless repetition in business, but no big deal. Indeed, the first page of every business plan seemingly must assert leverage at least once (Sense 2). Likewise, public figures would be all but speechless without political leverage (Sense 3). Still, most of its figurative applications do have descriptive alternatives based on a key concept -- advantage.

During my adult lifetime, one metaphorical meaning (Sense 4) has -- well, leveraged the word into an ugly expression. The so-called "leveraged buy-out" (LBO) dates back to the late '60s and, in my opinion, holds primacy among financial stratagems as uncreative, destructive, and motivated entirely by greed.

A speculator ("corporate raider" is the term of art) targets a public company that operates as a stable, profitable, debt-free enterprise, paying dividends. The raider purchases controlling interest via the stockmarket or by "tender offer" directly to stockholders, using bank borrowings or junk bonds to finance the purchase of requisite shares.

Having seized management authority, the raider cuts off dividends and transfers the debt to the company (that's 'leverage' Sense 4) in effect buying the company with its own money! The raider will turn around and sell blocks of stock to the public, pocketing the cash. That leaves the company to make the interest payments. Servicing the debt often necessitates draconing changes in the enterprise: selling off assets, laying off employees, discontinuing product lines. Bankruptcies are not unknown following an LBO.

One way for a potential target to avoid being raided is to increase the company's "debt-to-equity ratio" -- leveraging itself -- by borrowing money that may not be justified for operations. The company management is thus coerced into paying interest to lending institutions instead of dividends to stockholders. Meanwhile, the mere threat of an LBO is favored by governmental policies that give deductions for interest (paid to lenders) while taxing dividends (paid to equity holders).

Having become a mangled metaphor, 'leverage' (the 'L' in LBO) is a word I can do without.

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