Leverage Buyout

In: Business and Management

Submitted By abhishekjain
Words 1303
Pages 6
| 1. Leveraged Buyout – LBOThe acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital. | | In an LBO, there is usually a ratio of 90% debt to 10% equity. Because of this high debt/equity ratio, the bonds usually are not investment grade and are referred to as junk bonds. Leveraged buyouts have had a notorious history, especially in the 1980s when several prominent buyouts led to the eventual bankruptcy of the acquired companies. This was mainly due to the fact that the leverage ratio was nearly 100% and the interest payments were so large that the company's operating cash flows were unable to meet the obligation.
One of the largest LBOs on record was the acquisition of HCA Inc. in 2006 by Kohlberg Kravis Roberts & Co. (KKR), Bain & Co., and Merrill Lynch. The three companies paid around $33 billion for the acquisition.
It can be considered ironic that a company's success (in the form of assets on the balance sheet) can be used against it as collateral by a hostile company that acquires it. For this reason, some regard LBOs as an especially ruthless, predatory tactic. |

2. When you decide the capital structure of a firm, what factors you should consider??
Capital Structure is referred to as the ratio of different kinds of securities raised by a firm as long-term finance. The capital structure involves two decisions- a. Type of securities to be issued are equity shares, preference shares and long term borrowings (Debentures). b. Relative ratio of securities can be determined by process of capital gearing. On…...

Similar Documents

Leverage

...ASSIGNMENT #1 [pic] ASSIGNMENT #2 [pic] ASSIGNMENT #3 In terms of leverage, the Chinatrust is less risky than Metropolitan banks as evidenced by its higher Equity/Assets ratio and Equity/consumer Loans. As to liquidity, MetMetropolitan, on the other hand is more liquid since 45% of its total assets are earning assets as compared to Chinatrust’s 32%. ASSIGNMENT #4 Ayala Corporation has five industry segments where the Group operates: the Parent, Real Estate, Electronics, International and Automotives&Others. The parent company accounted for 20% of the consolidated revenues and 70% of the consolidated income. With very low opex, the Parent generates the highest operating profit at 90% and Net Profit margin of 70%. It is also the most efficient with the highest ROA among the segments. Real Estate segment contributed 30% of the consolidated income with an ROE of 10% and Net Profit Margin of 20%. The Electronics segment’s ROE and Net Profit Margin was almost zero despite its high revenues due to its large cost of opex. Electronics has many non-cash expenses, aside from the heavy depreciation which means it might have a good cash flow despite the very low Net Income. The Parent with 50% of the total assets financed by borrowings and Debt-Equity ratio of 1 is considered to be the most risky. On the other hand, the Automobile is the least risky with almost zero Debt/Asset and Debt/Equity Ratio. Ayala also presented its business segments on a......

Words: 516 - Pages: 3

A Leverage Buyout

...Running head: A LEVERAGE BUYOUT 1 Graves Dancer Takes Tribune Corporation private in an Ill-Fated Transacti A LEVERAGE BUYOUT 2 Introduction A leverage buyout (LBO) is a kind of acquisition where the buying price is financed via debt and equity. The cash flow or assets of the target company are used to secure the debt and repay it. The returns on equity increase as the debt increase as debt has a lower cost of capital compared to equity. In other word a LBO is a method of acquiring a company with money that is nearly all borrowed. To conduct an LBO, the acquirer ensures that the target’s assets are adequate as collateral for the loan needed to purchase the target. The acquirer must also create and study financial forecasts of the combined entities to make sure that they generate enough cash to cover the principle and interest payments. Once the buyer has determined that the LBO is financially feasible it works on acquiring enough cash for the acquisition by incurring debt. Doing an LBO is expensive and the process can be complex. LBO’s are popular in merger and acquisition as the acquiring organization uses money borrowed to fund the acquisition. The assets of the target organization are used as collateral to get the loan. LBO enables organization to make a big acquisition without using a lot of capital. Purpose of the paper This paper seeks to analyze the acquisition of Tribune Corporation by Grave Dancer. The......

Words: 1623 - Pages: 7

Buyout Offers

...JOURNALOF ELSEVIER Journal of Accounting and Economics 18 (1994) 157-179 Accounting &Economics Earnings management preceding management buyout Susan E. Perrya, Thomas offers b H. Williams** “School of Commerce. University of Virginia, Charlottesville, VA 22903-2493, USA bSchool of Business, University of Wisconsin, Madison, WI 53706, USA (Received February 1992; final version received March 1994) Abstract There are frequent expressions of concern in the accounting, economics, and legal literature about managers’ conflicting duties and incentives in management buyouts. This study is motivated by a concern about the managerial incentive to reduce reported earnings prior to the announcement of the buyout proposal. Our analysis of a sample of 175 management buyouts during 1981-88 provides evidence of manipulation of discretionary accruals in the predicted direction in the year preceding the public announcement of management’s intention to bid for control of the company. KeJ’ words: Contracting; JEL classification: Earnings management; Accruals; Management buyouts G34 1. Introduction Firms involved in going-private restructurings provide unique opportunities to investigate important accounting, economic, and legat issues. The accounting *Corresponding author. The authors want to thank Sharad Asthana, Larry Brown, J. Stanley Fuhrmann, Jerry Han, Jim McKeown, Steve Rock, Terry Warfield, Richard Willis, the workshop......

Words: 9445 - Pages: 38

Management Buyout

...Management Buyouts: A Framework for Value Realization Management buyouts (‘MBO’s) have become increasingly popular in recent years due in large part to the abundance of available capital in the North American marketplace. They can be particularly attractive as an exit strategy for business owners looking to retire and for corporations seeking to divest of a non-core business segment. In addition to the many Canadian-based financial investors searching for good MBO candidates, a growing number of players from the United States and other parts of the world are looking to Canada due to the scarcity of good prospects and the quality of the companies and management teams that reside here. Financial investors will compete among themselves for the chance to secure an opportunity that meets their investment criteria. Financial investors may take a minority equity interest or a majority stake in an investee company, and some financial investors specialize in certain industry sectors. Most financial investors publicize their areas of interest and general investment criteria on their websites. There a three main parties involved in an MBO: the owner of the company who is seeking to divest, the management team looking to acquire an equity interest, and the financial investor seeking a return on invested capital. In order to be successful over the long term, an MBO must be structured to satisfy the collective, yet sometimes conflicted, interests of these parties. This article examines......

Words: 2269 - Pages: 10

Leveraged Buyout

...Rawat G13095 Vikram Bhatt G13116 A leveraged buyout (LBO) is when a company or single asset (e.g., a real estate property) is purchased with a combination of equity and significant amounts of borrowed money, structured in such a way that the target's cash flows or assets are used as the collateral (or "leverage") to secure and repay the money borrowed to purchase the target-company/asset. Since the debt (be it senior or mezzanine) has a lower cost of capital (until bankruptcy risk reaches a level threatening to the lender[s]) than the equity, the returns on the equity increase as the amount of borrowed money does until the perfect capital structure is reached. As a result, the debt effectively serves as a lever to increase returns-on-investment (ROI). The purpose of a LBO is to allow an acquirer to make large acquisitions without having to commit a significant amount of capital. A typically transaction involves the setup of an acquisition vehicle that is jointly funded by a financial investor and management of the target company. Often the assets of the target company are used as collateral for the debt. Typically, the debt capital comprises of a combination of highly structured debt instruments including prepayable bank facilities and / or publicly or private placed bonds commonly referred to as high-yield debt. India has experienced a number of buyouts and leveraged buyouts since Tata Tea’s LBO of UK heavyweight brand Tetley for ₤271 million......

Words: 2273 - Pages: 10

Leverage Buyouts

...Lindsey Bembry Leveraged Buyouts A leveraged buyout, LBO, is an acquisition of a company or a portion of a company with a considerable portion of loaned funds. The assets of the target company are used as collateral. Each leveraged buyout is unique in that companies have their own capital structure. The one characteristic that is common within each LBO is the use of financial leverage to complete the purchase of the target company. In order for a LBO to take place, an investor, private equity firms or financial sponsor is needed. In a typical LBO, the firm obtaining the company will finance the purchase with a mixture of debt and equity. A segment of the debt in a LBO is protected by the assets of the target company. New cash flows from the bought out business are then used to pay the debt from the buyout. Leveraged buyouts happen to companies of all sizes and in all different types of industries. However, some elements from possible target firms include; small debt loads, history of positive cash flows, a significant amount of tangible assets, the possibility of new management making improvements, and for valuation/stock price to be minimal. Debt financing is borrowing money from a source with the intent to pay back the principal plus an agreed upon interest. An advantage of debt financing is those who use it can maintain ownership. Corporate balance sheets typically use principal and interest payments as a business expense which can be deducted from......

Words: 1109 - Pages: 5

Inbev’s Buyout

...The article, This Bud May Be for the Belgians, discusses InBev’s buyout of Budweiser. Discuss the value of the brand from a consumer perspective. Some of you may not be beer drinkers, or drink any alcohol, but you are still a part of a culture where beer drinking is an identifiable lifestyle component, so you should be able to provide some perspective. Some things to consider are Budweiser’s targeted blue-collar market segment, its country of origin, and our nationalistic “pride of ownership.” Switch perspectives a bit, and consider how international consumers might value the quintessential American beer. Do you think that coming from the US enhances the value to overseas customers? Why or why not?  (Blenkinsop & Geller, 2014) In replying to other classmates, discuss the consumer perspective, thinking about your own exposure to Budweiser’s products and promotions. Include your thoughts on the value of any of the AB brands. Even though I am not a beer drinking but during socializing events majority of my friends and the people I have observed prefer international beer (i.e. Russian, German etc). During the initial stages of the InBev buyout of Budweiser the response was not that great Hence, the AB InBev buyout adopted to understand and address factors hindering Budweiser’s growth in the US as well as build or introduce the brand in other markets helped them achieve strong in-market performance globally. In addition, the brand is now successfully developing a......

Words: 599 - Pages: 3

Dell's Buyout

...Dell’s Buyout Dell has always been one of the largest PC makers in the United States. Recently, though its share of the PC industry has been declining. It went from the number one low cost provider of PCs in the world to number 3. Its inability to adapt to the new markets that have emerged has caused the company to fall behind other hi-tech companies such as IBM, Apple, and even HP. I feel this is an important topic because it is an example of a large company that has lost touch with what consumers want and is currently trying to restructure itself in order to gain back the dominance they once had. Consequently, Michael Dell has announced his decision to attempt a leverage buyout in order to retain control of his company. Furthermore, throughout this paper, I will present the pros and cons of a leverage buyout and analyze the decision of Michael Dell to buy back his company. Jeff Sommer from The New York Times attempts to explain the situation in his article “The Dice are rolling on Dell’s Legacy” from the New York Times and goes into detail of the largest leveraged buyout that is taking place in the US since the financial crisis in 2008. Michael Dell founded his own tech company known as Dell in his dorm at the University of Texas in 1984. He revolutionized the PC industry when he created personal computers that were more powerful, reliable, and inexpensive whose features were able to be customized by the buyers (Sommer). Technology has evolved exponentially since then......

Words: 2390 - Pages: 10

Leverage

...Table of contents Contents i. Introduction to Leverage 3 ii. Significance of the Issue 3 iii. What is Leverage? 4 iv. Kinds of Leverage 4 a) Financial Leverage. 4 b) Operating Leverage. 4 c) Combined Leverage 5 v. Risks of Leverage 5 vi. Conclusion 5 vii. List of references 6   i. Introduction to Leverage In finance, Leverage is considered to be any financial instrument or loaned capital used to increase the potential return of an investment. Leverage is usually used in real estate and often in the automobile industry in the form of mortgage to purchase houses or vehicles. Leverage aids both the shareholder and the firm, but it comes with great deal of risk. If an investor makes use of leverage to create an investment and it doesn’t go in his or her favor, their loss is much larger than it would've been if they hadn’t used leverage. Leverage amplifies both gains and losses. In the business world, a firm is able to make use of leverage to try to produce shareholder wealth, but if it is unsuccessful to do so, the interest expense and credit risk of damaging the shareholder's value. Leverage can be used in many branches of finance including bonds, stocks, currencies, commodities and also other investments. Leverage can either be a good or bad thing for the firm depending on the situations that arise. ii. Significance of the Issue Leverage is one of the main topics in finance, one cannot study finance without coming across words like investments, loans,......

Words: 929 - Pages: 4

Leverage Case

...Title: Financial Leverage Practice of Indian Communications Ltd.: Bane or boon Indian Communications Ltd. had been a zero debt company since start. Of late, shareholders of the company were pressurizing to include debt in the capital structure as shareholders competitor company were getting a higher yield on account of financial leverage. The shareholders’ movement from Indian Communications has resulted in decline in the market price of the company. The board of the company was under a dilemma- should they go for debt not? If they went for debt, it might be risky, and if they did not would- shareholders would withdraw. In both the cases, it would affect the company’s survival. INDIAN COMMUNICATIONS LTD. Indian Communications Ltd was a telecommunication company headquartered in Mumbai, India. It was a leading player in next generation, integrated (wireless and wire line), and digital network, covering over 20,000 cities and towns and over 2, 00,000 villages . It had business operations in more than 20 countries. With US $ 10bn revenues in FY 14 it had been a great last year. It was India's truly integrated telecommunication service provider. The company had a Customer base of around 100 million including over 2 million individual overseas retail customers and corporate clientage over 30,000 Indian and multinational corporations. . Two friends started it in 1997 with just US$ 1000. From the beginning, the company had followed a conservative......

Words: 1709 - Pages: 7

Leveraged Buyout

...by Allen Michel and Israel Shaked RJR Nabisco: A Case Study of a Complox Lovoragod Buyout Several features of RJR Nabisco made it a particularly attractive LBO candidate. Its operations exhibited moderate and consistent growth, required little capital investment and carried low debt levels. Its problems—a declining return on assets and falling inventory turnover—appeared fixable. And it offered significant break-up value. Valuing RJR's equity at the time of the LBO requires detailed knowledge of the company's operations and extensive number crunching. The analysis is obviously quite dependent on the assumptions made about cash flow in the post-LBO period, as well as the long-term, steady-state growth rate. Nevertheless, the figures suggest that, even assuming a high, 5 per cent level of steady-state growth, RJR's cash flows would have to grow at a rate of at least 18 per cent per year to justify KKR's bid of $109 per share. RJR's board played a prominent role in the bidding process. By setting the bidding rules, the board successfully minimized the possibility of collusion and thus increased potential gains to stakeholders. The decision to accept KKR's offer over RJR management's higher bid appears to reflect the board's concern for employees and existing shareholders. OTH THE POPULAR press and the academic press have devoted extensive coverage to leveraged buyouts, but neither has devoted much attention to analyzing the features of a specific LBO.^ The RJR Nabisco B ...

Words: 8011 - Pages: 33

Amc Buyout

...UVA-F-1508 Rev. Oct. 5, 2009 THE BUYOUT OF AMC ENTERTAINMENT In July 2004, Sean Penmeyer, a principal at J.P. Morgan Partners (JPMP, the private equity arm of JPMorgan Chase & Co.), was in the midst of formulating the final terms of a public-to-private buyout proposal for AMC Entertainment Inc. (AMCE). Always alert for new investment opportunities, JPMP had invested in the theater industry before and had started a process earlier that year to learn more about the current state of the market. The interest was prompted by a gradual recovery in theater attendance since the recession and post–September 11 downturn. Big hits in 2002 and 2003 such as Spiderman, Finding Nemo, Lord of the Rings, and Matrix Reloaded had brought crowds back to the theaters and increased merger and buyout activity in the sector. Through various industry sources, Penmeyer had learned that AMCE might be looking for potential investors. On April 30, 2004, a senior partner at JPMP telephoned Peter Brown, chairman, president, and chief executive officer of AMCE, to gauge his interest in further discussions with JPMP. Earlier in the year, AMCE’s board had explored several opportunities to create value for shareholders. Those included acquisitions, strategic combinations with other theater companies, and a possible recapitalization of the company to simplify its capital structure. Several past investments, including a $250 million equity infusion by Apollo Management, L.P., in 2001,......

Words: 8643 - Pages: 35

Om Buyout Case

...the leveraged buyout of Scotts Company by a private equity firm, Clayton and Dubiler (C&D). Scotts Company was acquired from ITT. ITT was a global conglomerate with major holdings in Telecommunications, Entertainment, Insurance, and industrial products. The following is extracted from a brief history of IT (http://www.itt.com/_docs/news/pubs/itt-history-book-2011-eng-spread.pdf) ITT’s origins span more than one hundred years from the second industrial revolution to the computer age. During that time, the company expanded through acquisitions to become one of the world’s biggest businesses and then narrowed its focus to achieve a place as one of the top financial performers among multi-industry companies on Wall Street. We didn’t follow the crowd. Instead we created our own path and helped fine-tune the concept of a multi industry company that generates value from a shared management approach and synergies between our businesses. The following is extracted from C&D’s mission statement (http://www.cdr-inc.com/about/building_businesses.php): Question: C&D forced a number of changes on the Management Control System of Scotts. Some of these are discussed in the case: 1) Incentive Compensation, 2) Management Decision-Making Authority, 3) Monitoring and Advising Management. Why were these changes needed? O.M. Scott & Sons Company Leveraged Buyout Debt Covenants The organizational changes that Scott went through after the leveraged buyout were subtle,......

Words: 2341 - Pages: 10

Leverage Buyout

...Leverage Buyout A leveraged buyout (LBO) occurs when an investor, typically a financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing). The assets of the acquired company are used as collateral for the borrowed capital, sometimes with assets of the acquiring company. Typically, leveraged buyout uses a combination of various debt instruments from bank and debt capital markets. The bonds or other paper issued for leveraged buyouts are commonly considered not to be investment grade because of the significant risks involved. Management buyouts (MBO) are similar in all major legal aspects to any other acquisition of a company. The particular nature of the MBO lies in the position of the buyers as managers of the company, and the practical consequences that follow from that. In particular, the due diligence process is likely to be limited as the buyers already have full knowledge of the company available to them. The seller is also unlikely to give any but the most basic warranties to the management, on the basis that the management knows more about the company than the sellers do and therefore the sellers should not have to warrant the state of the company. Aside from debt financing, one of the principal features of the leverage buyout is the ability to unlock value in an undervalued company. The corporate raiders of the 1980's were famous, if not notorious,......

Words: 1080 - Pages: 5

Leveraged Buyouts

...Leveraged Buyouts A leveraged buyout or LBO is a restructuring strategy whereby a party, typically a private equity firm, buys all of a firm’s assets in order to take the firm private. ( Hitt, Ireland & Hoskisson, p. 207) A leveraged buyout also prevents the company’s stock from being publicly traded. In 2006, HCA quickly agreed to a $21 billion leveraged buyout from several private equity firms, including Bain Capital, Kohlberg Kravis Roberts & Co., and Merrill Lynch. The deal also included the assumption of $11.7 billion in debt. All stockholders received $51 in cash and a premium of 6.5 percent of the previous day’s closing price. However, this price was below the price at which the stock traded in late 2005 and early 2006. (“HCA Agrees,” 2006) HCA is only one example of large companies being willing to go private because they are unhappy with scrutiny from investors and regulators. Once a company is acquired, there is always an option for them to go public again. There are however, some downfalls once privatized. Generally, the first step to take place is company restructuring. Restructuring may include downsizing through layoffs and/or completely eliminating entire company divisions or sections. Unfortunately, this may cause resentment from the remaining staff, and can result in negative effects from the community as a whole which can hinder the company’s economic growth and prosperity. (“Our History,” 2011) However, once all of the dust has settled and the company......

Words: 359 - Pages: 2