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Chapter 33

Chapter 33. Principles of Corporate Finance, 8/e (Special Indian Edition). Corporate Restructuring. Topics Covered. Leveraged Buyouts Fusion and Fission in Corporate Finance Conglomerates Bankruptcy. Leveraged Buy-Outs. Unique Features of LBOs.

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Chapter 33

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  1. Chapter 33 Principles of Corporate Finance, 8/e (Special Indian Edition) Corporate Restructuring

  2. Topics Covered • Leveraged Buyouts • Fusion and Fission in Corporate Finance • Conglomerates • Bankruptcy

  3. Leveraged Buy-Outs Unique Features of LBOs Large portion of buy-out financed by debt Shares of the LBO no longer trade on the open market

  4. Leveraged Buy-Outs • Junk bond market • Leverage and taxes • Other stakeholders • Leverage and incentives • Leverage restructurings • LBOs and Leverage restructurings Potential Sources of Value in LBOs

  5. Leveraged Buy Outs 10 Largest LBO’s + recent examples

  6. Definitions • Corporate control -- the power to make investment and financing decisions. • Corporate governance -- the role of the Board of Directors, shareholder voting, proxy fights, etc. and to actions taken by shareholders to influence corporate decisions. • Financial architecture -- the financial organization of the business.

  7. Leveraged Buyouts • The difference between leveraged buyouts and ordinary acquisitions 1. A large fraction of the purchase price is debt financed. 2. The LBO goes private, and its share is no longer trade on the open market.

  8. Leveraged Buyouts • The three main characteristics of LBOs 1. High debt 2. Incentives 3. Private ownership

  9. Spin-offs, etc. • Spin off -- debut independent company created by detaching part of a parent company's assets and operations. • Carve-outs-- similar to spin offs, except that shares in the new company are not given to existing shareholders but sold in a public offering. • Privatization -- the sale of a government-owned company to private investors.

  10. Privatization • Motives for Privatization 1. Increased efficiency 2. Share ownership 3. Revenue for the government

  11. Conglomerates The largest conglomerates of 1979, ranked by sales compared with US industrial firms.

  12. Private Equity Partnership Investment Phase Payout Phase General Partner put up 1% of capital General Partner get carried interest in 20% of profits Mgmt fees Limited partners get investment back, then 80% of profits Limited partners put in 99% of capital Partnership Partnership Company 1 Company 2 Investment in diversified portfolio of companies Sale or IPO of companies Company N

  13. Conglomerates 2004 KKR Partner holdings

  14. Bankruptcy The Largest US Bankruptcies

  15. Web Resources Web Links Click to access web sites Internet connection required www.abiworld.org www.bankrupt.com www.bankruptcydata.com www.law.cornell.edu/uscode/11 www.uscourts.gov/library/bankbasic.pdf

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