...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 starts...
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...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 ...
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...Introduction This analysis of the LBO of Amtek Engineering Limited (“Amtek”) in 2007 is noteworthy, primarily because it is one of the more recent example in Singapore of a leverage buyout of a public company involving private equity players , and it showcases a example of how private equity firms typically restructure and streamline the acquired company, subsequently executing their exit strategy via an initial public offering. In this paper, I will first provide a background on the leverage buyout and privatization of Amtek in 2007. This will be followed by an elaboration on the strategic, operational and organizational restructuring measures implemented by the new owners. Lastly, we shall examine why the exit strategy through an IPO in 2010 was not well received by retail and institutional investors, resulting in a pullback of the targeted IPO proceeds and a languishing first-day stock price. Background Amtek was founded in Singapore as Metaltek Engineering Private Limited in 1970. With a core business in precision metals engineering and metal stamping, Amtek was formed during Singapore’s rapid industrialisation period in the 1970s. In 1987, it was listed on the Stock Exchange of Singapore. As an engineering company that did not have an exciting business or product, Amtek was profitable but primarily stayed off investors’ radar for many years. On 22 May 2007, Metcomp Holdings, a private equity partnership between Britain's CVC Capital Partners Asia Pacific, Standard...
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...BUS 330 Business Finance Online Final Examination Question 1: Chapter 11 Industries that generally perform well when other industries are performing well are referred to as: A. diversified industries. B. cyclical industries. C. risk-free industries. D. systematic risk industries Question 2: Chapter 12 Discuss how betas are measured for individual stocks. Betas are measured by plotting the historic returns of the stock against the market portfolio during the same period of time. Often times, another index is used instead of the market portfolio. The beta of the stock is the slope of the straight line drawn that best fits the observations of the plotted data. A slope of greater than 1.0 typically means that a stock’s returns are more volatile, while a slope of less than 1.0 typically means that the stock’s returns are less volatile than those of the market portfolio (or other index). Question 3: Chapter 13 The company cost of capital for a firm with a 65/35 debt/equity split, 8% cost of debt, 15% cost of equity, and a 35% tax rate would be: A. 7.02%. B. 8.63% C. 10.45%. D. 13.80%. Question 4: Chapter 14 When a firm issues 50,000 shares with a par value of $5 for $22 per share, additional paid-in capital will: A. decrease by $250,000. B. increase by $250,000. C. increase by $850,000. D. increase by $1,100,000. Question 5: Chapter 15 How do firms make initial public offerings and what are the costs of such offerings? When a firm makes an...
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...Although high-net-worth investors have been buying large positions in companies since the days of Carnegie and Rockefeller, the modern aspects of the industry took shape in the 1960’s through the efforts of Kohlberg, Kravis, and Roberts, three Bear Stearns bankers who would later form the eponymous private equity firm KKR. PE activity then grew rapidly in the 1970-80’s when a large number of family businesses that were started after WWII were struggling with succession concerns and an inability to continue organic growth. PE firms saw this uncertainty as an opportunity to “flip” these companies for a profit by acquiring them, restructuring their operations, and then either finding a strategic buyer or taking the company public. Around this same time was the start of the technology boom and rise of Silicon Valley, causing an influx of capital hoping to fund the next big growth story. This large amount of eager capital spurred the creation of PE firms to facilitate investment opportunities which led to the industry standards we have today. The first task for any aspiring private equity firm is to raise the pool of assets utilized for pursuing investment opportunities. Since its inception PE has been the domain of high-net-worth investors, and as a result PE firms source their capital from high value clients such as pension funds, university endowments, sovereign wealth funds, and the fund managers’ own personal wealth. Given a finite number of potential investors, PE firms compete...
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...story of 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...
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...| 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...
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...JOHN M. CASE COMPANY Mergers and Acquisitions OCTOBER 6, 2015 FINA 5513D - MERGERS AND ACQUISITIONS Syed Ali Ahmad (100978220), Long Thanh Dinh (100986227) Zeeshan Halim (100986227) Table of Contents Executive Summary .................................................................................................................. 2 Why the J.M.C. Company is an Attractive Target for the Firm’s Management ............... 3 Why purchase the J. M. C. Company by LBO ...................................................................... 4 Target Selection ...................................................................................................................... 4 Industry ................................................................................................................................... 4 Improve Operational Performance .......................................................................................... 5 Management Competence ....................................................................................................... 5 Valuation of the LBO................................................................................................................ 6 LBO Financing Structure......................................................................................................... 7 Ownership Retention ................................................................................................................ 8 Expansion...
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...An Important Juncture As a member of the Halley family and the chairman of one of the top French retailers, Promodes, Paul-Louis Halley witnesses the $16.6 billion takeover of his family’s firm by its long time competitor Carrefour, on January 25th, 2000. This merger, prompted by growing threats from foreign retailers, will establish Carrefour as the top European retailer. Although these two firms have a long history of rivalry and competition, this move would be the obvious choice. Despite having put aside their differences, “the marriage was clearly an externally driven affair.” (4) Months earlier, in June of 1999, Wal-mart expanded its european holdings with a $10 billion investment used to take over ASDA of Britain. The two french retailers, having themselves nearly been targeted for acquisition by Wal-mart in recent years, are very much aware of the growing threat that the world’s top retailer poses, especially in light of prior competition with the mega corporation throughout previous decades. Analysts have predicted that such a merger would take place between two major European retailers. To do so is to increase economies of scale for the newly merged. With a swap of 6 Carrefour shares for each of Promodes’, a total stock market value of 49 billion euro has been achieved, which despite still being much smaller than Wal-mart’s $200 billion (1), may be enough to hold the American retailer off, as Carrefour still controls a greater portion of the local market. Although...
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...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 income...
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...Executive Summary This report analyzes RJR Nabisco company as a potentially candidate for leverage buyout. It focuses on the major problems and risk of RJR LBO and provides some recommendations for this case. RJR Nabisco began as a tobacco company in 1875, and the extent to establish food business. The main bidding group includes KKR, The Management Group and The First Boston Group. Several features of RJR Nabisco made it a particularly attractive LBO candidate. The factors leading to election of the lowest bid and major risks will be analyzed in this report. This report adopts Problem-Oriented Method to analyze the RJR Nabisco case study. Table of Contents Core theme for RJR Nabisco LBO 3 sub-theme for RJR Nabisco LBO 4 Major problems 4 Major risks 5 Conclusion: 6 Recommendations: 7 Reference: 7 Core theme for RJR Nabisco LBO RJR Nabisco exhibited steady growth which was unaffected by business cycle. Moreover, RJR had low capital expenditure and a low debt level. Therefore, the firm was a particularly attractive LBO candidate. RJR's problems appeared fixable. Between 1985 to 1988, the return of firm on asset declined from 15.5 per cent to 11.5 per cent. Moreover, inventory turnover fell from 10.0 to 3.9. For solve these problems, RJR had potential for value creation and used discounted-cash-flow methodology to determine value. The quality of the bidding team includes KKR, Management Group, and The First Boston Group, which is a...
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...Workshop 4 Problems Kevin Rock MBA 465 Strategic Management BSA 555 November 1, 2011 David R. Gray, Ph.D 1. Why are acquisition strategies popular in many firms competing in the global economy? Because of globalization; deregulation of multiple industries in many different economies and favorable legislation; the number and size of domestic and cross-border acquisitions continues to increase; especially from emerging economies 2. What reasons account for firms’ decisions to use acquisition strategies as a means to achieving strategic competitiveness? To increase market power; overcome entry barriers to new markets or regions; avoid costs of developing new products and increase the speed of new market entries; reduce the risk of entering a new business; become more diversified; reshape their competitive scope with different portfolio of businesses; and enhance their learning. 3. What are the seven primary problems that affect a firm’s efforts to successfully use an acquisition strategy? Difficulty of effectively integrating the firms involved; incorrectly evaluating the target firm’s value; creating debt loads that preclude adequate long-term investment; overestimating the potential for synergy; creating a firm that is too diversified; creating an internal environment in which managers devote increasing amounts of their time and energy to analyzing and completing the acquisition; developing a combined firm that is too large (thereby necessitating extensive...
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...Business Plan: Business plan is a document that is the outcome of an integrated process of making future plans for different organizational functions. More specifically, business plan is (1) A written document that details the proposed venture. (2) A description of all the facts, like the project, marketing, research and development, manufacturing, management, critical risks, financing and milestone of proposed venture. (3) A document written to raise money for a growing company from the banks of financial investors. (4) Future guide for successful operation of the venture. Why business plan is so essential? 1.The preparation process of a business plan forces the entrepreneur to take an objective , critical, and unemotional look at the business in its entirely. 2. It is a tool to managing the business better. 3. It is a way of communicating the firm’s ideas to others and the basis for the financial proposal. 4. It improves the firm’s chances of success. 5. It sells the entrepreneur and others on the business.6. It communicates the strategy and business approach within the firm. Business plan checklist: A personal step by step evaluation 1. Business description segment 2. Marketing segment 3. Research design & development segment 4. Manufacturing segment 5. Management segment 6. Critical risk segment 7. Financial segment 8.Milestone schedule segment 9. Appendix segment Joint venture: A joint venture is a separate entity involving two or active participants...
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...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, for...
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...Private Equity 4/12/15, 7:31 PM Private Equity By root | November 25, 2003 DEFINITION Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet. The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company. INVESTOPEDIA EXPLAINS The size of the private equity market has grown steadily since the 1970s. Private equity firms will sometimes pool funds together to take very large public companies private. Many private equity firms conduct what are known as leveraged buyouts (LBOs), where large amounts of debt are issued to fund a large purchase. Private equity firms will then try to improve the financial results and prospects of the company in the hope of reselling the company to another firm or cashing out via an IPO. © 2015, Investopedia, LLC. http://www.investopedia.com/terms/p/privateequity...
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