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outline lbo - • Institutional Investors will sell for a...

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WHAT’S WRONG WITH LEVERAGED BUY-OUTS? DEFINITION OF A LEVERAGED BUY-OUT o Acquisition o Financing o Debt servicing LAYERS OF INVESTOR FINANCING o Bank o Mezzanine o Equity PURCHASE STRATEGY- CHARACTERISTICS OF TARGET o Underappreciated o Non-cyclical o Reliable cash flow o Small requirements for expensive capital investments EXIT STRATEGY o IPO- Reverse leveraged buy-out (RLBO) o Sale of the firm through another LBO or merger THE CONSEQUENCES OF A HIGHLY LEVERAGED STRUCTURE o Positive Considerations Irrelevance under the Modigliani-Miller theorem (M&M Theory) New management Agency problem associated with free cash flow, i.e., cash flow in excess of that required to fund all projects that have positive net present values Better incentives in a management buy-out (MBO)
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Unformatted text preview: • Institutional Investors will sell for a quick profit and may not have the best interests of the firm in mind • Closely held shares are more likely to consider strategic objectives when making decisions Fear of takeover increases management diligence • Cutting costs • Making disposals • Increasing leverage • Buying back their own stock • Diversification into other industries o Negative Considerations Financial Distress/ Insolvency • Explicit Costs • Implicit Costs Long-term investments and R&D Devaluation of Bonds • Increased risk- Junk Bonds • RJR Nabisco- Bond Covenants MBO conflicts Increased conflicts with bondholders • Paying large dividends • Risk shifting • Underinvestment...
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