outline lbo

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

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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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This note was uploaded on 03/19/2008 for the course LAW 101 taught by Professor Stone during the Spring '06 term at Yeshiva.

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

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