BUSI 536 - Module 4 - Homework 2.docx

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Running header: Homework 2 1 M&A Discussion Questions Liberty University BUSI 536-D01: Mergers & Acquisitions March 31, 2019
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Homework 2 2 1. Why were hedge funds developed? What role do they play in the market today? Per the textbook, hedge funds are funds gathered by investors without the need to solicit for them [Pat18]. According to the government site, hedge funds are partnerships that pool money from investors and invest in securities or another investment type with the goal to generate positive returns for their owners [Gov18]. Hedge funds have more leeway than other kinds of funds – mutual – to follow higher risk investment strategies. Hedge funds fit more for wealthier investors who can afford high participation fees and related higher risks. They play a critical role in today’s markets, as they move large amounts of investments in several markets, including technology and healthcare, affecting industry growths, as well as job generations. What we have learned is that these funds are critical for liquidity, both in bull and bear markets [Tim04]. Hedge funds provide the fuel for new product development, as well as growth opportunities to those organizations that need the capital to expand. 2. What were some of the reasons for corporate deleveraging despite the low Federal Reserve rates? Per the textbook, financial institutions drive the need for restrictive covenants, specifically the maintenance of specific financial ratios, to proceed with doing business with an organization [Pat18]. Also, each industry benchmarks the debt-to-equity ratios, with some capital-intensive industries experience higher than 2.0, while other sectors such fall below 0.5 [Sus18]. What we have learned from deleveraging is that it takes place when an organization attempts to decrease its total financial debt burden (leverage). The use of the available cash in the balance sheet allows the company to pay off its financial debts and that impact its financial performance ratios. The “total debt” ratio showcases the long-term solvency of the organization. The more substantial the debt burden, even when the federal rates are low, the higher the risk and less
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Homework 2 3 attractive as the organization becomes an investment. While debt financing is an excellent short- term influx of cash that an organization can use for its growth, it also becomes a warning sign when there a pattern of massive leveraging, burdening its assets and becoming unattractive to long-term investors. 3. What created the change in the activist acquisition targets? Per the textbook, hedge fund activism concentrates on short-term investments with high potential yields [Pat18]. J.P Morgan states in its investment journal that activist funds have grown from $12 billion in 2003 to $112 billion in assets under management, particularly since 2009 [JPM15]. A prime example was Valeant Pharmaceuticals and its relationship with activist investor Bill Ackman who pushed every which way to acquire Allergan a reality [Wil14]. What
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  • Summer '19
  • Leveraged buyout, LBOs

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