Chapter_13

Chapter_13 - Leveraged Buyout Structures and Valuation...

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Leveraged Buyout Structures and Valuation
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Course Layout: M&A & Other Restructuring Activities Part IV: Deal Structuring & Financing Part II: M&A Process Part I: M&A Environment Payment & Legal Considerations Public Company Valuation Financial Modeling Techniques Business & Acquisition Plans Search through Closing Activities Part V: Alternative Strategies Accounting & Tax Considerations Business Alliances Divestitures, Spin-Offs & Carve-Outs Bankruptcy & Liquidation Regulatory Considerations Motivations for Part III: M&A Valuation & Modeling Takeover Tactics and Defenses Financing Strategies Private Company Valuation Cross-Border Transactions
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Learning Objectives Primary Learning Objective: To provide students with a knowledge of how to analyze, structure, and value highly leveraged transactions. Secondary Learning Objectives: To provide students with a knowledge of The motivations of and methodologies employed by financial buyers; Advantages and disadvantages of LBOs as a deal structure; Alternative LBO models; The role of junk bonds in financing LBOs; Pre-LBO returns to target company shareholders; Post-buyout returns to LBO shareholders, and Alternative LBO valuation methods Basic decision rules for determining the attractiveness of LBO candidates
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Financial Buyers In a leveraged buyout, all of the stock, or assets, of a public corporation are bought by a small group of investors (“financial buyers”), usually including members of existing management and a “sponsor.” Financial buyers: Focus on ROE rather than ROA. Use other people’s money. Succeed through improved operational performance. Focus on targets having stable cash flow to meet debt service requirements. Typical targets are in mature industries (e.g., retailing, textiles, food processing, apparel, and soft drinks)
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LBO Deal Structure Advantages include the following: Management incentives, Tax savings from interest expense and depreciation from asset write-up, More efficient decision processes under private ownership, A potential improvement in operating performance, and Serving as a takeover defense by eliminating public investors Disadvantages include the following: High fixed costs of debt, Vulnerability to business cycle fluctuations and competitor actions, Not appropriate for firms with high growth prospects or high business risk, and Potential difficulties in raising capital.
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Classic LBO Models: Late 1970s and Early 1980s Debt normally 4 to 5 times equity. Debt amortized over no more than 10 years. Existing corporate management encouraged to participate. Complex capital structure: As percent of total funds
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Chapter_13 - Leveraged Buyout Structures and Valuation...

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