LBO - Anatomy of a Leveraged Buyout: Leverage + Control +...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Aswath Damodaran 1 Anatomy of a Leveraged Buyout: Leverage + Control + Going Private Aswath Damodaran Home Page : www.damodaran.com E-Mail : adamodar@stern.nyu.edu Stern School of Business
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aswath Damodaran 2 Leveraged Buyouts: The Three Possible Components Increase financial leverage/ debt Change the way the company is run (often with existing managers) Take the company private or quasi- private Leveraged Buyout Leverage Control Public/ Private
Background image of page 2
Aswath Damodaran 3 One Example: The Harman Deal Pre-deal Harman Publlicly traded equity Debt (mostly leases) $274 $ 5.5 billion Post-deal Harman KKR, Goldman & Managers $3 billion Public $ 1 billion Debt $ 4 billion KKR & Goldman would buy out existing equity investors Firm will become a quasi-private company with 75% of the equity held by KKR, Goldman and managers.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aswath Damodaran 4 Issues in valuing leveraged buyouts Given that there are three signifcant changes - an increase in fnancial leverage, a change in control/management at the frm and a transition From public to private status - what are the valuation consequences oF each one? Are there correlations across the three? In other words, is the value oF fnancial leverage increased or decreased by the Fact that control is changing at the same time? How does going private alter the way we view the frst two? Given that you are not required to incorporate all three in a transaction, when does it make sense to do a leveraged buyout? How about just a buyout? How about just going For a change in control? Just a change in leverage?
Background image of page 4
Aswath Damodaran 5 I. Value and Leverage
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aswath Damodaran 6 What is debt. .. General Rule : Debt generally has the following characteristics: Commitment to make Fxed payments in the future The Fxed payments are tax deductible ±ailure to make the payments can lead to either default or loss of control of the Frm to the party to whom payments are due. Using this principle, you should include the following in debt All interest bearing debt, short as well as long term All lease commitments, operating aas well as capital
Background image of page 6
Aswath Damodaran 7 The fundamental question: Does the mix of debt and equity affect the value of a business? Assets Liabilities Assets in Place Debt Equity Fixed Claim on cash flows Little or No role in management Fixed Maturity Tax Deductible Residual Claim on cash flows Significant Role in management Perpetual Lives Growth Assets Existing Investments Generate cashflows today Includes long lived (fixed) and short-lived(working capital) assets Expected Value that will be created by future investments Different Financing Mix? Different Value?
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aswath Damodaran 8 A basic proposition about debt and value For debt to affect value, there have to be tangible bene±ts and costs associated with using debt instead of equity.
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/01/2011 for the course FINANCE 350 taught by Professor Aswath during the Summer '10 term at NYU.

Page1 / 50

LBO - Anatomy of a Leveraged Buyout: Leverage + Control +...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online