Chapter_15

Chapter_15 - EXTERNAL EXPANSION ACQUIRING A FIRM INCLUDING...

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Unformatted text preview: EXTERNAL EXPANSION: ACQUIRING A FIRM, INCLUDING CRITERIA FOR A LBO AND FINDING A LBO TARGET EXTERNAL EXPANSION EXTERNAL EXPANSION ❖ Before we discuss acquiring a closely held Before we discuss acquiring a closely held firm let’s take a look at how conglomerates firm let’s take a look at how conglomerates were created with a publicly held firm. The were created with a publicly held firm. The trick was to get a “Pop in Earnings.” trick was to get a “Pop in Earnings.” EXTERNAL EXPANSION EXTERNAL EXPANSION ❖ Assume “Co. A” wants to acquire “Co. B”. Co. A Assume “Co. A” wants to acquire “Co. B”. Co. A pays $5,000,000 in pays $5,000,000 in stock stock for all of Co. B’s shares. for all of Co. B’s shares. Co. A Co.B Co.AB Earnings $1,000,000 $500,000 $1,500,000 Shares 1,000,000 500,000 1,250,000 EPS $1.00 $1.00 $1.20 Stock Price $20.00 ---------- $24.00 P/E 20/1 10/1 EXTERNAL EXPANSION EXTERNAL EXPANSION ❖ How did the stock price go up to How did the stock price go up to $24.00? $24.00? HOW TO GET A “POP” IN EARNINGS HOW TO GET A “POP” IN EARNINGS ❖ No No it’s not slight of hand. Co. A paid a lower P/E for Co. B’s stock than Co. A’s stock was priced in the market! ❖ Any time you pay a lower P/E than your P/E, you get a POP in earnings. If you pay a higher P/E you get a PLOP - dilution. CRITERIA FOR A LBO CRITERIA FOR A LBO ❖ “HOCKABLE” ASSETS - Assets that have a high “borrowing rate”; inventory, on the other hand, has very low “hockability”, so avoid companies with heavy inventory if that represents a large proportion of assets. This criteria mostly excludes service companies and distribution companies. ❖ NO or LOW LONG TERM DEBT - How can you borrow on an asset that is already “Hocked”? ❖ PROBABLY AN OLD FIRM - Older firms usually have low or no debt; owner may want to retire. CRITERIA FOR A LBO - Cont’d....
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This note was uploaded on 02/11/2012 for the course BUAD 497 taught by Professor Degravel during the Spring '07 term at USC.

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Chapter_15 - EXTERNAL EXPANSION ACQUIRING A FIRM INCLUDING...

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