Chapter_15

Chapter_15 - EXTERNAL EXPANSION: ACQUIRING A FIRM,...

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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 lets take a look at how conglomerates firm lets 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. Bs shares. for all of Co. Bs 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 its not slight of hand. Co. A paid a lower P/E for Co. Bs stock than Co. As 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 - Contd....
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Chapter_15 - EXTERNAL EXPANSION: ACQUIRING A FIRM,...

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