Chapter 32 Principles of Corporate Finance Tenth Edition

Chapter 32 Principles of Corporate Finance Tenth Edition Corporate Restructuring Slides by Matthew Will Mc. Graw-Hill/Irwin Copyright © 2011 by the Mc. Graw-Hill Companies, Inc. All rights reserved.

Topics Covered Ø Leveraged Buyouts Ø Fusion and Fission in Corporate Finance Ø Private Equity Ø Bankruptcy 32 -2

Leveraged Buy-Outs Unique Features of LBOs Large portion of buy-out financed by debt Shares of the LBO no longer trade on the open market 32 -3

Leveraged Buy-Outs Potential Sources of Value in LBOs – Junk bond market – Leverage and taxes – Other stakeholders – Leverage and incentives – Leverage restructurings – LBOs and Leverage restructurings 32 -4

Leveraged Buy Outs 10 Largest 1980 s LBO’s + recent examples 32 -5

Definitions Ø Corporate control -- the power to make investment and financing decisions. Ø Corporate governance -- the role of the Board of Directors, shareholder voting, proxy fights, etc. and to actions taken by shareholders to influence corporate decisions. Ø Financial architecture -- the financial organization of the business. 32 -6

Leveraged Buyouts Ø The difference between leveraged buyouts and ordinary acquisitions 1. A large fraction of the purchase price is debt financed. 2. The LBO goes private, and its share is no longer trade on the open market. 32 -7

Leveraged Buyouts Ø The three main characteristics of LBOs 1. 2. 3. High debt Incentives Private ownership 32 -8

AT&T Breakup Saga 32 -9

Spin-offs, etc. Ø Spin off -- debut independent company created by detaching part of a parent company's assets and operations. Ø Carve-outs-- similar to spin offs, except that shares in the new company are not given to existing shareholders but sold in a public offering. Ø Privatization -- the sale of a governmentowned company to private investors. 32 -10

Privatization Ø Motives for Privatization 1. 2. 3. Increased efficiency Share ownership Revenue for the government 32 -11

32 -12 Private Equity Partnership Investment Phase Payout Phase General Partner put up 1% of capital General Partner get carried interest in 20% of profits Mgmt fees Limited partners put in 99% of capital Partnership Limited partners get investment back, then 80% of profits Company 1 Investment in diversified portfolio of companies Company 2 Company N Sale or IPO of companies

Blackstone’s Portfolio 2009 32 -13

Conglomerates The largest conglomerates of 1979, ranked by sales compared with US industrial firms. 32 -14

Private vs. Public 32 -15

Bankruptcy The Largest Bankruptcies 32 -16

Web Resources Click to access web sites Internet connection required www. abiworld. org www. bankrupt. com www. bankruptcydata. com www. law. cornell. edu/uscode/11 32 -17