10. Business Reorganisations Flashcards
What are the 6 mains methods of divestment?
- Demerger
- Sell Off
- Franchise
- MBO
- IPO
- Liquidation
What happens to shares of a company under a demerger?
Shares in the business to be spun off are distributed to shareholders of the parent company in proportion to their original shareholding (no cash)
What are 3 reasons to undertake a demerger?
- Concentrate on core business
- Easier for investors to analyse, leading to a higher valuation
- Improve management focus
What happens to shares of a company under a sell off?
Shareholders retain no investment in the sold off company, cash is exchanged
What are the 3 steps of liquidation?
- Assets are disposed of
- Creditors/lenders paid off
- Any remaining funds passed to shareholders
What is franchise?
When the business concept is sold to others to replicate, in exchange for cash and an ongoing franchise fee
What is management buyout (MBO)?
A team of managers from inside the organisation buy out the business or part of it
What are the 2 main motivations behind an MBO for managers?
- Give the opportunity to own and run their own business
- Benefit from potential large equity gains
What are the 3 main motivations behind an MBO for organisation?
- Allow to dispose of non core operations
- Allow to raise cash
- Quicker than a sale to a third party
What is the driving factor for the financing structure of an MBO?
MBO team will want a good share of the equity but can only personally afford a small fraction of the amount payable
What is the general approximate financing structure of an MBO? (4)
- Management team 5%
- Bank secured debt 35%
- Bank/investor mezzanine debt 35%
- Venture capital 25%
What is a leveraged buyout?
Where an investor buys a controlling interest in equity and finances a significant percentage of the purchase through borrowing
Who owns venture capital firms?
Major banks or large independent firms
What do venture capitalists look for?
Businesses with high potential growth and a proven track record
What 3 things will venture capitalists want?
- 30% average annual return (dividends + capital gain)
- Board presence and decision making input
- Clear exit plan (3-7 years)
