Ch. 32: Corporate Restructuring & LBO Flashcards
LBOs differ from ordinary acquisition in two immediately obvious ways - which?
1) the target goes private after an LBO and shares are no longer traded on open market
2) a large fraction of the purchase price is financed by debt
In an LBO, the acquirer finances a larger fraction of the purchase price by debt. These loans/ bonds are:
A) secured by the assets and cash flows for the PE firm
B) secured by the assets and cash flows for the target
C) unsecured
B) secured by the assets and cash flows for the target
When a buyout is led by existing management, the transaction is called____?
Management buyout (MBO)
Which of the following is NOT a motive for LBO? (select 0 - 4)
A) potential for making the target leaner and meaner - leading to higher exit multiples than entry multiples –> higher IRR
B) tax savings due to high leverage ratios (but limitations of interest payment tax deductibility was imposed in 2018: max 30% of EBITDA)
C) amplified return in event of exit due to lower equity capital commitment
D) management and FTEs are forced to become more efficient due to need to generate enough cash for debt service
All of the above are true
One of the characteristics of an LBO is that additional incentives are induced on managers. How so?
Managers are given a greater stake in the business, e.g., via stock options or direct ownership of shares
The high debt level in an LBO is intended to be rather permanent throughout the holding period of the PE firm
True/ False
False: the debt is intended to be paid down throughout the holding period, which constitutes a lever for value creation - you are expanding your proportion of equity relative to debt when debt is paid down
The private ownership in an LBO is not intended to be permanent.
True/ False
True: the most successful LBOs go public again as soon as debt has been paid down and sufficient improvements of operating performance has been obtained
How is an LBO different from a leveraged restructuring?
A) managers have greater incentives in LBOs than leveraged restructurings
B) the debt level is higher in leveraged restructurings than LBOs
C) firms undergoing leveraged restructuring continue as public firms, while LBO candidates go private
C) firms undergoing leveraged restructuring continue as public firms, while LBO candidates go private
LBO and leveraged restructuring both lead to higher management incentives and have high debt levels. They only differ by option C
In a PE partnership, limited partners contribute with almost the entirety of the equity capital to be invested. LPs are generally (select all correct):
A) individual common private investors
B) pension funds
C) endowments
D) insurance companies
E) very wealthy individual investors
B) pension funds
C) endowments
D) insurance companies
E) very wealthy individual investors
Which of the following partnerships invests in early non-mature companies needing capital for growth?
A) VC Funds
B) LBO Funds
A) VC Funds
In the market for corporate control, we distinguish between fusion and fission. Which one of the following options is not under the fission category?
A) LBO
B) MBO
C) mergers and acquisitions
D) carve-outs
E) spin-offs
F) privatizations
G) divestures
C) mergers and acquisitions
This is under the fusion category, not fission
Which of the following statements is/are not true about a spin-off? Select all wrong answers
A) a new independent company is created by detaching part of the parent firm’s assets and operations
B) shares in the new firm are distributed to the parent company’s stockholders
C) a benefit is that it widens investor choice by allowing them to invest in specific a part of the business
D) a benefit is that it improves incentives for managers since performance is more transparent in the independent new entity
E) it is generally good news for investors
All options are correctly about a spin-off
Which of the following statements is/are not true about a carve-off? Select all wrong answers
A) a new independent company is created by detaching part of the parent firm’s assets and operations
B) the independent new entity’s shares is sold in a public offering rather than distributed to parent firm’s shareholders
C) benefit of a carve-out is that the parent earns cash on the sold shares
D) most carve-outs leave the parent with the majority control of the new entity, usually 80% of ownership
All options are correctly about a carve-out
Asset sales is a type of fission in the market for corporate control. Which of the following statements is/ are not true about asset sales? Select all wrong answers:
A) it means a sale/divesture of part of the parent firm - can either be larger assets but also whole divisions
B) it is a way of getting rid of “poor fits”
C) can be required by FTC as a condition for approving a merger
D) leads to increased share ownership in the parent company
E) asset sales are typically good news for investors of selling firm bc. on average, the asset sold is employed more productively after the sale
Wrong:
D) leads to increased share ownership in the parent company
Privatization and nationalization is a type of fission in the market for corporate control. Which of the following statements is/ are not true about privatization? Select all wrong answers:
A) it is a sale of a government-owned company to private investors
B) most privatizations are more like carve-outs than spin-offs because shares are sold for cash rather than distributed to parent shareholders
C) a motive of privatization is increased efficiency due to exposure to the discipline of competition amid lack of insulation from political influence
D) leads to higher taxable income for the government due to higher efficiency
E) widens the investor choice by allowing them to invest in an independent part of the parent’s business
E) widens the investor choice by allowing them to invest in an independent part of the parent’s business
This is a benefit from spin-off
There are two forms of bankruptcy that a firm can be declared: which?
A) Oversee the firm’s death and dismemberment (Chapter 7)
B) Nurse the firm back to health (Chapter 7)
C) Oversee the firm’s death and dismemberment (Chapter 11)
D) Nurse the firm back to health (Chapter 11)
A) Oversee the firm’s death and dismemberment (Chapter 7)
D) Nurse the firm back to health (Chapter 11)
Which of the following statements does not hold for the oversee the firm’s death and dismemberment (Chapter 7)?
A) a trustee closes the firm down and auctions off the asset with the proceeds used to pay off creditors
B) secured creditors can recover the value of their collateral
C) secured creditors join the queue with unsecured creditors to if the firm’s collateral is not worth enough to repay the secured debt
D) the court and appointed trustee are first in the line of repayment
E) wages are second in line
F) federal and state taxes and debt are third in line
G) remaining unsecured creditors mop up any remaining crumbs from the table
All options are correct
Which of the following statements does not hold for nurse the firm back to health (Chapter 11)?
A) Chapter 11 aims a keeping the firm alive and operating while a plan for reorganization is worked out
B) The responsibility for developing the reorganization plan falls on the debtor firm, but if it fails to do so, the court may invite anyone to make the plan - e.g., a committee of creditors
C) Acceptance of the plan requires approval by at least 50% of votes in each class of creditors
D) Acceptance of the plan requires approval by 2/3 of the shareholders of the firm in financial distress
E) The reorganization plan is basically a statement of who gets what
All options are correct
Chapter 11 proceedings are often successful, and the patient emerges fit and healthy. But in other cases, rehabilitation proves impossible, and the assets are liquidated under Chapter 7.
True/ False
True
Chapter 11 is designed to keep the firm in business, the reorganization plan often involves the sale or closure of large parts of the business.
True/ False
True
The main problem with Chapter 11 is that the goal of paying off the company’s creditors often conflicts with the aim of keeping the business going
True/ False
True
