Class 6 powerpoint Flashcards
Leveraged buyout (LBO)
the use of debt to purchase shares of the firm
normally involves making a public firm private (known as going-private deal or public-to-private transaction - PTP)
management buyout (MBO)
The sale of a business unit or even the whole firm to a management group
Deconglomeration
a process of firms being disassembled in the 1970s via sell-offs following a series of large-scale acquisitions in the previous decade
LBO firms (later known as private equity (PE) firms)
those which create pools to benefit from undervalued assets and firms
those who resort to debt to fund their profitable acquisitions
reverse LBOs compared to normal LBOs
On average, reverse LBOs are much larger in size, have more leverage and profitability, and are backed by more reputable underwriters
what happened to the superior performance of LBOs thorughout time? has this made people less attracted to LBOs?
The superior performance seems to have eroded over time
nah, poor returns did not prevent the frenzy fundraising activity of LBO dealmakers
what were the 200s characterized by?
characterized by a robust economy, a rising stock market, a housing bubble, and low interest rates (i.e., equity and debt capital markets were very liquid)
when were LBOs vibiiing? until which point?
LBOs enjoyed globalization as from the 1990s, and one observes a much higher LBO activity in Europe relative to the US in the 2000s until the onset of the 2008 Financial Crisis
the buying group of LBOs are made of insiders or outsiders?
what about MBOs?
The buying group in an MBO is made up of insiders
The buying group in an LBO is made up of outsiders
which between an MBO and LBO has higher odds of success? why?
An MBO tends to have higher odds of success relative to an LBO on average
because the bidders of the former have a richer information set Ω(·)
Some potential conflicts of interest in an MBO
Dual Role
Earnings management
dual role (MBO conflict of interest)
management may not extend optimal offer value, but they are supposed to defend shareholders’ interest (i.e., suboptimal offer)
Earnings management (MBO conflict of interest)
management may use accounting manoeuvers to minimize profit (i.e., suboptimal deal size)
LBO conflicts: relevant court rulings In Revlon, Inc. v. MacAndrews and Forbes Holdings
the Delaware Supreme Court rules that directors of Revlon, Inc. breached their fiduciary duties by favouring Forstmann Little & Co. in the bidding process via a lockup option
In Edelman v. Fruehauf, the circuit court concludes that directors of Fruehauf did not or did not carry out a fair auction process?
nah because they failed by properly consider the all-cash offer made by Edelman
