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
There exists a positive relation between pre-transaction undervaluation and the expected shareholder gains at PTP transactions, mainly in MBOs and IBOs (retention of part of the incumbent management)
why is this so?
information asymmetry could lead to opportunities
Performance-based compensation systems led to what?
induced some managers to illegally inflate stock prices so as to get more stock-based compensation
irresponsible risk-taking
Managers and operational and/or financial slack
Managers could believe that the firm yields subpar returns (i.e., undervaluation), which could induce them to pursue an MBO
Asset-based lending
the use of the target firm’s assets as collateral for the debt involved in the funding of the acquisition
Unlike capital-intensive industries (e.g., manufacturing), service industries tend to use what as as collateral for LBOs?
what do investors expect from this?
tend to use cashflows
investors expect higher returns
In the 1980s, an important share of tender offers was contested by incumbent management. Yet, there exists a decline of hostility in the 1990s for mergers
what could this mean?
corporate governance improvement
Firms with declining growth in analyst coverage, falling institutional ownership, and low stock turnover tend to do what?
tend to go private and opt to do so sooner
A primary reason behind the decision of IPO firms to abandon their public listing is what?
the lack of financial visibility and investor interest
NPV formula
sum of PV of all cashflows - initial cashflow
