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ICAS - AFin > Module 19 > Flashcards

Module 19 Flashcards

1
Q

Sell off

A

Involves selling part of a business to a third party usually for cash

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2
Q

Spin off

A

No change in ownership of the business new company is created with assets transferred to it

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3
Q

Reasons for sell-offs/ spin-offs (6)

A
  • Different types of businesses
  • Defence strategy
  • Improved efficiency
  • Removal of negative synergy
  • Improved use of resources
  • After acquisition (asset stripping)
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4
Q

Reasons against divestment (3)

A
  • Vulnerability (to takeover)
  • Loss of economies of scale
  • Harder to raise finance/ higher cost
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5
Q

Management buy out

A

Existing managers of a business (commonly join with VC funds and banks) to buy it from the current owners

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6
Q

Common incentives featuring in MBO (2)

A
  • Envy ratios

- Rachet

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7
Q

Envy ratio

A

Where management team invests less than VC to obtain percentage of shares

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8
Q

Rachet

A

Where management team outperform forecasts, percentage shareholding increases

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9
Q

Institutional buy out (IBO)

A

Institutions via an auction buy business (usually achieves higher price than traditional MBO)

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10
Q

Details of IBO (2)

A
  • More common than MBOs for large deals (> £50m) where it’s too hard for management to raise finance
  • Management often offered equity incentives to motivate
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11
Q

Management and employee buy out (MEBO)

A

Key employees and executive management

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12
Q

Employee buy out (EBO)

A

All employees offered an opportunity to buy a stake

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13
Q

Management buy-in (MBI)

A

Outside managers, backed by institutions

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14
Q

MBO details (2)

A
  • Benefit from existing management expertise

- Often used in niche sectors

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15
Q

Buy in management buy out (BIMBO)

A

External managers join forces with internal management and financial institutions

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16
Q

Advantages of BIMBO (3)

A
  • More reliable information because existing managers invited to join new venture
  • Less acquisitional slippage as existing managers are motivated to make the deal succeed
  • Vendor knows employees are likely to be safe after the sale
17
Q

Leveraged buy out (LBO)

A

Can imply cross border ownership (significant amount of borrowing to finance acquisition)

18
Q

Circumstances behind buy-outs (5)

A
  • Needs investment
  • Parent needs to reduce borrowings
  • Retirement
  • Insolvent parent company
  • Insolvent company
19
Q

Buy out structures (2)

A
  • Sale of shares

- Sale of assets

20
Q

Sale of shares

A

Most straightforward form of MBO > managers acquire shares in the target

21
Q

Sale of assets

A

May not be possible or desirable to acquire shares in target, so Newco acquires assets and trade of business instead

22
Q

Use of a Newco (3)

A
  • Rare not to use Newco
  • Can obtain tax relief on interest paid on borrowings obtained to acquire target and offset against target’s taxable profits
  • Desired shareholding structure can be more easily achieved with fresh company
23
Q

Eventual mix of debt and equity influenced by

A

Performance and objectives of lead finance provider

24
Q

Equity vs debt

A

Equity is more expensive to the company than debt, however, over-leveraging a business with debt is risky

25
Q

Majority of finance for Newco will be

A

Debt

26
Q

Two principle types of acquisition debt

A
  • Senior debt

- Mezzanine debt

27
Q

Senior debt

A

Funded by core earnings of business. Usually secured by charge over assets. Repaid 5-7 years. Margins of 1.5%-2/5% over LIBOR

28
Q

Mezzanine debt

A

Emerged to fill gap between senior debt and equity > highest risk form of debt. Cheaper than equity, but more costly than traditional debt.
Lenders may require board representation, and participate in future growth of the company

29
Q

S895 allows companies

A

To enter into any type of scheme regarding either trade payables or shareholders as long as it does not breach general law or another statutory provision

30
Q

S895 scheme calculate (3)

A
  • Position of each stakeholder under liquidation
  • Position of each stakeholder in terms of the proposed scheme
  • Scheme is only accepted if everyone is better off

ICAS - AFin (21 decks)

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