Private Equity and Leverage Buyouts

Question 1

What is the formula for calculating CFA using FCF?

Answer 1

CFA=(aprox.)FCT-(1-t)*interest payment=FCT-interest payment+tax shield

Question 2

What are LBO rationales? Why are there typically no operating synergies?

Answer 2

1 Good deal

*Target’s stock price is underpriced
*Interest rates low –> Debt finance deal

1. Improve operating efficiency (cut costs, better control of inventories etc.)
2. Change strategy (e.g., acquisitions)
3. Improve capital structure (e.g., discipline, tax savings (high partner debt –> high interest tax shield)

There are typically no operating synergies because no new assets are merged into the firm)

Question 3

What is characteristics of a good target profile?

Answer 3

1. It should be able to bear huge debt load
   *CFs: stable, predictable, repeatable
   *Industry: Mature, stable, recession-proof
   *CAPX: Low, predictable needs
   *Market position: Good, established, strong, brand, insulated
   *Excess cash
   *Liquid B/S
   *Collateralizable assets
2. Low current leverage
3. Potential for efficiency gains
   *Room for cost reductions, “bolt-on” acquisitions

Question 4

How do you calculate CFA when you do not use FCF as basis?

Answer 4

Net income + dep. & amortization -reinvested dep. (if assumed) - CAPX - changes in NWC
–> Thus, same as FCF, just start with net income instead of (1-t)*EBIT

Question 5

IRR-method

Question 6

DCF-method (APV)

Question 7

Sources and uses of funds

Question 8

Dynamics between 4 different

Question 9

Tax shield