1
Q
LBO Stages
A
- 1= planning and fundraising, 10% cash from investor, 50-60% debt, rest is subordinated debt
- 2= firm is purchased and privatised, assets often sold off to pay back debt
- 3= attempt to increase cash flows and profitability of firm
- 4= improved firm is listed publicly again by investor group (second ipo /SIPO) (found to be very profitable for investors)
2
Q
1980s LBOs
A
- junk bond debt availability
- Good economic environment for LBOs = availability of debt, strong economic health, innovation of high yield bonds
3
Q
Typical Industry
A
non-regulated, predictable, and predictable cash flows (textiles, soft drinks, retail - not tech)
4
Q
Typical target firm
A
strong market position, undervalued assets, good liquidity, capable management
5
Q
Empirical Results - Premiums
A
DeAngelo - 56% premium
Lowenstein - 56% premium in 1980s
6
Q
Empirical Results - Magnitude of Gains
A
Kaplan - few highly debt backed firms in the 80s had defaulted by the 90s.
Mian - average firm value change was 89% positive.
7
Q
Early 1990s LBOs
A
- Known as LBO correction period
- Lots more financial investors but less possible targets
- Winners curse came into play far more
- General economic downturn
8
Q
Late 1990s LBOs
A
- Resurgence period of LBOs
- Economy was more stable and favourable
- New industries were utilised for LBO procedure
- Joint deals with strategic buyers were popularising
9
Q
Sources of Gains
A
- Tax benefits = interest tax shelter, step ups in asset prices of acquirer. Value of tax benefit can be 0.2-1.2 times premium
- Managerial incentives = greater debt means more pressure to perform, managers are more aligned with shareholders
- Agency costs savings = less agency costs of free cash flow as all cash is going to debt payback
- Premiums often have large positive pay-outs for shareholders
- Asymmetric information = managers and investors are far more aware of true firm price than shareholders
FINANCE
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