Leveraged Restructuring

2 Key excerpts on "Leveraged Restructuring"

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  Corporate Finance

  Economic Foundations and Financial Modeling

  • Michelle R. Clayman, Martin S. Fridson, George H. Troughton, Michelle R. Clayman, Martin S. Fridson, George H. Troughton(Authors)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  Higher equity valuations are beneficial for equity-financed acquisitions, sales, and spin offs. If a company believes its stock is overvalued, it can use these transactions to exchange overvalued stock and realize value. While rarer, corporate transactions in periods of weak economic growth have been found to create more value, on average, than those in periods of strong economic growth. BCG found that “weak economy” deals are associated with a nearly 10% higher increase in shareholder return over three years than “strong economy” deals (Kengelbach, Keienburg, Gell, Nielsen, Bader, Degen, and Sievers 2019). In other words, in periods of economic stress and risk aversion, there are benefits to risk-taking. 596 Business Models and Financial Modeling Besides asset prices, empirical research also suggests that corporate restructuring activity tends to come in industry-specific waves during regulatory changes, technological changes, or changes in the growth rate of the industry, collectively known as industry shocks. Essentially, corporate issuers take action to adapt to disruptions in their competitive environment, which we will see through examples throughout this chapter. 2.3. Types of Corporate Restructurings Within the general categories of investment, divestment, and restructuring, most corporate restructurings can be classified as one of nine specific types, as shown in Exhibit 5. Leveraged buyouts (LBOs) are a special type of restructuring that combines elements of each category. EXHIBIT 5: Types of Corporate Restructurings Leveraged Buyout (LBO) Special case with elements of investment, divestment, and restructuring Investment Increase Size Equity Investment Joint Venture Acquisition Restructuring Improve Costs Balance Sheet Reorganization Divestment Decrease Size Sale Spin Off Increasing Financial Impact 2.3.1.

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  Investment Banking

  Valuation, Leveraged Buyouts, and Mergers and Acquisitions

  • Joshua Pearl, Joshua Rosenbaum(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  PART Two Leveraged Buyouts 199 CHAPTER 4 Leveraged Buyouts A leveraged buyout (LBO) is the acquisition of a company, division, business, or collection of assets (“target”) using debt to finance a large portion of the purchase price. The remaining portion of the purchase price is funded with an equity contri- bution by a financial sponsor (“sponsor”). LBOs are used by sponsors to acquire control of a broad range of businesses, including both public and private companies, as well as their divisions and subsidiaries. The sponsor’s ultimate goal is to realize an acceptable return on its equity investment upon exit, typically through a sale or IPO of the target. Sponsors have historically sought a 20% + annualized return and an investment exit within five years. In a traditional LBO, debt has typically comprised 60% to 70% of the financing structure with equity comprising the remaining 30% to 40% (see Exhibit 4.12). The disproportionately high level of debt incurred by the target is supported by its pro- jected free cash flow 1 and asset base, which enables the sponsor to contribute a small equity investment relative to the purchase price. The ability to leverage the relatively small equity investment is important for sponsors to achieve acceptable returns. The use of leverage provides the additional benefit of tax savings realized due to the tax deductibility of interest expense. Companies with stable and predictable cash flow, as well as substantial assets, generally represent attractive LBO candidates due to their ability to support larger quantities of debt. Free cash flow is needed to service periodic interest payments and reduce the principal amount of debt over the life of the investment. In addition, a large tangible asset base increases the amount of bank debt available to the borrower (the least expensive source of debt financing) by providing greater comfort to lenders regarding the likelihood of principal recovery in the event of a bankruptcy.

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