Chapter-13收購、兼并和重組課后題目

FinancingtheDeal:

PrivateEquity,HedgeFunds,andOtherSourcesofFinancingNoonespendsotherpeople’smoneyascarefullyastheyspendtheirown.—MiltonFriedmanExhibit1:CourseLayout:Mergers,Acquisitions,andOtherRestructuringActivitiesPartIV:DealStructuringandFinancingPartII:M&AProcessPartI:M&AEnvironmentCh.11:PaymentandLegalConsiderationsCh.7:DiscountedCashFlowValuationCh.9:FinancialModelingTechniquesCh.6:M&APostclosingIntegrationCh.4:BusinessandAcquisitionPlansCh.5:SearchthroughClosingActivitiesPartV:AlternativeBusinessandRestructuringStrategiesCh.12:Accounting&TaxConsiderationsCh.15:BusinessAlliancesCh.16:Divestitures,Spin-Offs,Split-Offs,andEquityCarve-OutsCh.17:BankruptcyandLiquidationCh.2:RegulatoryConsiderationsCh.1:MotivationsforM&APartIII:M&AValuationandModelingCh.3:TakeoverTactics,Defenses,andCorporateGovernanceCh.13:FinancingtheDealCh.8:RelativeValuationMethodologiesCh.18:Cross-BorderTransactionsCh.14:ValuingHighlyLeveragedTransactionsCh.10:PrivateCompanyValuationLearningObjectivesPrimaryLearningObjective:ToprovidestudentswithaknowledgeofhowM&Adealsarefinancedandtheroleofprivateequityandhedgefundsinthisprocess.SecondaryLearningObjectives:ToprovidestudentswithaknowledgeofAdvantagesanddisadvantagesofLBOstructures;HowLBOscreatevalue;Leveragedbuyoutsasfinancingstrategies;FactorscriticaltosuccessfulLBOs;andCommonLBOcapitalstructures.HowareM&ATransactions

CommonlyFinanced?BorrowingOptions:AssetbasedorsecuredlendingCashfloworunsecuredlenders(seniorandjuniordebt)Long-termfinancing(junkbonds,leveragedbankloans,convertibledebt)BridgefinancingPayment-in-kindFinancingM&As:BorrowingOptionsAlternativeFormsofBorrowingTypeofSecurityBackedByLendersLoanUptoLendingSourceSecuredDebtShort-Term(<1Yr.)

IntermediateTerm(1-10Yrs.)LiensgenerallyonreceivablesandinventoryLiensonLandandEquipment50-80%dependingonqualityUpto80%ofappraisedvalueofequipment;50%ofrealestateBanks,financeandlifeinsurancecompanies;privateequityinvestors;pensionandhedgefundsUnsecuredDebt(Subordinatedincl.sellerfinancing)BridgeFinancingPayment-in-KindCashgeneratingcapabilitiesoftheborrowerLifeinsurancecompanies,pensionfunds,privateequityandhedgefunds;targetfirmsFinancingM&As:EquityOptionsAlternativeFormsofEquityEquityTypeBackedByInvestorTypesCommonStockCashgeneratingcapabilitiesofthefirmLifeinsurancecompanies,pensionfunds,hedgefunds,privateequity,andangelinvestorsPreferredStock--CashDividends--Payment-in-KindCashgeneratingcapabilitiesofthefirmSameasaboveFinancingM&As:SellerFinancingSellerdefersaportionofthepurchasepriceAdvantagestoseller:Buyermaybewillingtopayseller’saskingpricesincedeferralwillreducepresentvalueMakessalepossiblewhenbankfinancingnotavailable(e.g.,2008-2009)Advantagestobuyer:ShiftsoperationalrisktosellerifbuyerdefaultsonloanEnablesbuyertoputinlesscashatclosingFinancingM&As:CashonHandandSelling

RedundantAssets“Cashonhand”representscashinexcessofnormaloperatingrequirementsontheacquirerortarget’sbalancesheet.Target’sexcesscashcanbeusedtobuytargetfirm’soutstandingshares.Redundantassetsarethoseownedbytheacquirerortargetfirmthatarenotconsideredgermanetotheacquirer’sbusinessstrategy.FinancialBuyers/SponsorsInaleveragedbuyout,allofthestock,orassets,ofapublicorprivatecorporationareboughtbyasmallgroupofinvestors(“financialbuyersakafinancialsponsors”),oftenincludingmembersofexistingmanagementanda“sponsor.”Financialbuyersorsponsors:FocusonROEratherthanROA.Useotherpeople’smoney.Succeedthroughimprovedoperationalperformance,taxshelter,debtrepayment,andproperlytimingexit.Focusontargetshavingstablecashflowtomeetdebtservicerequirements.Typicaltargetsareinmatureindustries(e.g.,retailing,textiles,foodprocessing,apparel,andsoftdrinks)RoleofPrivateEquityandHedgeFundsinDealFinancingFinancialIntermediariesServeasconduitsbetweeninvestors/lendersandborrowersPoolresourcesandinvest/lendtofirmswithattractivegrowthprospectsLendersandInvestorsof“LastResort”Buyersofaboutone-halfofprivateplacementsSourceoffundsforfirmswithlimitedaccesstocreditmarketsProvidersofFinancialEngineering1andOperationalExpertiseforTargetFirmsLeveragedrivesneedtoimproveoperatingperformancetomeetdebtserviceImprovedoperatingperformanceenablesfirmtoincreaseleveragePrivateequityownedfirmssurvivefinancialdistressbetterthancomparablyleveragedfirmsPre-buyoutannouncementdateshareholderreturnsoftenexceed40%duetoinvestoranticipationofoperationalimprovementandtaxbenefitsPost-buyoutreturnstoLBOshareholdersexceedreturnsonS&P500duetoimprovedoperatingperformance(bettercontrols,activemonitoring,willingnesstomaketoughdecisions)1Financialengineeringdescribesthecreationofaviablecapitalstructurethatmagnifiesfinancialreturnstoequityinvestors.LeveragedBuyouts(LBOs)Financeasubstantialportionofthepurchasepriceusingdebt.FrequentlyrelyonfinancialsponsorsforequitycontributionsTargetfirmmanagementoftenequityinvestorsinLBOsManagementbuyouts(MBOs)areLBOsinitiatedbymanagementLBOsAsFinancingStrategiesLBOsareacommonlyusedfinancingstrategyemployedbyprivateequityfirmstoacquiretargetsusingmostlydebttopayforthecostoftheacquisitionTargetfirmassetsusedascollateralforloansMostliquidassetscollateralizebankloansFixedassetssecureaportionoflong-termfinancingPost-LBOdebt-to-equityratiosubstantiallyhigherthanpre-LBOratioduetodebtincurredtobuysharesfrompre-buyoutprivateorpublicshareholdersDebt-to-equityratioalsomayincreaseevenifpre-andpost-LBOdebtremainsunchangedifthetarget’sexcesscashandtheproceedsfromsaleoftargetassetsusedtobuyouttargetshareholders(Why?Assetsdeclinerelativetoliabilitiesshrinkingthetarget’sequity)ImpactofLeverageonReturntoShareholdersAll-CashPurchase($Millions)50%Cash/50%Debt($Millions)20%Cash/80%Debt($Millions)PurchasePrice$100$100$100Equity(CashInvestmentbyFinancialSponsor)$100$50$20Borrowings0 $50$80EarningsBeforeInterestandTaxes(EBIT)$20$20$20Interest@10%10 $5$8IncomeBeforeTaxes$20$15$12LessIncomeTaxes@40%$8 $6$4.8NetIncome$12$9 $7.2After-TaxReturnonEquity(ROE)212%18%36% ImpactofLeverageon

FinancialReturns1Taxshelterin50%and20%debtscenariosis$2million(I.e.,$5x.4)and$3.2million(i.e.,$8x.4),respectively.2IfEBIT=0underallthreescenarios,incomebeforetaxesequals0,($5),and($8)andROEaftertaxinthe0%,50%and80%debtscenarios=$0/$100,[($5)x(1-.4)]/$50and[($8)x(1-.4)]/$20=0%,(6)%and(24)%,respectively.Notethevalueoftheoperatingloss,whichisequaltotheinterestexpense,isreducedbythevalueofthelosscarryforwardorcarryback.LBO’sImpactofTargetFirmEmployment,Innovation,andCapitalSpendingNetreductioninemploymentatfirmsseveralyearsafterundergoingLBOsis1%Employmentattargetfirmsdeclinesabout3%inexistingoperationscomparedtootherfirmsinthesameindustryButemploymentatnewventuresincreasesabout2%EmploymentatprivatefirmsmayincreaseLBOsoftenincreaseR&DandcapitalspendingrelativetopeersOperatingperformanceparticularlyforprivatefirmsundergoingLBOsimprovessignificantlyduetoincreasedaccesstocapitalDiscussionQuestionsDefinethefinancialconceptofleverage.DescribehowleveragemayworktotheadvantageoftheLBOequityinvestor?Howmightitworkagainstthem?Whatisthedifferencebetweenamanagementbuyoutandaleveragedbuyout?Whatpotentialconflictsmightarisebetweenmanagementandshareholdersinamanagementbuyout?LBOAdvantagesandDisadvantagesAdvantagesincludethefollowing:Managementincentives,Betteralignmentbetweenownerandmanagerobjectives(reducesagencyconflicts),Taxsavingsfrominterestexpenseanddepreciationfromassetwrite-up,Moreefficientdecisionprocessesunderprivateownership,Apotentialimprovementinoperatingperformance,andServingasatakeoverdefensebyeliminatingpublicinvestorsDisadvantagesincludethefollowing:Highfixedcostsofdebtraisethefirm’sbreak-evenpoint,Vulnerabilitytobusinesscyclefluctuationsandcompetitoractions,Notappropriateforfirmswithhighgrowthprospectsorhighbusinessrisk,andPotentialdifficultiesinraisingcapital.HowLBOsCreateValueFactorsContributingtoLBOValueCreationBuyoutsofPrivateFirmsBuyoutsofPublicFirmsKeyFactor:AlleviatingAgencyProblemsKeyFactor:ProvidesAccesstoCapitalFactorsCommontoLBOsofPublicandPrivateFirmsDeferringTaxesDebtReductionOperatingMarginImprovementTimingoftheSaleoftheFirmLBOsCreateValuebyReducingDebtandIncreasingMargins

TherebyIncreasingPotentialExitMultiplesFirmValueDebtReductionReinvestinFirmFreeCashFlowYear1Year2Year3Year4Year5Year6Year7Year1Year2Year3Year4Year5Year6Year7DebtReduction&ReinvestmentIncreasesFreeCashFlowandInturnBuildsFirmValueTaxShieldAddstoFreeCashFlowDebtReductionAddstoFreeCashFlowbyReducingInterest&PrincipalRepaymentsReinvestmentAddstoFreeCashFlowbyImprovingOperatingMarginsTaxShield11Taxshield=(interestexpense+additionaldepreciationandamortizationexpensesfromassetwrite-ups)xmarginaltaxrate.LBOValueisMaximizedbyReducingDebt,ImprovingMargins,andProperlyTimingExitCase1:DebtReductionCase2:DebtReduction+MarginImprovementCase3:DebtReduction+MarginImprovement+ProperlyTimingExitLBOFormationYear:TotalDebtEquityTransaction/EnterpriseValue$400,000,000

100,000,000$500,000,000$400,000,000

100,000,000$500,000,000$400,000,000

100,000,000$500,000,000ExitYear(Year7)Assumptions:CumulativeCashAvailableforDebtRepayment1NetDebt2EBITDAEBITDAMultipleEnterpriseValue3EquityValue4$150,000,000$250,000,000$100,000,0007.0x$700,000,000$450,000,000$185,000,000$215,000,000$130,000,0007.0x$910,000,000$695,000,000$185,000,000$215,000,000$130,000,0008.0x$1,040,000,000$825,000,000InternalRateofReturn24%31.2%35.2%CashonCashReturn54.5x6.95x8.25x1CumulativecashavailablefordebtrepaymentincreasesbetweenCase1andCase2duetoimprovingmarginsandlowerinterestandprincipalrepaymentsreflectingthereductioninnetdebt.2NetDebt=TotalDebt–CumulativeCashAvailableforDebtRepayment=$400million-$185million=$215million3EnterpriseValue=EBITDAin7thYearxEBITDAMultiplein7thYear4EquityValue=EnterpriseValuein7thYear–NetDebt5Theequityvaluewhenthefirmissolddividedbytheinitialequitycontribution.TheIRRrepresentsamoreaccuratefinancialreturn,becauseitaccountsforthetimevalueofmoney.CommonLBODealStructuresDirectmerger:TargetfirmmergeddirectlyintothefirmcontrolledbythefinancialsponsorSubsidiarymerger:Targetfirmmergedintoaacquisitionsubsidiarywholly-ownedbytheparentfirmwhichinturniscontrolledbythefinancialsponsorAreversestocksplit:Usedwhenafirmisshortofcashtoreducethenumberofshareholdersbelow300whichforcesdelistingofthefirmfrompublicexchanges.Majorityshareholdersretaintheirsharesafterthereversesplitreducesthenumberofsharesoutstanding;minorityshareholdersreceiveacashpayment.DirectMergerAcquirer(ControlledbyFinancialSponsor)TargetFirmShareholdersTargetFirmLenderTargetMergeswithAcquirerTargetStockAcquirerCashandStockLoanFinancialSponsor(LimitedPartnershipFund)EquityContributionSubsidiaryMergerFinancialSponsorLimitedPartnershipFundParent(ControlledbyFinancialSponsor)LenderTargetFirmTargetFirmShareholdersMergerSubEquityContributionMergerSubCash&SharesTargetFirmSharesMergerSubMergesIntoTargetMergerSubSharesEquityContributionLoanLoanGuaranteeTypicalLBOCapitalStructurePurchasePriceEquity(25%)Debt(75%)CommonEquity(10%)PreferredEquity(15%)RevolvingCredit(5%)SeniorSecuredDebt(40%)SubDebt/JunkBonds(30%)TermLoanATermLoanBTermLoanC2ndMortgageDebtMezzanineDebt&PIKCaseStudy:CoxEnterprisesTakesCoxCommunicationsPrivateInanefforttotakethefirmprivate,CoxEnterprisesannouncedaproposaltobuytheremaining38%ofCoxCommunications’sharesnotcurrentlyownedfor$32pershare.Valuedat$7.9billion(including$3billioninassumeddebt),thedealrepresenteda16%premiumtoCoxCommunication’ssharepriceatthattime.CoxCommunicationsisthethirdlargestproviderofcableTV,telecommunications,andwirelessservicesintheU.S,servingmorethan6.2millioncustomers.Historically,thefirm’scashflowhasbeensteadyandsubstantial.CoxCommunicationswouldbecomeawholly-ownedsubsidiaryofCoxEnterprisesandwouldcontinuetooperateasanautonomousbusiness.CoxCommunications’BoardofDirectorsformedaspecialcommitteeofindependentdirectorstoconsidertheproposal.CitigroupGlobalMarketsandLehmanBrothersInc.committed$10billiontothedeal.CoxEnterpriseswoulduse$7.9billionforthetenderoffer,withtheremaining$2.1billionusedforrefinancingexistingdebtandtosatisfyworkingcapitalrequirements.CableservicefirmshavefacedintensifiedcompetitivepressuresfromsatelliteserviceprovidersDirecTVGroupandEchoStarcommunications.Moreover,telephonecompaniescontinuetoattackcable’shigh-speedInternetservicebycuttingpricesonhigh-speedInternetserviceoverphonelines.Cablefirmshaverespondedbyofferingabroaderrangeofadvancedserviceslikevideo-on-demandandphoneservice.Since