Chapter 33 Principles PrinciplesofCorporateFinance Ninth Edition Corporate Restructuring Slides by Matthew Will Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin

33- 2 Topics Covered  Leveraged Buyouts  Fusion and Fission in Corporate Finance  Private Equity  Bankruptcy

33- 3 Leveraged Buy-Outs Unique Features of LBOs Large portion of buy-out financed by debt Shares of the LBO no longer trade on the open market

33- 4 Leveraged Buy-Outs –Junk bond market –Leverage and taxes –Other stakeholders –Leverage and incentives –Leverage restructurings –LBOs and Leverage restructurings Potential Sources of Value in LBOs

33- 5 Leveraged Buy Outs 10 Largest 1980s LBO’s + recent examples

33- 6 Definitions  Corporate control -- the power to make investment and financing decisions.  Corporate governance -- the role of the Board of Directors, shareholder voting, proxy fights, etc. and to actions taken by shareholders to influence corporate decisions.  Financial architecture -- the financial organization of the business.

33- 7 Leveraged Buyouts  The difference between leveraged buyouts and ordinary acquisitions 1. A large fraction of the purchase price is debt financed. 2. The LBO goes private, and its share is no longer trade on the open market.

33- 8 Leveraged Buyouts  The three main characteristics of LBOs 1. High debt 2.Incentives 3.Private ownership

33- 9 AT&T Breakup Saga

Spin-offs, etc.  Spin off -- debut independent company created by detaching part of a parent company's assets and operations.  Carve-outs-- similar to spin offs, except that shares in the new company are not given to existing shareholders but sold in a public offering.  Privatization -- the sale of a government- owned company to private investors.

Privatization  Motives for Privatization 1.Increased efficiency 2.Share ownership 3.Revenue for the government

Blackstone’s Portfolio 2007

KKR Partners’ Portfolio 2004 KKR Partner holdings

Private Equity Partnership Investment PhasePayout Phase General Partner put up 1% of capital General Partner get carried interest in 20% of profits Limited partners put in 99% of capital Limited partners get investment back, then 80% of profits Investment in diversified portfolio of companies Sale or IPO of companies Partnership Company 1 Company 2 Company N Mgmt fees

Conglomerates The largest conglomerates of 1979, ranked by sales compared with US industrial firms.

Private vs. Public

Bankruptcy The Largest Bankruptcies

Web Resources Click to access web sites Internet connection required