Corporate Restructuring Principles of Corporate Finance Eighth Edition Chapter 33 Corporate Restructuring Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Topics Covered Leveraged Buyouts Fusion and Fission in Corporate Finance Conglomerates Bankruptcy

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 29

Leveraged Buy-Outs Potential Sources of Value in LBOs Junk bond market Leverage and taxes Other stakeholders Leverage and incentives Leverage restructurings LBOs and Leverage restructurings 30

10 Largest LBO’s + recent examples Leveraged Buy Outs 10 Largest LBO’s + recent examples

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.

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.

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

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

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

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

Conglomerates 2004 KKR Partner holdings

The Largest US Bankruptcies Bankruptcy The Largest US Bankruptcies

Web Resources Web Links Click to access web sites Internet connection required www.abiworld.org www.bankrupt.com www.bankruptcydata.com www.law.cornell.edu/uscode/11 www.uscourts.gov/library/bankbasic.pdf