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Presentation transcript:

The McGraw-Hill Companies, Inc., 2000 Principles of Corporate Finance Brealey and Myers Sixth Edition Control, Governance, and Financial Architecture Slides by Matthew Will Chapter 34 Irwin/McGraw Hill The McGraw-Hill Companies, Inc., 2000

Topics Covered Leveraged Buyouts Spin-offs and Restructuring Conglomerates Private Equity Partnership Control and Governance

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 the 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

Leveraged Buyouts 10 Largest LBOs in 1980s and 1997/98 examples

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

Privatization Examples of Privatization

Conglomerates The largest US conglomerates in 1979

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