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The McGraw-Hill Companies, Inc., 2000

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1 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

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

3 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.

4 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.

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

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

7 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.

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

9 Privatization Examples of Privatization

10 Conglomerates The largest US conglomerates in 1979

11 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

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