Chapter 3. M&A II Summary (2016)Resumen Inglés
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TOPIC 3: MERGERS AND ACQUISITIONS
OF COMPANIES II
1. Buying companies using a financial leverage: LBO and MBO
LBO: Leveraged buyout
The acquisition of another company using a significant amount of borrowed money (bonds or
loans) to meet the cost of acquisition. Often, the assets of the company being acquired are
used as a collateral (abal) for the loans in addition to the assets of the acquiring company. The
purpose of leveraged buyouts is to allow companies to make large acquisitions without having
to commit a lot of capital. (only the bank lends money)
Another definition: LBO as a transaction where is taken over a company applying a relevant
level of debt. The unique guarantee is the cash flow of the firm and its repayment capacity.
The target companies for an LBO is characterized by the following features: 1.
Consistent and stable free cash flows: short term, current situation Growth potential in a medium and long term: future situation Experienced and stable management team Possibility of Cost Reduction strategies: = types of scales of economies. i.e. be more efficient, find any gap to reduce cost.
5. Low leverage: so that the company will be able to face any additional debt.
6. Assets selling alternatives: to improve cash flow level of the firm. (even from direct operations of the company or indirect like sale of real state).
The components of LBO: >Senior debt: traditional debt >Subordinated debt “Junior debt”: all the time of the reinvorsement of the money, it is a second level ( ∆ risk for the bank, ∆ interests). If a company goes bankrupt and it doesn’t have money to pay back loans, this enters into a “second level” and senior debt becomes priority. If the company can pay just one debt, it should pay the “senior debt” first.
>Preferred shares: capital stock The LBO influences mainly the following 3 aspects: Changes in an ownership structure Changes in an assets structure: the other companies could have another facilities and restructure the assets of the company.
Changes in an organizational structure: chart MBO: Management buyout Is a form of acquisition where a company’s existing managers acquire a large part or all of the company from either the parent company or from the private owners. (manager takes a little part) Another definition: MBO as a take over option where managers are buying a small percentage of shares with the support of debt and other investors. If exists debt, it’s also a LBO transaction.
MBI: is a MBO but managers being external.
2. The Due Diligence report ***Topic 2.
COMPLEMENTARY MATERIAL Participants >Target: being the firm acquired >Vendor: as the ownership of Target company before MBO transaction >NEWCO: as a new “vehicle” company used on the transaction.
>Investor: as the financial partner of “NEWCO” who is providing the main equity (money of individuals/institutions that arrives to a company in the form of capital stock) financial resources for the acquisition of the Target company >Funding: as players who are providing debt financial resources to “NEWCO” applied to acquisition of the Target company.
How does a LBO/MBO/MBI work? .
*Target shares: bought by target company *Transaction debt: debt for paying to the selling company, because it can’t be placed on the target company balance sheet NEW “NEWCO” BALANCE SHEET = Balance sheet of NEWCO + Balance sheet of target company *Operational liabilities from Target: suppliers, taxes… *Debt related with transaction: debt used to pay previous shareholders of the Target Acquisition of company XYZ, S.A.
VALUE OF SHARES – EQUITY = *Value: Value of the shares NEWCO structure: we have to take the value of the shares as the new value for the NEWCO Different to the 10%, comes from their own Total amount that comes from debt (financial institutions) NEWCO AFTER-MERGE BIMBO BIMBO it’s an MBO + MBI (current and new managers) and current sellers who are reinvesting part of selling price perceived on the company.
LBU LBU “Leveraged build-up” as the acquisition of a company as a first stage of “accumulative” acquisitions for reaching a fast growth. It’s involved always a relevant debt level. Commonly used for those types of services that need to grow very fast. “Acquiring a lot of small companies”.