Principles of Corporate Finance Brealey and Myers Sixth Edition Control, Governance, and Financial Architecture Slides by Matthew Will Irwin/McGraw Hill Chapter 34 ©The McGraw-Hill Companies, Inc., 200 34- Topics Covered Leveraged Buyouts Spin-offs and Restructuring Conglomerates Private Equity Partnership Control and Governance Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 34- 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 Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 34- Leveraged Buyouts The difference between leveraged buyouts and ordinary acquisitions: A large fraction of the purchase price is debt financed The LBO goes private, and its share is no longer trade on the open market Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 34- Leveraged Buyouts The three main characteristics of LBOs: Irwin/McGraw Hill High debt Incentives Private ownership ©The McGraw-Hill Companies, Inc., 200 34- Leveraged Buyouts 10 Largest LBOs in 1980s and 1997/98 examples Acquirer KKR KKR KKR Thompson Co AV Holdings Wing Holdings KKR TF Investments FH Acquisitions Macy Acquisition Corp Bain Capital Citicorp Venture Capital Cyprus Group (w/mgmt) Clayton, Dublier & Rice Clayton, Dublier & Rice (w/mgmt) Kohlberg & Co (w.mgmt) Irwin/McGraw Hill Target RJR Nabisco Beatrice Safeway Southland Borg-Warner NWA, Inc Owens-Illinois Hospital Corp of America For Howard Corp RH Macy & Co Sealy Corp Neenah Corp WESCO Distribution Inc North Maerican Van Lines Dynatech Corp Helley Performance Products Year Price ($bil) 1989 1986 1986 1987 1987 1989 1987 1989 1988 1986 1997 1997 1998 1998 1998 1998 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 24.72 6.25 4.24 4.00 3.76 3.69 3.69 3.69 3.59 3.50 811.20 250.00 1,100.00 200.00 762.90 100.00 ©The McGraw-Hill Companies, Inc., 200 34- 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 governmentowned company to private investors Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 34- Privatization Motives for Privatization: Irwin/McGraw Hill Increased efficiency Share ownership Revenue for the government ©The McGraw-Hill Companies, Inc., 200 34- Privatization Examples of Privatization Country France France Germany Jamaica Jpan Mexico New Zealand Singapore United Kingdom United Kingdom United Kingdom United States Irwin/McGraw Hill Amount Issued, $ millions Company and Date St Gobain (1986) Paribas (1987) Volkswagon (1961) Caribbean Cement (1987) Japan Airlines (1987) Telefonos de Mexico (1990) Air New Zealand (1989) Neptune Orient Lines (1981-1988) British Gas (1986) BAA (Airports)(1987) British Steel (1988) Conrail (1987) $ $ $ $ $ $ $ $ $ $ $ $ 2,091.40 2,742.00 315.00 45.60 2,600.00 3,760.00 99.10 308.50 8,012.00 2,028.00 4,524.00 1,650.00 ©The McGraw-Hill Companies, Inc., 200 34- 10 Conglomerates The largest US conglomerates in 1979 Sales Rank 15 42 51 66 73 103 104 128 131 132 143 173 180 188 Irwin/McGraw Hill Company ITT Tenneco Gulf & Western Industries Litton Industries LTV Illinois Central Industries Textron Greyhound Marin Marietta Dart Industries U.S Industries Northwest Industries Walter Kidde Ogden Industries Colt Industries Numebr of Industries 38 28 41 19 18 26 16 19 14 18 24 18 22 13 ©The McGraw-Hill Companies, Inc., 200 34- 11 Private Equity Partnership Investment InvestmentPhase Phase Payout PayoutPhase Phase General Partner put up 1% of capital General Partner get carried interest in 20% of profits Mgmt fees Limited partners put in 99% of capital Partnership Investment in diversified portfolio of companies Irwin/McGraw Hill Partnership Company Company11 Company Company22 Limited partners get investment back, then 80% of profits Sale or IPO of companies Company CompanyNN ©The McGraw-Hill Companies, Inc., 200 ... McGraw-Hill Companies, Inc., 200 34- Definitions Corporate control the power to make investment and financing decisions Corporate governance the role of the Board of Directors, shareholder voting,... Companies, Inc., 200 34- 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... Partner put up 1% of capital General Partner get carried interest in 20% of profits Mgmt fees Limited partners put in 99% of capital Partnership Investment in diversified portfolio of companies Irwin/McGraw