Principles of corporate finance 6th brealey myers chapter 34

 Control, Governance, and Financial Architecture Slides by...  Corporate control -- the power to make investment and financing decisions..  Corporate governance -- the role of the

 Control, Governance, and Financial

Architecture

Slides by

Topics Covered

 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

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

Leveraged Buyouts

KKR RJR Nabisco 1989 $ 24.72

KKR Beatrice 1986 $ 6.25

KKR Safeway 1986 $ 4.24

Thompson Co Southland 1987 $ 4.00

AV Holdings Borg-Warner 1987 $ 3.76

Wing Holdings NWA, Inc 1989 $ 3.69

KKR Owens-Illinois 1987 $ 3.69

TF Investments Hospital Corp of America 1989 $ 3.69

FH Acquisitions For Howard Corp 1988 $ 3.59

Macy Acquisition Corp RH Macy & Co 1986 $ 3.50

Bain Capital Sealy Corp 1997 $ 811.20

Citicorp Venture Capital Neenah Corp 1997 $ 250.00

Cyprus Group (w/mgmt) WESCO Distribution Inc 1998 $ 1,100.00

Clayton, Dublier & Rice North Maerican Van Lines 1998 $ 200.00

Clayton, Dublier & Rice (w/mgmt) Dynatech Corp 1998 $ 762.90

Kohlberg & Co (w.mgmt) Helley Performance Products 1998 $ 100.00

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

Amount Issued, Country Company and Date $ millions

France St Gobain (1986) $ 2,091.40 France Paribas (1987) $ 2,742.00 Germany Volkswagon (1961) $ 315.00 Jamaica Caribbean Cement (1987) $ 45.60 Jpan Japan Airlines (1987) $ 2,600.00 Mexico Telefonos de Mexico (1990) $ 3,760.00 New Zealand Air New Zealand (1989) $ 99.10 Singapore Neptune Orient Lines (1981-1988) $ 308.50 United Kingdom British Gas (1986) $ 8,012.00 United Kingdom BAA (Airports)(1987) $ 2,028.00

Examples of Privatization

Sales Rank Company Numebr of Industries

42 Gulf & Western Industries 41

73 Illinois Central Industries 26

The largest US conglomerates in 1979

Private Equity Partnership

Investment Phase

Investment Phase Payout PhasePayout Phase

General Partner put up 1% of capital

General Partner get carried interest in 20% of profits

Limited

partners put in

99% of capital

Limited partners get investment back, then 80%

of profits

Investment in diversified Sale or IPO of companies

Partnership Partnership

Company 1

Company 1

Company 2

Company 2 Mgmt fees