The importance of LBO

Week 13–Discussion topic for the week.

Discussion Forum

Wow! Thirteen weeks have elapsed. Mergers and Acquisitions remain a critical issue in Finance. As we can see from following business news, Mergers and Acquisitions move through hot and cold periods. We are in a pretty cold time now. Even so, bigger, wealthier companies as well as Warren Buffett are on the move and the climate may change quickly.

Here is the question: Looking back over the course, what were the Best Ideas you picked up? You can briefly discuss a single concept or you may wish to identify a broader business concept. In terms of the idea you select, be concise. "The Best Idea(s) in the course was (were) xxxx." Then you can discuss it.

Also, see what your classmates say and comment on their insights.

As conclusion, the best idea of this course is I guess LBO. However, all of things are strongly related with others so I can't say categorically whether it's right or wrong.

According this course, tax issue is also good concept from the view of inner decision making   unlike outside issue such as tax haven. It is closely related with asset management which I’d like to study deeply. In case of LBO of Toys"R"Us, KKR used their amount of plant assets. LBO is also good concept because debt financing is much better tax deduction way than using equity. LBO is deeply related with character of stock, bond and other asset. Secured or unsecured debt or junk bond is distinguished to make things easier. We can also utilize the difference of common stock and preferred stock to take an advantage. Especially, they are voting right and dividend issue. This course bluster my perspective of financial statement in term of valuation. LBO needs scrutinizing target company’s stable cash flow and asset through due diligence.

When company is suffering from bankruptcy, liquidity issue regarding common stock and preferred stock would be considered in asset bases. In this situation, LBO will be conducted for going private. Employ stock ownership plans are also related with tax issue. It makes us possible to make a tax benefit. The valuation of financial security will be more important for me concerning time value analysis such as future value of stock, bond and mortgage.

We also need to consider stockholder’s welfare regarding IPO or Carve out due to the fact that the management must maximize stockholder’s benefit as common sense of company’s philanthropy. In another way, LBO is only good idea for large company although Business alliance or Joint Venture is good for small company. Borrowing money from bank is kind of risky so technology alliance such as IBM did is easy way to increase market share.

There are many famous terms of hostile buyout such as White knight, Proxy fight, Packman defense, and Crown jewel and so on. However, Poison pill is little complicated with some legal issues. According to convertible bond and creditor/debtor issues, poison pill is likely to be on the court. Golden Parachute is corporate governance ethical issue. Buffet and Icahn is different management style. Icahn has more unethical problem as corporate raider. Buyout is usually conflicted with this kind of problems.

Yoichi Horibe