What are the characteristics of leveraged buyouts? Advantages of leveraged buyouts

Leverage means to amplify funds, for example, a real estate company sells 2000 square meters of land, and there happens to be a garden company next door that has a state-protected forest tree that is worth a lot of money, so they use the principle of leverage to buy the forest garden next door, and sell it with the first tree plus the land, so that it will be several times and hope to adopt.

Leveraged buyout refers to the acquisition strategy in which the acquirer uses its own assets as collateral for debt to obtain large-scale financing to acquire another company, and uses the assets and future earnings of the target company as collateral for the loan, and uses the future cash flow of the acquired company to pay the interest on the loan.

The advantages of leveraged buyouts are as follows:

M&A projects have low asset or cash requirements.

Create synergies.

By extending production and operation beyond the enterprise. Compare: HorizontalIntegration

Operational efficiency is improved.

By removing the value-destroying effects of excessive diversification.

Improve leadership and management.

The way some managers manage the company (through control, returns, and other management methods to increase their personal authority) is often at the expense of the company's shareholders and the company's long-term advantages. Through mergers and acquisitions, these managers can either be out of the game immediately, or follow the "rules".

The pressure of high interest payments is forcing managers to find ways to improve operational performance and productivity. With the string of "debt" tightly in their minds, their attention has to be constantly focused on various actions to improve performance, such as divesting non-core businesses, downsizing, reducing costs, investing in technological transformation, and so on. Note:

In this sense, lending is not only a financial instrument, but also an effective tool for promoting management change.

Criticism of leveraged buyouts has focused on the fact that the acquiring company squeezes additional cash flow from the target company by misappropriating the wealth of third parties, such as the federal **. The acquired company is exempt from the tax on interest payments, and is taxed only slightly in the subsequent production operations, but the dividends distributed to shareholders do not enjoy such benefits.

In addition, the biggest risks associated with leveraged buyouts lie in unforeseen events such as financial crises, late rents, economic recessions, and policy adjustments. This will result in: difficulties in regular interest payments, technical defaults, and total liquidation.

In addition, if the target is not managed well and the motivations of management and shareholders are not aligned, the success of the leveraged buyout can be threatened.

Advantages of leveraged buyouts: M&A projects have low asset or cash requirements, resulting in synergies; Operational efficiency is improved by extending production and operation beyond the enterprise; Improve leadership and management by removing the value-destroying effects of excessive diversity.

Leveraged buyouts, also known as financing mergers and acquisitions and debt-based business acquisitions, are a kind of corporate financial means. It refers to the strategy of a company or individual to use the assets of the acquisition target as debt collateral to acquire the company. The main body of a leveraged buyout is generally a professional financial investment company, and the purpose of the investment company to acquire the target enterprise is to buy the company at a suitable price, increase the value of the company through operation, and increase investment income through financial leverage.

Typically, the investment company contributes only a small portion of the money, and most of the funds come from bank mortgage loans, institutional loans, and the issuance of junk bonds (high-interest and high-risk bonds), which are secured by the assets and future cash flows and earnings of the acquired company and used to repay the principal and interest. If the acquisition is successful and the expected benefits are achieved, the lender will not be able to share in the proceeds of the company's assets (unless there is a debt-for-equity swap agreement).

It may be necessary to arrange a bridge loan as a short-term financing and then complete the acquisition by borrowing (borrowing or borrowing money). In foreign countries, leveraged buyouts are often carried out by the acquired company by issuing a large number of junk bonds, and establishing a new company with a high concentration of power and a highly leveraged financial structure.

In specific applications, leveraged buyouts are generally carried out in the following steps.

The first stage: the design and preparation stage of a leveraged buyout, in which the promoter formulates the acquisition plan, negotiates with the acquiree, carries out the financing arrangements for the acquisition, and participates in the target enterprise with its own funds if necessary, and the promoter is usually the acquirer of the enterprise.

The second stage: in the fundraising stage, the acquirer first raises 10% of the purchase price through a group composed of corporate management, and then borrows a bridge loan from the bank with the assets of the company to be acquired, which is equivalent to 50-70% of the funds of the entire Huaidan acquisition, and sells bonds of about 20-40% of the purchase price to investors.

Stage 3: The acquirer buys the desired share of the acquired company with the funds raised.

The fourth stage: rectify the target enterprise of the merger and acquisition to obtain the cash flow of the liabilities formed at the time of the merger and reduce the debt risk.

Non-leveraged buyouts are not used to acquire with their own funds, and leveraged buyouts do not use their own funds to acquire.

A non-leveraged buyout is an acquisition method in which the target company's own funds and operating income are used to pay or guarantee the payment of the acquisition price.

Most of the forms of acquisition in the early M&A wave fall into this category. A leveraged buyout is a strategy in which a company or individual acquires a company using the assets of the target as collateral for debt.

Summary. Hello, the difference between financial leverage and leveraged mergers and acquisitions, the difference is as follows: When the company raises funds, before the capital structure reaches the optimal capital structure, a certain improvement in the capital structure can cause leverage benefits, so as to additionally improve the capital structure. Leveraged mergers and acquisitions are mergers and acquisitions that use financial leverage to operate.

1) In the company's finances, the interest, preferred stock dividends and lease fees to be paid by the company from EBIT (pre-tax income net of interest) are fixed when the capital is unchanged. If the EBIT increases, the fixed interest and lease fees per dollar of profit will be relatively reduced, which will bring additional profit per common share, which is known as financial leverage.

The difference between financial leverage and leveraged mergers and acquisitions is as follows: When the company raises funds, before the capital structure reaches the optimal capital structure, a certain improvement in the capital structure can cause leverage benefits, thereby additionally improving the capital structure. Leveraged mergers and acquisitions are mergers and acquisitions that use financial leverage to operate. (1) In the company's finances, when the capital remains unchanged, the interest paid by the company from EBIT (income before tax after interest), the interest on preferred shares, and lease fees are fixed.

If the EBIT increases, the fixed interest and lease fees per dollar of profit will be relatively reduced, which will bring additional profit per common share, which is financial leverage.

Leveraged and implicit purchases are a type of mergers and acquisitions. It refers to the fact that the M&A does not completely use the Zhuzhi's own funds, but has loans. Financial leverage and operating leverage refer to the leverage phenomenon in the company's operation. These are two questions.