沃顿 高级公司理财学PE&lbo09.ppt

Private Equity and BuyoutsIntroduction,Worldwide private equity funds managed more than$1 trillion in 2007(Metrick,Yasuda,2007)Three quarters buyout funds the rest VC2007 Private equity funds accounted for about one-fifth of M&A activity(Axelson et.al.Aug 2007)In 2006 Buyouts transactions totaled$233 billion in US and$151 billion in EuropeIn 2007 Buyout funds had raised$250 billion that had yet to be investedPrivate Companies 2.3%of public companies,Private Equity and Buyouts,1,Private Equity and Buyouts,2,Private Equity and Buyouts,3,Private Equity Funds,Mainly limited partnershipsGeneral PartnersCreate funds and raise capitalReceive feesManagement fees for managing the funds Typically about 2%Transaction fees when deals are doneMonitoring fees for monitoring management of firms owned by the fundsAlso receive a fraction of returns generated by the funds(usually 20%)Also invest in the funds(about 1%of the investment),Private Equity and Buyouts,4,Private Equity Funds,Limited PartnersMajority investment is by pension fundsInsurance companies Wealthy individualsEndowmentsSupply capital to the funds,Private Equity and Buyouts,5,Private Equity Deals,The deals Acquisitions of firms which are held and managed by the fundsSome are public firms Some are already privateSome are divisions of public firmsHighly levered transactions(60%-90%debt)Usually held for a fixed periodExit(“harvest”)by IPO Exit(“harvest”)by sale to another companyFinancial buyersTrade buyers,Private Equity and Buyouts,6,Private Equity Firms2008 Fortune RankingBased on recently raised funds,CarlyleGeneral partnershipRecent(08)buyout funds raised$39 billion1000 employees,$81 billion under managementBlackstonePublicly tradedRecent buyout funds raised$34.5 billion1200 employees,7,Private Equity and Buyouts,Private Equity FirmsFortune Rankingbased on recently raised funds,3.KKRFounded in 1976 since then 160 transactions;enterprise value$410 billionRecent buyout funds raised$27.3 billion4.BainRecent buyout funds raised$21 billionMore than$50 billion under management,8,Private Equity and Buyouts,Private Equity FirmsFortune Rankingbased on recently raised funds,5.Warburg PincusFounded in 1966Recent buyout funds raised$21billion6.Texas Pacific Group(TPG)Recent buyout funds raised$15.2 billion7.Advent InternationalRecent buyout funds raised$13.3 billion,9,Private Equity and Buyouts,Private Equity FirmsFortune Rankingbased on recently raised funds,8.ApolloRecent buyout funds raised$12.5billion9.ProvidenceRecent buyout funds raised$12 billion10.First ReserveRecent buyout funds raised$12 billion11.Silverlake Recent buyout funds raised$10.4 billion,10,Private Equity and Buyouts,Private Equity FirmsFortune Rankingbased on recently raised funds,12.Thomas H.LeeRecent buyout funds raised$10.1billion13.Madison DearbornRecent buyout funds raised$10 billion14.Hellman&FriedmanRecent buyout funds raised$8.4 billion15.Cerberus Recent buyout funds raised$7.5 billion,11,Private Equity and Buyouts,Notes on LBOs and Private Equity,12,LBOs in the 1980s,These transactions were prominent in the mid 1980s Market became significant in 1984The number of transactions grew in number and value until 1989Average LBO in 1981$39.4 million(Source for these and later numbers:Mergers,Acquisitions and Corporate Restructurings,by Gaughan)Average LBO in 1987$137.4 million,Notes on LBOs and Private Equity,13,1980s(contd),Peak year for value of transactions was 1988 Most transactions in 1989growth and decline tied to growth and decline of“Junk Bond”financing84-87:15,000 mergers and acquisitions worth$640 billionincluded 1,100 LBOs worth$120 billion,Notes on LBOs and Private Equity,14,1980s(contd),1987:LBOs accounted for 7%of M&A activity by number of transactions1987:21.3%of M&A activity by value of transactionsBiggest M&A deal,RJR,valued at$24.6 billion,was an LBO Many did involve management buyouts and resulted in the firm going private,Notes on LBOs and Private Equity,15,1990s,Completed deals(Institutional Investor,January,2000)1990:$12.2 billion,6.7%of M&As1998:$5.7 billion,.4%of M&As,Notes on LBOs and Private Equity,16,FromGaughan,Mergers,AcquisitionsAndCorporateRestructuring,3rd Edition,Wiley,2002,Notes on LBOs and Private Equity,17,Notes on LBOs and Private Equity,18,FromGaughan,Mergers,Acquisitions and Corporate Restructuring,3rd Edition,Wiley,2002,Notes on LBOs and Private Equity,19,Recent Years,October 3,05 Report of Thompson Financial2005 deals to date:Included SunGard$11.3 billion deal that closed in August.Purchased by a consortium of Blackstone,KKR,Silver Lake and others Also included$8.8 billion buyout of Toys“R”Us by KKR,Bain Capital and Vornado RealtyIncluded another$3.8 deal and 10 others over$1 billion in third quarter of 05,Notes on LBOs and Private Equity,20,Recent Situation,October 3,05 Report of Thompson Financial2005 Buyout of GM”S Hertz unit for$15 billion Buyers are Clayton,Dubilier and Rice,The Carlyl Group and Merrill Lynch Global Private EquityAll sectors represented,Notes on LBOs and Private Equity,21,Recent large deals,Notes on LBOs and Private Equity,22,Recent large deals,Notes on LBOs and Private Equity,23,Recent large deals,Notes on LBOs and Private Equity,24,Economist 11/23/06,2,677 2005 deals valued at$326.5 Billion2006 to date$542 Billion in dealsReturn over 13%during the past twenty years,Notes on LBOs and Private Equity,25,Notes on LBOs and Private Equity,26,Beefits f,From“The Benefits of Private Equity,2005 Update,”Center for International securities and DerivatviesMarkets,University of Massachusetts,Notes on LBOs and Private Equity,27,Target Industries“80s,Paper products TobaccoOil and GasPublishingRetailingBasic manufacturing,Notes on LBOs and Private Equity,28,80s Targets,Often firms with assets that could be used to secure the debt LBOs more prominent in capital intensive manufacturing industries than in the services sector,Notes on LBOs and Private Equity,29,Recent Past,October 4,04 Report of Thompson FinancialBuyouts in all sectorsHealthcare,satellites,chemicalsReturn to traditional safer targets rather than tech or telecomProminence of“club deals”,Notes on LBOs and Private Equity,30,Recent Past,September 16,2005 Report of Dow Jones Capital Markets Current Targets are large stable companies,Notes on LBOs and Private Equity,31,80s Capital Structure,Equity/Assets between 5%and 20%in 80s;between 20%and 30%in 90sshort term debt:5-20%from commercial bankslong term and subordinated debt:40-80%from Life Insurance companies,some banks and LBO funds,Notes on LBOs and Private Equity,32,Recent Capital Structures,September 16,05 Report of Dow Jones Capital Markets Equity component 26%in second quarter 05 was 37%3 years agoAsset backed debt:Hertz deal fleet will be used as collateral,Notes on LBOs and Private Equity,33,Recent Capital Structures(contd),October 4,04 Report of Thompson FinancialQuotes S&P debt to EBITDA multiple of 4.5 As high as 8.8 in 80s 5.8 in 90s,Notes on LBOs and Private Equity,34,Why go private?,Costs of being publicly tradedSEC registration and cost of filingslarge for small firms;inconsequential for large firms estimated at$100,000 in 1976 study($285,000 in 1995 dollars),Notes on LBOs and Private Equity,35,Why go private?(contd),Benefits of Going Private and of Concentrated OwnershipBetter Management managements and shareholders interests are more closely alignedmore informed shareholders:improved monitoring,Notes on LBOs and Private Equity,36,Why go private?(contd),Improved management incentivesmanagement has a significant ownership stake in the firm5-10%:Vishny Schleiffer studyInvestment banks,private equity firms and institutions with high stakes have representatives on the management team and closely monitor managers Accompanying leverage gives management an incentive to avoid default,Notes on LBOs and Private Equity,37,Why an LBO?,In MBOs management doesnt have the capital to buy the firmBenefits of Debtinterest deductibility and tax laws incentives created by debt,Notes on LBOs and Private Equity,38,Why an LBO?(contd),In many cases assets were divested to reduce debtbreakup“LBOs”In the 80s LBOs 43%of the assets acquired were sold off,Notes on LBOs and Private Equity,39,Objections to LBOs,Creates focus on the short term to pay off creditorsHigh leverage reduces access to capital marketsReduces the firms flexibility to respond to market changes with new investments Eliminates growth potential,Notes on LBOs and Private Equity,40,What makes a good LBO candidate?,predictable,stable,non-cyclical cash flow strong market position“mundane product lines”;not high tech industries mature industry where investments for growth are not required:wont need to raise capital for growth,Notes on LBOs and Private Equity,41,What makes a good LBO candidate?(contd),strong managementpotential for improving cash flow through simple management innovations(Norris example:Vishny Schleiffer)low preexisting debt;absence of encumbered assets,Notes on LBOs and Private Equity,42,What makes a good LBO candidate?(contd),presence of liquid assets which can be divestedpresence of assets that can be used as collateral,Notes on LBOs and Private Equity,43,What makes a good LBO candidate?(contd),low cost of financial distress:operation wont become impossible in financial distresse.g.,supplies can be assured in case of financial distress(became a problem in the Campeau buyout of Macys),Notes on LBOs and Private Equity,44,What makes a good LBO candidate?(contd),Other examplesAirlines in financial distress lose business because travelers fear inconvenience of service interruptions;also fear of losing frequent flyer milesDurable goods suppliers in financial distress lose customers who fear problems with future maintenance and service if the firm ultimately fails,Notes on LBOs and Private Equity,45,Sources of Gains,Tax savings because of debt(Kaplan study:predictable and captured by pre-buyout owners)Tax savings because of asset write-ups leading to increased depreciation:Vishny Schleiffer,Notes on LBOs and Private Equity,46,Sources of Gains(contd),Improved management:Vishny Schleiffer examples:Norris,Converse and Gibson Greeting CardsKaplan found increases in operating profits,reductions in inventory relative to industry averages over two yearsKaplan:45%of large 1979-1986 LBOs return to public ownership before 1990,Notes on LBOs and Private Equity,47,Sources of Gains(contd),Holthausen and Larcker(1996 study)90 reverse LBOs(IPOs of firms that had been taken private in LBOs)improved operating income/assets and cash flow/assets while private;continues for 4 fiscal years after the IPOless working capital and cap-ex before IPO;rise after IPOreduction in leverage at IPO doesnt reduce performance,reduction in management stake does lower performance,Notes on LBOs and Private Equity,48,Sources of Gains(contd),Workers lossesLabor contracts renegotiated,Notes on LBOs and Private Equity,49,Sources of Gains(contd),Bondholders lossesRJR and Macys casesIn general not a major source of gainevent risk:credit rating of outstanding bonds falls solution covenants such as“poison puts”:Issuer gives creditors a put on the bond,Notes on LBOs and Private Equity,50,What Happened?,Kaplan 91 study:170 1979-86 LBOs 62%still private24%purchased by publicly owned firms14%went public and remained independentmedian time private 2.5 years39%insider holding,Notes on LBOs and Private Equity,51,What Happened?(contd),93 Kaplan-Stein study of 124 highly levered MBOs plus 12 Highly Leveraged Recapitalizations41 80-84 LBOs1 default,Notes on LBOs and Private Equity,52,What Happened?(contd),83 LBOs in the period 85-8922 defaults by 914 more defaults after 91Characteristics of deals for firms that defaulted high price/cash flow and D/E ratiosriskier industriesmore“junk debt”larger up front fees,Notes on LBOs and Private Equity,53,What Happened?(contd),Andrade-Kaplan 98 studied the 31 firms that had defaulted by 1995 from Kaplan and Steins sample of 136Found that on average the original transaction had increased the firms value even after the defaultAlthough these firms were“financially distressed,”none of these firms were“economically distressed”since each had positive operating margins,Notes on LBOs and Private Equity,54,What Happened?(contd),1991 Gertner-Scharfstein Journal of Finance study“by June 1990,156(24%)of the 662 companies that issued high yield bonds between 1977 and 1988 had either defaulted,gone bankrupt or restructured their public debt.The face value of these distressed bonds amounts to nearly$21 billion.”,Notes on LBOs and Private Equity,55,References,Andrei Schleifer and Robert Vishny,“Management Buyouts as a Response to Market Pressure,”In A.Auerbach,editor,Mergers and Acquisitions,University of Chicago Press,1987.Steve Kaplan,“The Effects of Management Buyouts on Operating Performance and Value,”Journal of Financial Economics,October,1989.,Notes on LBOs and Private Equity,56,References,Steve Kaplan,“The Staying Power of Leveraged Buyouts,”Journal of Financial Economics,October,1991.Steve Kaplan,“The Staying Power of Leveraged Buyouts,”Journal of Financial Economics,October,1991.,Notes on LBOs and Private Equity,57,References,Robert Gertner and David Scharfstein,“A Theory of Workouts and the Effects of Reorganization Law,”Journal of Finance,September,1991Steve Kaplan and Jeremy Stein,“The Evolution of Buyout Pricing and Financial Structure(or What Went Wrong)in the 1980s,”Quarterly Journal of Economics,May,1993.,Notes on LBOs and Private Equity,58,References,Robert Holthausen and David Larcker,“The Financial Performance of Reverse Leveraged Buyouts,”Journal of Financial Economics,November,1996.Gregor Andrade and Steve Kaplan,“How Costly is Financial(not Economic)Distress?Evidence from Highly Leveraged Transactions that Became Distressed,”Journal of Finance,October,1998.,Notes on LBOs and Private Equity,59,References,Patrick Gaughan,Mergers,Acquisitions and Corporate Restructurings,Third edition,Wiley,2002.,Notes on LBOs and Private Equity,60,Bankruptcy Law Summary,Chapter 7:liquidation supervised by trusteeChapter 11:Reorganization and operation under existing management during proceedings Debtors or creditors can petition for bankruptcyAutomatic stay:protection from pre-existing creditors,Notes on LBOs and Private Equity,61,Bankruptcy Law Summary(Contd),Proceeds distributed according to priority of claims under chapter 7Chapter 11 reorganizations for firms that are only experiencing short term problemsdebtor in possession manages firm subject to need for approval for some decisions such as major new investmentsmajority(2/3 rds of value must also be in favor)voting within creditor classes,Notes on LBOs and Private Equity,62,Chapter 11 Reorganizations(Contd),all impaired classes including shareholders must vote in favor except those with no obvious valuable claim.Possibility of“cramdown”by the court on dissenting classes:subject to“fairness”tax forgiveness of reduction in creditors claims(would be a taxable