Slides by

1
Principles of Corporate Finance Brealey and Myers
Sixth Edition

• Control, Governance, and Financial
  Architecture

• Slides by
• Matthew Will

Chapter 34

• The McGraw-Hill Companies, Inc., 2000

Irwin/McGraw Hill
2
Topics Covered

• Leveraged Buyouts
• Spin-offs and Restructuring
• Conglomerates
• Private Equity Partnership
• Control and Governance

3
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.

4
Leveraged Buyouts

• The difference between 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.

5
Leveraged Buyouts

• The three main characteristics of LBOs
• 1. High debt
• 2. Incentives
• 3. Private ownership

6
Leveraged Buyouts
10 Largest LBOs in 1980s and 1997/98 examples
7
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.

8
Privatization

• Motives for Privatization
• 1. Increased efficiency
• 2. Share ownership
• 3. Revenue for the government

9
Privatization
Examples of Privatization
10
Conglomerates
The largest US conglomerates in 1979
11
Private Equity Partnership
Investment Phase
Payout Phase
General Partner put up 1 of capital
General Partner get carried interest in 20 of
profits
Mgmt fees
Limited partners get investment back, then 80 of
profits
Limited partners put in 99 of capital
Partnership
Partnership
Company 1
Company 2
Investment in diversified portfolio of companies
Sale or IPO of companies
Company N