Marketing Research Basics

'LEVERAGED BUYOUT - LBO'

LBO is acquisition of a company using large amounts of debt (bonds or loans). Since the D/E ratio is high, these bonds are called junk bonds. To secure debt often assets of both companies are used as collateral. Allows large acquisitions without committing large amounts of capital

HOSTILE TAKEOVER: if the LBO uses the assets of the the company being acquired to secure the debt required. It’s risky because, if the combined cash flows of acquirer and acquired don’t meet debt obligations, the acquired will go into loss

LEVERAGED RECAPITALISATION

The company in order to avoid take-over takes up a large amount of debt to make itself unattractive. It recapitalizes its assets and liabilities such that it increases its debt amount to pay dividends and/ or it repurchases its shares. This is called shark repellant because it takes up large debt amounts

White knight is a savior company that is sought when a hostile takeover is in the offing. The white night usually lets the management continues, gives time for negotiation or gives a better deal to the investor

Pacman defense: in case of hostile takeover, the target company tries to get the stock of the attacking company to counter the bid.

Tender Offer: An offer to purchase shares at a premium above the market price

Poison pill: strategies to prevent hostile takeovers.

1. ESOP that kicks in if acquired ( makes it difficult to retain good employees)
2. Golden parachute: benefits to management if the firm is acquired
3. Issueing preferred stocks that are convertible to common stock if acquired
4. Complicated byelaws that delay board of directors election etc to create difficulties to acquiring firms
5. Issueing more stocks to existing shareholders at a discount

Poison put: the right of a bond holder to redeem before maturity in case of a hostile takeover