Anatomy of a Leveraged Buyout - NYU Stern School of Business

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Harman’s existing debt The market value of interest bearing debt can be estimated: • In September 2007, Harman had book value of debt of $76.5 million, interest expenses of $9.6 million, a current cost of borrowing of 4.85% and an weighted average maturity of 4 years. 1 Estimated MV of Harman Debt = (1" (1.0485) 9.6 4 # & % ( 76.5 % ( + = $97 million 4 % .0485 ( (1.0485) $ ' Harman has lease commitments stretching into the future Year Commitment Present Value 1 $43.50 $41.49 2 $40.90 ! $37.20 3 $38.50 $33.40 4 $23.90 $19.78 5 $19.20 $15.15 6-? $31.45 $126.58 Debt Value of leases = $273.60 Debt outstanding at Harman =$ 97 + $ 274= $ 371 million Aswath Damodaran 18
Limitations of the Cost of Capital approach It is static: The most critical number in the entire analysis is the operating income. If that changes, the optimal debt raito will change. It ignores indirect bankruptcy costs: The operating income is assumed to stay fixed as the debt ratio and the rating changes. Beta and Ratings: It is based upon rigid assumptions of how market risk and default risk get borne as the firm borrows more money and the resulting costs. Aswath Damodaran 19
Page 1 and 2: Anatomy of a Leveraged Buyout: Leve
Page 3 and 4: One Example: The Harman Deal Pre-de
Page 5 and 6: I. Value and Leverage Aswath Damoda
Page 7 and 8: The fundamental question: Does the
Page 9 and 10: 1. Tax Benefit: Debt: The Basic Tra
Page 11 and 12: The Miller-Modigliani Theorem In a
Page 13 and 14: Tools for assessing the effects of
Page 15 and 16: How the debt trade off manifests it
Page 17: Harman : Working out the mechanics.
Page 21 and 22: Estimating the Distress Effect- Har
Page 23 and 24: c. The APV Approach to Optimal Capi
Page 25 and 26: Harman: APV at Debt Ratios Based up
Page 27 and 28: The macro environment has a relativ
Page 29 and 30: II. The Value of Control Aswath Dam
Page 31 and 32: What is the value of control? The
Page 33 and 34: Reinvestment Rate 42.00% Current Ca
Page 35 and 36: Reinvestment Rate 70.00% Current Ca
Page 37 and 38: Implications for the control premiu
Page 39 and 40: III. The Public/ Private Transition
Page 41 and 42: Perceived Risk: Private versus Publ
Page 43 and 44: Why go private? Agency issues: The
Page 45 and 46: Good candidates for going private..
Page 47 and 48: Leverage and Control The good: A f
Page 49 and 50: Leverage and Going Private The Goo

Anatomy of a Leveraged Buyout - NYU Stern School of Business

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