Anatomy of a Leveraged Buyout - NYU Stern School of Business

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Why go public? To raise capital: It is true that private companies have access to new sources of capital (private equity, venture capital) that might not have been accessible decades ago, but it is usually less expensive to raise equity in public markets than from private hands. To monetize value: Even if a private firm is valuable, the value is an abstraction. Being traded puts a “price” on the company, allowing its owners to get both bragging rights and financial advantages. To bear risk more efficiently : Much of the risk in any business is firm-specific and diversifiable. Private business owners are often invested primarily or only in their businesses. The marginal investors in a public company are more likely to be diversified and price the business based on the risks that they perceive. Aswath Damodaran 40
Perceived Risk: Private versus Public Private Owner versus Publicly Traded Company Perceptions of Risk in an Investment Private owner of business with 100% of your weatlth invested in the business Total Beta measures all risk = Market Beta/ (Portion of the total risk that is market risk) Is exposed to all the risk in the firm Demands a cost of equity that reflects this risk 80 units of firm specific risk 20 units of market risk Market Beta measures just market risk Eliminates firmspecific risk in portfolio Demands a cost of equity that reflects only market risk Publicly traded company with investors who are diversified Aswath Damodaran 41
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 and 18: Harman : Working out the mechanics.
Page 19 and 20: Limitations of the Cost of Capital
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: III. The Public/ Private Transition
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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