,Control, Governance, and Financial Architecture,Principles of Corporate FinanceSeventh Edition Richard A. Brealey Stewart C. Myers,Slides by Matthew Will,Chapter 34,McGraw Hill/Irwin,Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved,Topics Covered,Leveraged Buyouts, Spin-offs and Restructurings Fusion and Fission in Corporate Finance Conglomerates Control and Governance,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 to actions taken by shareholders to influence corporate decisions. Financial architecture - the financial organization of the business.,Leveraged Buyouts,The difference between leveraged buyouts and ordinary acquisitions1. 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.,Leveraged Buyouts,The three main characteristics of LBOs1. High debt 2. Incentives 3. Private ownership,Leveraged Buyouts,10 Largest LBOs in 1980s and recent examples,Spin-offs, etc.,Spin off - debut independent company created by detaching part of a parent companys 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.,Privatization,Motives for Privatization1. Increased efficiency 2. Share ownership 3. Revenue for the government,Privatization,Examples of Privatization,Conglomerates,The largest US conglomerates in 1979,Ownership of Daimler Benz,Bayerishe Landesbank,Robert Bosch,Komet Automobil Beteiligungsges,Dresdner Bank,25% 25% 25% 25%,25% 25% 50%,28.3% 14% 25.23% 32.37%,Daimler Benz AG,Japanese Bank Ownership,Sumitomo Corporation,Sumitomo Trust,Sumitomo Bank,3.4%,5.9%,4.8%,1.8%,3.4%,2.4%,Private Equity Partnership,Investment Phase,Payout Phase,General Partner put up 1% of capital,General Partner get carried interest in 20% of profits,Limited partners put in 99% of capital,Limited partners get investment back, then 80% of profits,Investment in diversified portfolio of companies,Sale or IPO of companies,Partnership,Partnership,Company 1,Company 2,Company N,Mgmt fees,