Leveraged buyout in capital operation
First, leveraged buyouts.
Leveraged buyout refers to a kind of capital operation activity in which a company uses financial leverage to raise funds mainly through borrowing when it is carrying out structural adjustment and asset reorganization.
The difference between leveraged buyouts and general buyouts is that the liabilities in buyouts are mainly paid by the acquirer's funds or other assets, while the liabilities generated by leveraged buyouts mainly depend on the future operating benefits of the acquired enterprises, and are paid by selectively selling some of the original assets, and the investors' funds only account for a small part. Usually 10%-30%. Leveraged buyouts appeared in the United States in the 1960s, and then became popular in North America and Western Europe. At first, leveraged buyout transactions were only carried out in small-scale companies. However, after 1980s, with the intervention of banks, insurance companies, venture capital and other financial institutions, it promoted the development of leveraged buyout, and because leveraged buyout transactions can make stock holders and lending institutions gain huge profits, it may also make company managers become company owners, thus developing rapidly.
The characteristics of leveraged buyout are: (1) The buyer can get a large amount of bank loans to buy the target enterprise only by investing a small amount of its own funds. (2) Buyers can obtain tax incentives through leveraged buyouts; Interest expenses on capital can be deducted before tax. For the prey enterprises, if there are losses before being acquired, they can be postponed to offset the profits after the acquisition, thus reducing the income base. (3) High debt ratio will encourage operators and investors to improve their management and economic benefits.
In order to properly use leveraged buyout, we must fully analyze the industrial environment, profitability, asset composition and utilization of the target company according to the company's situation, scientifically choose strategic methods, reasonably control financing risks, optimize the allocation of various resources, and maximize capital appreciation.
Second, the strategic approach.
As the specific application of leveraged buyout, there are eight strategic ways to choose from.
First, debt holding. That is, the acquirer and the bank agreed to repay the long-term debt of the prey enterprise exclusively as their actual investment, and part of the bank loan was transferred to the equity of the prey as the capital of the acquirer, which was enough to achieve the controlling position.
Second, continuous mortgage. In M&A transactions, the working capital of the acquirer is not needed, but the assets of the acquirer are used as collateral to obtain a considerable amount of loans from banks. After the merger is successful, the assets of the prey enterprise are used as collateral to apply for new corporate loans from the bank, and so on.
Third, joint ventures and mergers. If the acquired enterprise is weak, it can rely on its own operating advantages and reputation to form a larger capital with other joint ventures first, and then merge the larger enterprises.
Fourth, mutual benefit with the shareholders of prey enterprises. If the prey enterprise is a joint-stock company, its major shareholders often become the acquisition targets. Give them relevant benefits to gain their support, and mergers and acquisitions can often get twice the result with half the effort.
Fifth, when lending money to financial institutions to buy enterprises, financial institutions can be given greater preferential interest rates, but in exchange for longer repayment. This is the combination of sweetness and time difference.
Sixth, issue junk bonds with prey enterprises as collateral. The acquirer issues junk bonds with the important assets of the acquired party as collateral, and the funds raised are used to pay the property owners of the acquired enterprise.
Seventh, the assets of prey enterprises are reset and listed overseas. In this way, we will first raise funds to acquire and merge more than 565,438+0% equity or become the largest shareholder, and then reorganize the assets of the prey enterprises. On this basis, we will register companies overseas and prepare new financial reports, so that we can take advantage of the flexibility of overseas listed companies in examination and approval to collect large sums of money back and forth.
Eighth, installment payment. "Borrow" the credit means of deferred payment to achieve the purpose of merger. The usual practice is to evaluate the asset value of the prey enterprise. The acquirer acquires 565,438+0% of its shares and pays off the money in installments within several years.
Third, risk control.
Leveraged buyout financing uses the principle of financial leverage. It must be noted that financial leverage is a double-edged sword. When the return on assets is greater than the interest rate of infiltrated funds, increasing financial leverage can greatly improve the earnings per share of joint-stock enterprises. On the other hand, if the enterprise is not well managed, its net income and earnings per share will decrease sharply. Buyers can't ignore the risks of leveraged buyouts. Because most of the funds needed for leveraged buyouts are loans, if the company's operating conditions cannot be improved well after the acquisition, debt financing will become the burden of enterprises, and even affect the survival of enterprises in serious cases.
Specifically, this kind of debt financing has the following risks:
1. Repayment risk, that is, the possibility that the enterprise cannot repay the principal as required and cause economic losses.
2. Payment cost risk, that is, the possibility that the enterprise can't pay the due interest or dividend according to the regulations and cause economic losses.
3. Refinancing risk, the enterprise can't raise the required funds in time, or the refinancing cost increases.
Possibility of economic loss.
4. Financial risk, that is, the risk that equity investors may suffer losses due to debt financing.
The most important thing to control risks is to determine the level of debt ratio allowed by enterprises. Under the premise of fixed equity capital, the debt ratio is directly determined by the amount of debt. There are three kinds of liabilities for enterprise risk control and financial decision-making.
The critical limit of bankruptcy, that is, the limit of liabilities, is the net assets of the enterprise. Once these assets are insolvent, they will stop paying back.
2. Liabilities at the breakeven point. Enterprises must use earnings before interest and tax to offset the interest cost of liabilities. That is, the income before interest and tax/debt interest rates.
3. The appropriate amount of liabilities to realize the expected earnings per share of the enterprise.
EPS=(I*R-D*i)(l-t)/n
EPS: Expected earnings per share I: Total investment R: Estimated investment profit rate before interest and tax D: Total liabilities.
I: debt interest rate T: income tax rate N: number of ordinary shares
Fourthly, the application of leveraged buyout in China.
With the development of China's economy and the establishment of the market system, the reorganization of enterprise assets has been highly valued by the state and local governments and is being actively implemented. Enterprises are also restructuring and optimizing resource allocation. Because the proportion of listed companies in China is too small, it is difficult for most enterprises to achieve the purpose of mergers and acquisitions through the stock market. On the other hand, M&A needs a lot of financial support, and most enterprises lack sufficient self-owned funds for M&A.. At the same time, in order to support enterprises, the loan interest rate has been lowered again and again, allowing enterprises to use loans to raise funds. This laid the foundation and created conditions for the financing of leveraged buyouts.
At present, although leveraged buyout has not been widely recognized and accepted by all parties and the relevant laws and regulations are not perfect, there have been many successful cases. For example, the "China policy phenomenon" has been widely concerned and aroused strong repercussions. On the one hand, Hong Kong Zhongce Group Co., Ltd. reduces capital expenditure through international financial capital, on the other hand, it adopts the methods of reducing payment, installment payment and deferred payment. And buy state-owned enterprises in China on a large scale, and then sell the shares of state-owned enterprises purchased. Wuhan Dida Group once merged Wuhan Match Factory by installment, which is a 98-year-old state-owned enterprise with twice its size. Wait a minute. It can be predicted that with the in-depth development of China's property rights system reform and industrial structure adjustment, leveraged buyout will surely attract widespread attention.