Forms of Restructuring: Leveraged buyout; Buyback of securities

Leveraged Buyouts (LBOs) Explained

A leveraged buyout (LBO) is a financial transaction where a company is acquired using a significant amount of borrowed money (debt), often secured by the assets of the company being acquired. Essentially, the acquirer uses very little of their own capital and instead relies heavily on debt financing.

Advantages of Leveraged Buyouts

LBOs can offer several advantages to both buyers and sellers:

Advantages for Buyers:

• Lower Equity Investment: Buyers can acquire a company without committing a large amount of their own capital. This allows them to pursue larger acquisitions and potentially earn higher returns on their invested capital.
• Increased Rate of Return: Because of the smaller equity investment, even moderate increases in the value of the acquired company can translate into significant returns for the buyer. The leverage magnifies both gains and losses.

Advantages for Sellers:

• Higher Sale Price: LBOs can sometimes result in a higher sale price for the seller. The availability of debt financing allows buyers to offer more than they might be able to without leverage.
• Access to Funding: If a buyer doesn't have sufficient cash on hand, an LBO structure can provide the necessary financing to complete the deal. This can be especially helpful if the seller is looking for a quick sale.

Share Repurchases (Buybacks)

Share repurchases, also known as buybacks, are a corporate action where a company buys back its own outstanding shares from the market. This can be a significant restructuring tactic with various motivations and potential consequences.

Objectives of Share Repurchases

Companies undertake share repurchases for a variety of reasons:

• Increase Earnings Per Share (EPS): By reducing the number of outstanding shares, the company's earnings are distributed over a smaller base, potentially increasing EPS. This can make the company appear more profitable to investors.
• Enhance Shareholder Value: Repurchases can signal management's belief that the company's shares are undervalued. This can boost investor confidence and potentially drive up the share price. It can also increase return on capital and net worth.
• Provide Liquidity: Buybacks can offer an exit strategy for shareholders who wish to sell their shares, especially if the trading volume is low.
• Consolidate Ownership: Repurchases can increase the ownership stake of remaining shareholders.
• Defend Against Takeovers: By reducing the number of outstanding shares, buybacks can make it more difficult for a hostile entity to acquire a controlling stake in the company.
• Return Excess Cash to Shareholders: Instead of paying dividends, companies might choose to repurchase shares as a way of returning value to shareholders. This can be more tax-efficient for some investors.
• Optimize Capital Structure: Buybacks can be used to adjust the company's capital structure, potentially making it more attractive to investors.
• Support Share Price: In times of market downturn, buybacks can be used to stabilize or support the company's share price.
• Efficient Capital Allocation: Repurchases can be a way to deploy excess cash when the company lacks other profitable investment opportunities.

Methods for Buyback of Securities

Companies can repurchase shares through various methods:

• Proportionate Buyback: The company offers to buy back a certain percentage of shares from all existing shareholders.
• Open Market Purchase: The company buys back shares on the open market, just like any other investor.
• Tender Offer: The company makes a formal offer to shareholders to buy back their shares at a specific price.
• Purchase from Odd Lots: Buying back shares from "odd lots" (small holdings of shares, typically less than a marketable lot) can simplify share administration.
• Employee Stock Options/Sweat Equity: Repurchasing shares issued to employees through stock option plans or sweat equity programs.

Potential Drawbacks of Share Repurchases

• Missed Investment Opportunities: Using cash for buybacks might mean foregoing investments in research and development, acquisitions, or other initiatives that could generate future growth.
• Negative Market Signal: If not communicated effectively, buybacks could be misinterpreted by the market as a sign that the company lacks promising investment opportunities.
• Debt Burden: If the buyback is financed with debt, it can increase the company's financial risk.
• Manipulation Concerns: There are concerns that buybacks can be used to artificially inflate share prices, which can be detrimental to long-term investors.