C HAPTER 12 C ASE STUDY T HE B UYOUT B INGE Nguyen Le Tuong Vi MA2N0223 1

T ABLE OF C ONTENTS  Definition  Brief summarize of the case study’s content  Question & Answer 2

D EFINITION What is Leverage? Results from the use of fixed-cost assets or funds to magnify returns to the firm’s owner. What is Capital Structure? The mix of long-term debt and equity maintained by the firm. 3

What is private equity? An asset class consisting of equity securities and debt in operating companies that are not publicly traded on a stock exchange. A private equity investment will generally be made by a private equity firm, a venture capital firm or an angel investor. 4 D EFINITION (C ONT.)

BRIEF SUMMARIZE OF THE CASE STUDY ’ S CONTENT  The 1980s: the decade of leveraging, or adding debt to capital structure.  The 1990s: the decade of de-levering; much of the debt binge had to be reversed.  2007: the deals were heating up again. The acquirers this time were private-equity firms. Renewed concern arose that companies might be adding debt to the balance sheet as a defensive measure. 5

 Money has poured in by the billions as market returns have been beaten by private-equity funds. Ex: U.S. private-equity firms collectively were sitting on a $400 billion war chest. That cash + leverage → private-equity’s buying power increases fourfold or fivefold. 6 BRIEF SUMMARIZE OF THE CASE STUDY ’ S CONTENT (C ONT.)

 The danger is that with that much money available, and some deals will simply be so expensive that making them pay off could be difficult. 7 Ex: 1998, the Chrysler buyout by Germany’s Daimler Corporation: the initial deal was for $36 billion. 2007, Cerebus Capital Management LP (a private-equity firm) bought 80% of Chrysler Group from Daimler Chrysler AG for a mere $7.4 billion.

If a firm's cost of capital decreases, it is less expensive for them to raise money. This will allow them to achieve greater returns on future investments, and undertake new investments which may not have been previously profitable under their old cost of capital. Q UESTION : W HAT EFFECT WOULD A DECREASED COST OF CAPITAL HAVE ON A FIRM ' S FUTURE INVESTMENTS ? 8

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