catalogue
Basic information of 1
brief introduction
wake up
operation sequence/order
Lever M&A is in China
Two benefits
It has an incentive effect on managers.
Other benefits
3 Applicable conditions
Stable cash flow.
Stable and experienced management.
There is a lot of room to reduce costs.
Shareholders' equity of a certain scale.
Reduce debt before acquisition.
Non-core industries that are easy to separate.
Basic information of 1
brief introduction
Leveraged buyout originated and became popular in America. Today, in the changing China, its vitality has begun to show. Leverage M&A means that the acquirer obtains the property rights of the target company mainly through borrowing, that is, completes M&A activities with the help of financial leverage, so it is called "leverage M&A". Leveraged M&A funds come from venture capital, which is called venture leveraged M&A.
wake up
The general sense of "enterprise merger and acquisition" has a long history in the United States, but why did leveraged mergers and acquisitions revive in the United States from the late 1970s? What is the reason and background of its rise? Generally speaking, it is mainly due to some important changes in the economic environment of the United States in the late 1970s and early 1980s.
(1) Inflation in this period has a great influence on economic activities. Inflation has a direct impact on the value and use of company assets. First, inflation makes the nominal value of a company's assets exceed its historical cost. 198 1 American economic recovery tax act (ERTA) allows enterprises to adopt accelerated depreciation for newly purchased old assets and brand-new assets. Enterprises can take advantage of this opportunity to acquire assets and accelerate depreciation from the beginning on the basis of a large base. Moreover, according to the tax law of the United States 1986 before the tax reform, full acquisition is more conducive to corporate tax payment, because the tax law stipulates that enterprises in liquidation can be exempted from paying capital gains tax when selling assets. Second, inflation has reduced the actual debt burden of enterprises. Because the interest rate of debt is fixed and does not rise with the rise of price index, we can obtain some benefits brought by inflation by borrowing, and then transfer the debt burden.
(2) The change of tax law is another important reason to promote leveraged merger. In 1950s and 1960s, due to the huge difference between the federal income tax rate (applicable to the company's operating income) and the capital gains tax rate, comparatively speaking, the United States has a high federal income tax rate and a low capital gains tax rate, which greatly promoted the prosperity of the stock market. After the 1970s, the state adjusted the tax rate: the income tax rate was lowered to 50%, and the upper limit of the capital gains tax rate was raised to 35%. The narrowing of the tax rate gap between the two made stock trading in the "zero growth" period in the 1970s, and many stocks had to be sold at prices lower than the book value of the company. The listing and issuance of stocks are also inactive, and enterprises mainly borrow money for financing. In addition, persistent inflation and people's expectations of inflation make borrowing more cost-effective. The economic recovery tax law of 198 1 year makes ESOP more attractive. Employee stock ownership plan (ESOP) is a plan to encourage employees to buy and participate in stocks and enhance their awareness of participation. With this plan, you can purchase company shares from bank loans and enjoy preferential interest rates and principal repayment. Therefore, it is more profitable for the company to borrow through the employee stock ownership plan.
(3) M&A activities need huge funds, and loans from financial institutions are an important source of M&A funds. Due to the government's deregulation of finance, the competition among financial institutions has intensified, and the cost of obtaining funds for financial institutions has also increased, which makes banks and other financial institutions strive to find lending channels. Before 1978, only a few large insurance companies provided loans for leveraged mergers and acquisitions. Now, various financial institutions have set up special M&A departments. It is estimated that 90% of the funds needed for mergers and acquisitions are loans from financial institutions, and the number and types of loans are increasing.
To sum up, inflation, tax system modification and adequate financial market are the three macroeconomic conditions to promote leveraged mergers and acquisitions. In order to adapt to the macroeconomic changes, enterprises have taken measures to gain benefits from it, and leveraged mergers and acquisitions came into being.
The difference between risk leverage M&A and general leverage M&A is that the debt funds of the former come from venture capital funds instead of bank loans. Moreover, the capital utilization of risk leveraged buyout is also different from that of general leveraged buyout, which is used for venture enterprises with innovation maturity and potential market.
operation sequence/order
Taking the typical form of leveraged mergers and acquisitions, that is, listed companies are transformed into non-listed companies through leveraged mergers and acquisitions as an example, this paper introduces the main process of leveraged mergers and acquisitions.
The first stage: raise the funds needed for the acquisition and design a manager incentive system. Usually, the acquisition team led by the company's senior management or acquisition experts provides 10% of the funds as the equity basis of the new company. Incentive compensation based on stock price is provided to managers in the form of stock options or subscription rights. In this way, if the enterprise runs well, the share of managers (excluding directors) will continue to increase, and generally it will eventually be higher than 30%. 50% to 60% of the required funds apply to the bank for guarantee to purchase loans with the company's assets as collateral. Loans can be provided by a consortium of several commercial banks. This part of the funds can also be provided by insurance companies or limited partnerships specializing in venture capital or leveraged buyouts. If the source of funds is venture capital, this kind of bid acquisition is called venture leverage merger and acquisition, and other funds are raised through private placement (for pension funds, insurance companies, venture capital enterprises, etc.). ) or publicly issue high-yield debt (junk bonds) in the form of various levels of subordinated bonds.
The second stage: the organized acquisition group acquires all the circulating shares of the target company (in the form of stock purchase) or all the assets of the target company (in the form of asset purchase). In order to gradually repay the bank loan and reduce the debt, the new owner of the company sold a part of the company, greatly reducing the inventory.
The third stage: managers try to increase profits and cash flow by cutting operating costs and changing market strategies. They will rectify and reorganize production equipment, strengthen inventory control and accounts receivable management, change product quality, product line and pricing, adjust staff work, and strive to reach more favorable terms with suppliers. In order to pay the ballooning debts on time, they will even lay off employees and cut back on investment in research and new factory equipment.
The fourth stage: if the adjusted company can become stronger and the investment group's goal has been achieved, the group may make the company become a public holding company again, which is called reverse leveraged buyout. This process can be realized by public offering of shares (this issue is usually called secondary public offering). One reason for this is to provide liquidity to existing shareholders. In addition, a study of 72 companies that made reverse leveraged buyouts from 1976 to 1987 shows that 86% of the companies intend to use the funds raised by the second public offering to reduce the leverage ratio of the companies. Most reverse leveraged buyouts are successful leveraged buyout companies. Except for the first stage, there is no essential difference between venture leveraged buyouts and general leveraged buyouts.
Lever M&A is in China
At present, China's economic reform is being carried out in all directions, but the most important thing is enterprise reform. In enterprise reform, "M&A", as an effective form, has attracted more and more attention and favor from the government and all walks of life. After nearly half a century's development, China's modern economic structure and enterprise system have reached the stage of adjustment and upgrading. Some problems accumulated in history can only be solved by more drastic means. For example, some enterprises with heavy burdens and lack of necessity go bankrupt or are merged. However, the current social, political and economic system in China does not allow large-scale bankruptcy of enterprises, and many workers are thrown into the streets. Therefore, under the condition of imperfect social security system, it is necessary to mainly adopt merger and asset reorganization, which is milder than bankruptcy, to realize the adjustment of economic structure.
China's asset reorganization and enterprise merger activities promoted by the government started at 1984 and reached a small climax at 1988. After the economic contraction from 65438 to 0989, it gradually ended. The soft landing of economy since 1993 made the government restart merger and reorganization. After the 15th National Congress of the Communist Party of China was held, the enterprise reform was intensified and the pace was accelerated. In addition, the market system and mechanism have been further improved, creating a good soil for corporate mergers and acquisitions. It can be said that a new era of enterprise merger and acquisition has arrived!
As a form of M&A, lever M&A has a broad development prospect in China.
First, there are a large number of enterprises that should be acquired in China at present. These enterprises have a considerable number of tangible and intangible assets, and their asset operation efficiency is low, so they urgently need to reorganize and find a way out.
Second, except for a few powerful companies, the vast majority of dominant enterprises cannot rely entirely on their own funds for M&A activities. In addition, even well-funded companies may acquire by borrowing for the purpose of optimizing capital structure.
Third, China's financial institutions have trillions of deposits, and it is urgent to find efficient investment channels.
To sum up, although it will inevitably encounter a series of obstacles and difficulties in actual operation, leveraged M&A, as an effective way of economic adjustment, will play a very important role in the development of China's market economy. With the rise and development of China's venture capital industry, China's venture leverage M&A will gradually develop and become an important financing method.
Two benefits
It has an incentive effect on managers.
The following mainly analyzes a typical leveraged buyout (which turns a listed company into a non-listed company), especially the management buyout (which is driven by the management of the target company), which increases the managers' shareholding, thus increasing their motivation to improve their business performance. First of all, some efficient investment projects require managers to make extremely hard efforts, so only when managers get the benefits corresponding to the project benefits will the projects be adopted. However, external shareholders may think that these managers' compensation contracts are "too generous". In this case, the transfer of a listed company to a non-listed company is helpful to reach a compensation agreement. Secondly, managers of listed companies may waste resources to maintain their position in front of potential competitors and external shareholders. They may carry out some projects whose profits are not the highest, but whose benefits are more easily noticed by outsiders. Switching to a public listing can eliminate such costs. Generally speaking, the mortgagee holds a large number of shares. Therefore, they will pay close attention to the enterprise management after the takeover. This will reduce the unsmooth and asymmetric information between managers and shareholders. From this point of view, the "concentration of equity" caused by leveraged buyout reflects the re-combination of ownership and control, which will inevitably reduce the cost of agents. Third, free cash flow often encourages managers to splurge rather than distribute it to shareholders as dividends. Increasing debt through leveraged buyouts will force these cash flows to be used to repay debts. In addition, leveraged buyout is an effective alternative to paying dividends. Compared with the distribution of dividends, managers have less freedom to choose to repay debts. Therefore, the increase of debt reduces the manager's right to distribute free cash flow; Leveraged buyout reduces the agency cost brought by free cash flow. The increase in debt will also put pressure on managers, prompting them to redouble their efforts to avoid bankruptcy. Therefore, to some extent, leveraged buyout represents a debt-binding behavior and has a certain binding effect on managers.
The following two sets of data can be used as empirical evidence of the above theory. First, after MBO, the shareholding ratio of managers has been greatly improved. 76 samples of MBO cases from 1980 to 1986 show that before the takeover, the shares of the president and the manager were 1.4% and 5.88% respectively. After pipe pressing, it became 6.40% and 22.63% respectively. Therefore, after the takeover, the ownership of managers has tripled. Second, the operating performance of leveraged buyout enterprises. Through the discovery of the second public offering announcement of re-listed companies, researchers found that more than two-thirds of enterprises (54 out of 72) disclosed at least one reorganization activity after leveraged buyout. These activities include asset reorganization (production equipment reorganization and asset divestiture). ), adopt cost reduction plan, change market strategy (including product line, product quality, pricing and customer service) and so on. As a result of these reorganization activities, the operating performance of these companies has been greatly improved. Among the 35 cases for which relevant data can be obtained, for medium-sized enterprises, the total sales at constant prices increased by 94%, gross profit and operating profit increased by 27.0% and 45.4% respectively during the period from leveraged buyout to the second public offering (average 29 months), with remarkable achievements.
Other benefits
(1) For the acquired party:
Due to the change of the company's overall business strategy, the company's branches or subsidiaries may no longer be suitable for continued operation, so we can buy and sell equity through leveraged buyouts, while protecting the interests of employees and avoiding labor conflicts. In addition, if the stock market is inactive, the market price of many stocks is lower than their net asset value, but leveraged mergers and acquisitions can pay a premium on the basis of the market price; For those "chimney industries" (sunset industries), this premium effect is more obvious because the development prospects are not optimistic.
(2) For the acquirer:
A. leverage, buy a large-scale enterprise with a small investment and fully enjoy the leverage brought by high debt.
B. tax incentives, high leverage brings more interest tax avoidance. The increase in the value of book assets leads to higher depreciation; If the acquired party is a loss-making enterprise, it will also have functions such as delaying losses.
(3) For creditors:
You can get interest rate income 3-5 percentage points higher than the preferential interest rate, and on the other hand, you can reduce the loan risk by accepting mortgage, guarantee and equity participation.
(4) For the Government:
As mentioned earlier, companies participating in leveraged mergers and acquisitions can get tax incentives. Does this mean that wealth is transferred from the state to enterprises, and national interests are harmed? The answer is no, shareholders should pay income tax on the corresponding capital gains for the stocks sold in leveraged buyouts; In addition, if a company becomes stronger and goes public later, it will have to pay more corporate tax.
The reason why countries and enterprises can benefit is that leveraged mergers and acquisitions often bring about the process of value creation. This can get some enlightenment from the manager incentive effect mentioned above. Another source of value may come from asset reorganization and optimal allocation of resources brought about by leveraged mergers and acquisitions.
3 Applicable condition editing
It is difficult to generalize what kind of enterprises are suitable for leveraged mergers and acquisitions. But generally speaking, the attraction of M&A target to acquirers mainly comes from the following aspects:
Stable cash flow.
Creditors are particularly concerned about the stability of cash flow. In their view, the stability of cash flow is even more important than its amount.
Stable and experienced management.
Lenders often have strict requirements on the managers of the acquisition target, because only the managers do their best can they ensure the timely repayment of principal and interest. The stability of personnel is generally judged according to the length of service of managers. The longer managers are employed, the more likely lenders are to think that they will stay after the acquisition.
There is a lot of room to reduce costs.
After leveraged buyout, the target company has to bear new debt pressure. If the company can easily reduce costs, this pressure can be buffered to some extent. Possible cost reduction measures include layoffs, reducing capital expenditures, cleaning up redundant equipment, and controlling operating expenses. According to statistics, after the merger of American companies, the average reduction ratio of administrative staff is 16%, while the reduction ratio of workers on production lines is very small.
Shareholders' equity of a certain scale.
The assets mortgaged by the target enterprise can provide some protection for creditors. On this basis, if the acquirer can make certain equity investment, such as increasing certain equity capital, it can further buffer the risk of creditors. Since the 1990s, the awareness of self-protection of lenders has been generally enhanced, so the requirements for the proportion of equity investment of acquirers have become higher and higher.
Reduce debt before acquisition.
If the debt of the target enterprise before the acquisition is lower than the value of the mortgaged assets, then the acquirer can bear more debt after the acquisition. And if the target enterprise is already heavily in debt and insolvent, then the acquirer will not be able to obtain new debt capacity.
Non-core industries that are easy to separate.
If the target enterprise has non-core departments or industries that are easy to sell, it can quickly obtain debt repayment funds by selling such departments or industries when necessary. This is one of the advantages of attracting lenders.