M&A fund acquisition with leveraged buyout as the main way can create company value and make enterprises more profitable. This kind of value creation comes from excellent management-good plan, good risk control system and good management mode; The creation of value comes from the synergy of dynamic board of directors, management shareholding, asset integration and debt constraint.
Leverage-Buyout (LBO) came into being in the United States in the 1970s, and quickly became an influential M&A model in the climax of M&A in the 1980s. At present, it has become the main operation mode of M&A fund.
Leveraged buyout refers to an M&A form in which the acquirer (usually M&A fund or industrial investor) takes the assets and future cash flow of the target company (usually listed company) as collateral and guarantee, and obtains the acquisition funds through borrowing and financing to acquire the target company. In the financial structure of LBO, equity investment accounts for 10% ~ 20%, and liabilities account for 80% ~ 90%. The M&A fund does not provide guarantee for the corresponding debt financing, but only takes the assets and future cash flow of the target company as financing guarantee.
Like a lot of important innovations in economic life, leveraged buyouts have developed outside the mainstream economy. Leveraged buyout is on the edge of finance, but it has evolved into a powerful financing buyout technology and a financial project that has a great impact on capital market, corporate governance and value creation because of the use of a large number of financial instruments and financial levers.
Leveraged buyout affects enterprise capital structure and corporate governance.
First, the role of capital structure in corporate governance. Leveraged buyout financing can improve the company's new capital structure by using financial instruments and institutional investors in the capital market and money market. Among them, the constraint of debt controls the increase of agency cost and promotes the formation of positive cash flow mechanism, thus creating shareholder value.
In fact, on the one hand, different capital structures affect the institutional arrangement of corporate governance structure; On the other hand, different corporate governance structures also affect the institutional arrangement of capital structure. As Professor Miller said, choosing an appropriate capital structure can promote corporate governance structure and improve governance efficiency, while a good governance structure can ensure that corporate managers get what they need for investment, but not more money to complete profitable projects. In other words, capital structure can coordinate the interests and behaviors between investors and operators, and between shareholders and creditors within investors through the unique role of equity and creditor's rights and their rational allocation.
Second, the role of debt in corporate governance. Zhan Sen and other scholars believe that debt expenditure reduces the company's "free cash flow", thus reducing the choice space for managers to engage in inefficient investment. In the process of declining earnings of listed companies, the core problem of liabilities is free cash flow.
Zhan Sen (199 1) draws the following three conclusions on the role of debt: First, control the loss of cash flow. Debt restraint will help limit the loss of cash flow. Debt is actually a substitute for equity capital by forcing managers to repay the funds they should keep. Under this mechanism, managers will diversify cash flow and not invest in projects with low returns or losses.
Second, debt is a powerful agent system that adapts to changes. For all companies that are anxious about excessive debt, excessive use of leverage will have side effects. It will bankrupt a company, sell part of its shares, and then re-focus on a few core businesses.
The third is the early warning function. In other cases, the deviation from the debt contract will cause a wider crisis, which will prompt the top management to respond faster.
Fourth, debt can force managers to adopt some value creation policies that they are usually unwilling to adopt.
Debt constraint, as the core of leveraged buyout, has brought about corporate governance reform and shareholder value revolution, which has been widely accepted by theoretical and business circles. Since1980s, more and more companies have adopted the governance mode of leveraged buyout.
Leveraged buyout shows the positive significance of financing structure to company value creation: financing mode not only affects the distribution of cash flow, but also affects its management mode; The process of value creation is a long-term pursuit, and the accumulation of wealth in leveraged buyouts is not a short-term behavior, nor is it irrational speculation; It is the result of active efforts and long-term vigilance against surrounding events; It is the result of the harmonious unity of the interests of managers and owners, as well as the ability to deal with emergencies and crises.
Leveraged buyout has a far-reaching impact on value creation.
The success of the acquisition ultimately depends on the value creation strategy as the core, linking the ownership incentive with the financial structure and supervision mechanism of the acquisition, and promoting their interaction. The value creation in leveraged buyout is based on the consultation, decision-making, incentive and control provided by financial capitalists as shareholders.
First, the acquisition and control of the board of directors-control constraints. Leveraged buyout institutions represent investors who own a large number of common shares in the company. An important motive for controlling the board of directors is to enable the company's long-term value creation plan to be implemented without interference. The division of responsibilities between management and leveraged buyout institutions is generally that the decision-making power of business strategy and the choice of business are in the management, while the control of the company's financial expenditure is in the leveraged buyout institutions.
First, in order to arouse the enthusiasm of management, managers should be given appropriate autonomy and abide by the principle of avoiding intervention in process management; Second, M&A funds control the board of directors, and the board of directors should attach great importance to the decision-making and management of value creation; Retain majority control over the board of directors; Third, there is constant communication and discussion between the board of directors and the management.
These measures to control the board of directors ensure that directors are committed to achieving the goals required by shareholders. At present, more and more companies in the United States adopt these measures in part or in whole, and shareholders are increasingly evaluating the behavior of company directors and managers according to their own wishes.
Second, to achieve the same interests-(MBO) interest synergy. An important part of acquisition is to make as many people as possible in the target company become shareholders. If managers truly consider the best interests of shareholders (including themselves), they will correctly balance the interests of all members of the company and work more effectively to increase the long-term and short-term value of the enterprise. The goal of unifying the interests of operators and shareholders is the premise of leveraged buyout investment in any enterprise.
How to do this? The first is management shareholding (MBO). After the M&A transaction, management shareholding can greatly improve the performance of the acquired company, that is, by making managers invest considerable personal wealth (more than 80% is borrowed money) in the enterprises they manage and make them owners, they will have considerable motivation to serve the best interests of all shareholders; The second is to establish a stock option mechanism. Stock option is an option contract with stock as the subject matter. Stock option enables employees to enjoy the profit growth brought by the appreciation of the company's stock and bear the corresponding risks; Third, the stock appreciation rights mechanism, that is, employees can get option price difference income in the form of cash or stock or both; The fourth is to establish a management compensation mechanism.
Empirical analysis shows that a key step of leveraged buyout is to use wealth leverage to distribute part of the equity to management, build an incentive mechanism for management, achieve consistency with the interests of management, and maximize shareholder value. In addition, in most cases of leveraged buyouts, the managers of these companies also participated in the acquisition activities, so most leveraged buyouts are also MBO. Leveraged buyout makes marginal MBO become the mainstream tool of corporate governance. In MBO, managers' management motivation has changed fundamentally because of acquisition activities, and they begin to pay more attention to the increase of shareholder value.
Third, form a partnership-business collaboration. A successful acquisition must make the owner agree with the values of the manager. Through MBO, the partner mechanism of leveraged buyout binds the interests of external investors (strategic buyers or financial buyers) and managers in a way that forces everyone to care about the long-term viability and value creation of enterprises. Its purpose is to let everyone not only weigh the improvement of profitability and short-term business performance, but also link up with the long-term strategy of investment, innovation and value preservation.
Asset integration and value creation
After leveraged buyout, the primary task of enterprises is to obtain cash flow and create value by divesting assets, cutting labor costs and re-listing. Research shows that integration can bring more abundant cash flow to the company, and integration is the most likely work to enhance value.
Zhan Sen (1989) thinks that the management, salary and financial structure of LBO directly lead to the improvement of efficiency and the return of value. He believes that the asset-liability ratio is a major advantage of leveraged buyouts. Part of the reason may be that we have to try to sell assets to repay debts and recover cash, and the evidence of historical experience can support the above statement accordingly. Kaplan (1989) made statistics on the frequency of leveraged buyouts to sell and reorganize the target enterprises. Within one year, 16 of 42 leveraged buyout companies sold at least 10% of all the acquired companies. The evidence provided by American scholars Bhagat, Shleifer and Vishny( 1990) shows that leveraged acquirers are more inclined to realize assets and sell them than non-leveraged acquirers.
Another most important evidence about integration creating value is Mas Karila and Weizpine's research on reorganization activities. They found that more than two-thirds of enterprises (54 of 72 enterprises) have carried out at least one company integration activity since the leveraged buyout operation. These activities include asset adjustment (reorganization of production facilities, divestiture, etc. ), the start of cost reduction plan, changes in marketing strategy (including product mix, product quality, pricing and customer service). Due to the reorganization of these companies, the operating performance of private enterprises has been greatly improved. In 35 cases for which data are available, the sales of enterprises in the intermediate state of leveraged buyout and re-listing (SIPO) (with a median period of 29 months) increased by 9.4% at constant prices, while the gross profit and operating profit increased by 27.0% and 45.4% respectively.
The asset integration of leveraged buyout mainly includes the following measures: stripping and selling inefficient assets and departments, and withdrawing capital from projects that destroy value; Cut and control management expenses and reduce agency expenses; Reduce redundant staff and simplify the management structure of the company; Adjust the capital structure and reduce the cost of capital; Increase the added value of the market (that is, the market value of the company).