(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. 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. At present, China's economic reform is being carried out in all directions, but the most important thing is enterprise reform. In the 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.