Demerging

Date: 2015-10-07; view: 829.

Leveraged Buyouts

Leverage means having a large proportion of debt compared to equity capital. Leveraged buyouts (LBOs) are takeovers which involve buying a company with a lot of borrowed money. Acquirers borrow money, and choose a large, badly-managed, inefficient or under-priced corporation or conglomerate, or a company with huge cash reserves, or a company in the fields that are not sensitive to a recession (food, tobacco). They buy the company, restructure it and split the assets up, then sell the profitable bits, make a profit in the process and pay back the principle and interest to the bank or other lenders. It is called asset-stripping–selling off the assets of poorly performing or under-valued companies. But this process can go wrong. If there is a recession or a stock market crash, it is more difficult to sell the assets, and if you have less sales revenue, it becomes harder to pay the interest on the borrowed money. Where a company is bought by its existing managers, we talk of management buyout or MBO.

Demerging is the reverse (opposite) process to integration. To demerge is to carry out the separation of a company from another. Sometimes, a corporation decides to sell a part of its existing business operations or set it up as a new and independent corporation. There may be several reasons for such a step. A firm might decide, for example, that it should focus more specifically on its core businesses. Such a sale is called a divestiture. When a firm sells part of itself to raise capital, the strategy is known as a spin-off.