business-haroun/mba/ch76.org

Section 13 | Lesson 76 - financing alternatives

• Links
• notes
  • Harvesting an investment
  • Planning an exit strategy
  • Buyouts
    • firms
      • example firms
    • management buyout (MBO)
    • Employee Stock Ownership Plan (ESOP)
  • Initial Public Offering (IPO)
    • what is an initial public offering
    • shares
      • types of shares
        • primary
        • secondary
      • in practice
      • dilution
    • structure, underwriting and listing requirements
      • listing requirements for NASDAQ
  • Troubled Ventures and Turnarounds
    • basics
    • corporate raiders
    • ways to die
    • reqlities
    • bankruptcy law
      • chapter types
        • types
        • general rules
        • most important
      • chapter 7 liquidation
      • capter 11 bankruptcy filing
        • types of restructuring
        • this can save a company
        • steps

Links

• TOC | Business
• S14:L76 course video

notes

Harvesting an investment

• asset can be transferred to investors
• company can be sold and cash distributed to investors
• company goes public and shares are distributed 6 months post IPO lockup

Planning an exit strategy

• need to explain liquidity targets to investors when you are raising capital

  • make sure you are both thinking the same way
  • have a lawyer prepare the documents

Buyouts

• "leveraged buyout" LBO
• financed using debt
• must have great cash flows to secure loans

firms

• many public companies partner with private equity firms and go private
• goal is to go public again at some point

example firms

• KKR
• TPG

management buyout (MBO)

• when management buys the company

  • loans
  • investors
  • their own money

• gains

  • independence
  • control

Employee Stock Ownership Plan (ESOP)

• employees buy the company
• all employees own it not just management

Initial Public Offering (IPO)

what is an initial public offering

• private company sells shares to the public through a stock exchange

• this allows

  • company to raise capital for growth
  • early investors and employees to convert their holdings to cash

shares

types of shares

primary

• newly issued shares created by the company for the IPO
• when sold to outsider investors the money goes to the company's treasury
• used to fund expansion, pay debt, invest in new projects

secondary

• already existing shares held by people "shareholders"

  • it's the shareholders that make money when selling their shares
  • venture capital firms
  • founders or employees that want to cash out

in practice

• most IPOS are a mix

  • primary raises growth capital
  • secondary is the payout for whoever bought in early

dilution

• when primary shares are made and sold, existing shares are worth less
• company gets money to raise to invest in projects that can increase it's overall value in cluding the diluted shares

structure, underwriting and listing requirements

• underwriting spread is fee the investment bank gets (usually up to 7%)

listing requirements for NASDAQ

• share price >= $4, at least 1M publicly held shares
• several years of operating history and financials

• must have a Board of Directors (BOD) with independent members

  • oversee management
  • ensure regularatory compliance
  • protect shareholders
  • maintain audient, compensation and nominating committees

Troubled Ventures and Turnarounds

basics

• turnarounds don't work in tech

• very rare exceptions

  • steve jobs at apple
  • IBM

• this is due to 'secular decline'

  • A secular decline is a persistent, structural decrease in growth, productivity, or demand that continues for many years regardless of normal economic ups and downs.

corporate raiders

• dont let sentiment cloud your judgement

• it's a zombie. shoot it and move on.

  • liquidate
  • sell it

ways to die

financial distress

when cash on hand is insufficient to pay for current liabilities

load default

one missed payment and it is over

acceleration provision

when a firm defaults on just one payment then all future payments are due immediately

cross default provision

one late payment on one loan causes all loans to go into default

foreclosure

the legal process where lenders collect and take stuff from you

insolvent

negative book equity

reqlities

• 25% of companies go belly up within 2 years of being founded
• more than 50% of companies shut down within 4 years of being founded

bankruptcy law

• a legal code that has many chapters that protect you

chapter types

types

chapter 7

how people / firms liquidate stuff

chapter 9

how cities deal w/ bankruptcy

chapter 11

how firms deal w/ bankruptcy

chapter 12

how farms deal w/ bankruptcy

general rules

chapters 1, 3, 5

general bankruptcy rules

chapter 15

trustees that help banks

chapter 13

restructuring personal debt

most important

• chapter 7 - liquidating
• chapter 11 - restructuring

chapter 7 liquidation

• after a person / company files for bankruptcy then a court supervises the liquidation process

capter 11 bankruptcy filing

• temporarily protects a distressed firm so they can restructure or pay off debt

types of restructuring

operations restructuring

incraese revenue or cut expenses

asset restructuring

selling assets to improve ratios

• day sales outstanding
• inventory conversion period

this can save a company

• 65% of companies reorganize
• 28% liquidate
• 7% merge with another firm

steps

1. file for chapter 11 with one of 300 bankruptcy courts
2. a bankruptcy judge accepts or doesn't accept petition
3. if no fraud a company has 120 days to make a plan
4. 60 days is then given to creditors to accept the plan
5. investors then vote