Question

What is the difference between takeovers and leveraged buyouts? Are either good for U.S. firms or the economy? Discuss in detail.

Answer 1

In the seventies and eighties, corporate takeovers had become a common aspect of the American market landscape. A hostile takeover typically requires a public tender – a competitive bid of a particular amount, generally at a significant premium over the prevailing market price, good for a limited time, a significant percentage of the target firm's stock. Unlike a merger which needs the approval of the board of directors of the target firm as well as the approval of the stockholders' voting, a tender offer will provide the bidding firm with voting power without the approval of the management and directors of the target.

Small business leveraged buyouts had already been available for decades, but major public corporations' LBOs became available in the 80's. An LBO is a going-private deal involving a tender offer for all the common stock of a company, often funded by debt, made by a consortium that typically involves several members of the incumbent management. LBOs and leveraged cash-outs (first cousins of LBOs in which the target company remains public and a small portion of the payout to selling shareholders is equity in the new , highly leveraged enterprise) rose to prominence for large public companies in the late 1980s as a reaction to hostile takeover activity.

Managers of target firms have exposure to a range of defensive tactics in takeover battles, many of which were invented during the tumultuous 80's. Such protective mechanisms have also been contentious, because they inevitably present a management conflict of interest. The narrow self-interest of a top manager is to save his job which he sometimes loses after a takeover. His legal duty is to offer the shareholders a fair deal, which also includes approving the takeover. Not unexpectedly, some managers go with an interest in themselves.

The industry is doing much better than most people thought a year ago because of the company's quality, significant improvements in its operations and flexibility of its capital structures; Although buyout firms mark the valuation of some of their portfolio firms as stock market rallies, they aren't ready to participate in the freewheeling investment that marked the LBO market peak.