Question

a) Please discuss the importance of getting financing plans ready in LBO transactions for the acquirer.
b) What are the major challenges do you believe that Sony faces after buying the MGM? How should Sony meet these challenges?
c) In what way do you believe that Sony’s objectives might differ from those of the private equity investors making up the remainder of the consortium? How might such differences affect the management of MGM? Identify possible short-term and long-term effects.
d) How did Time Warner’s entry into the bidding affect pace of the negotiations and the relative bargaining power of MGM, Time Warner, and the Sony consortium?
e) Sony’s major business used to focus on consumer electronics, but the management then decided to purchase aggressively the culture contents like music, movies, and games. What is the management’s motivations behind this movement? If diversifying harms firm value and it is more efficient to make diversification at the investor(shareholder) level, why do you think the management
still choose to make diversified acquisitions?
f) What do you believe were the major factors persuading the MGM board to accept the Revised Sony bid?

Answer 1

a)  Importance of getting financing plans ready in LBO transactions for the acquirer:

A leveraged buyout (LBO) is a type of acquisition in the business world whereby the vast majority of the cost of buying a company is financed by borrowed funds. In this type of transactions acquirer uses debt to finance it's purchase. This helps buyer to acquire other company without investing his own funds. The advantage that acquirer is receiving here is that he can undertake buyout even when he is not having sufficient funds.

Importance of financing plans is inevitable in leveraged buyout (LBO) transactions. Reason is that without financing arrangement it would not be possible for acquirer to undertake buyout transaction. So, financing arrangement is the basis of this type of transaction. There can be several arrangements to finance buyout plans like private equity sponsor, bank financing, bonds or private placements, mezzanine, Junior, or subordinated debt, seller financing, etc. So importance of getting financing plans ready in LBO transactions for the acquirer is apparent from above discussion. Without financing plan there can be no acquisition. Besides there can be a loss of great opportunity to acquirer if he does not have finance arrangement in place. Before undertaking any LBO, acquirer should ensure that financing plan is solid and will be available at the right time.

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