Question

15. Matt Green is discussing leveraged buyouts (LBOs) with his assistant Donald Martin. In particular, Green is educating Martin on the value creation methods of LBOs. Which of the following statements best describes a “buy and build” strategy?

A. Seeks out underperforming firms with too much leverage and weak management.

B. A diverse shareholder group with little ability to have direct involvement in the management of the firm is replaced by an LBO firm willing to take on an active overseer role.

C. If the LBO firm believes that divisions of the firm are misunderstood by the investing public, then there is an opportunity to sell off some assets to focus on the undervalued core business.

D. Several operating firms or divisions are acquired through additional buyouts and then combined.

16. Which of the following is most accurate regarding club deals in the LBO market?

A. They are rarely utilized in the LBO market.

B. They limit the auction process leading to companies being acquired at less attractive prices.

C. They might reflect a lack of opportunities in the LBO market so firms join together.

D. They lead to a more concentration of risk particularly for large deals.

17. Venture capitalists can be distinguished by the specific stage they choose to invest. At what stage do most venture capitalists invest?

A. First stage

B. Creation stage

C. Angel stage

D. Mid or late stage

Answer 1

1) The correct option is :-

(D) Several operating firms or divisions are acquired through additional buyouts and then combined.

A leveraged buyout is the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. In a leveraged buyout (LBO), there is usually a ratio of 90% debt to 10% equity. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

In LBO one of the value creation strategies is buy & build startegy. Many Private Equity firms have expanded their value creation capabilities through this buy & build startegy. The concept of ‘Buy and Build’ involves purchasing a target company with the view to making subsequent ‘add-on’ acquisitions in the same sector, keeping in mind the concept that the whole is greater than the sum of its parts. This ‘platform’ company is often an established business with proven management, systems and back office functions allowing the PE house to use the infrastructure of this platform as a base to grow and realise synergistic benefits. Revenue growth can be achieved from improved market positioning and shared marketing techniques, as well as expansion into new geographic markets and an increased product base, hence a higher rate of return for the comapny shareholders. All of this can be achieved at a quicker rate than through organic growth.

2) The correct option is:-

(B) They limit the auction process leading to companies being acquired at less attractive prices.

A club deal refers to a private equity buyout where several private equity firms pool their assets (come together) to acquire a company. Club deals allow private equity firms to collectively acquire expensive companies they normally could not afford and spread the risk among the participating firms. However, the club deals are often criticized for the issues regarding regulatory practices, market cornering, and conflicts of interest. For example, often in the past there heve been concerns and accusations as well, that club deals decrease the amount of money that shareholders of the acquired firm receive, as a group of private equity firms has fewer parties to bid against during the acquisition process.
The fundamental concern about club deals has been that the private equity partnerships may be colluding together, to depress prices by limiting the number of competing bidders in an auction for a takeover target, and thereby may be shortchanging passive, dispersed shareholders of target publicly-traded corporations. In response to these concerns, in 2006 the Department of Justice began an inquiry into possible anticompetitive behavior by some of the largest and prominent private equity firms. In 2007 several lawsuits were also filed against these same set of PE firms alleging collusion resulting in lower premiums for target firms.

3) The correct option is :-

(A) First Stage

Venture capital funds manage the money of investors who want private equity stakes in startup and small- to medium-sized enterprises. Venture capital funds focus on early-stage investment, and high-growth firms that are risky, and have long investment horizons. Venture capital funds are considered seed money or early-stage capital. If the venture capital firm like the idea, then the VC firm generally get a stake in the new venture in return for investing in its development.
Venture capitalists provide the lion's share of the money needed to start a new business. It is a considerable investment, paying for product development, market research, and prototype production. Most startups at this stage have offices, staff, and consultants, even though they may have no actual product.