Chapter 25: Leasing and Chapter 31: Mergers
Chapter 25: Leasing
Financing Alternatives
This chapter explores leasing as a financing option for businesses. Similar to borrowing, leasing involves making future payments, either to a lender or a lessor.
Types of Leases
- Operating Leases: Short-term or long-term with cancellation options.
- Financing/Capital Leases: Long-term leases for the asset’s economic life.
Lease Considerations
- Maintenance and Costs: Full-service leases include maintenance costs, while net leases require the lessee to cover these expenses.
- Asset Ownership: Direct leases involve the leasing company owning the asset, while sale-and-leaseback arrangements involve the client selling the asset to the lessor and then leasing it back.
Reasons for Leasing
- Short-term asset needs.
- Maintenance inclusion.
- Economies of scale through standardization.
- Tax deductions and avoidance of alternative minimum tax.
- Superior claims in bankruptcy.
- Avoiding capital expenditure controls.
- Off-balance sheet financing.
- Impact on ROA.
Lease Valuation
Lease valuation involves calculating the present value of an annuity, considering factors like payment frequency and discount rate.
Lease Pricing
Lease pricing considers asset cost, maintenance expenses, tax depreciation benefits, and discount rate to determine the equivalent annual cost.
Financing Leases vs. Borrowing
Financing leases, unlike operating leases, are long-term and serve as an alternative to borrowing for asset purchase. Tax implications differ between leasing and borrowing, influencing the choice between the two.
Chapter 31: Mergers
Merger Types
- Horizontal: Merging firms within the same industry.
- Vertical: Merging firms within the same supply chain.
- Conglomerate: Merging unrelated firms.
Merger Goals and Synergies
The primary goal of a merger is to create a more valuable entity through synergies, often achieved through economies of scale, particularly in horizontal mergers.
Reasons for Mergers
- Economies of scale and cost savings.
- Vertical integration and improved coordination.
- Complementary resources and access to expertise.
- Utilization of surplus funds.
- Addressing management issues.
- Industry consolidation.
- Diversification (with limitations).
- EPS increase (with caveats).
- Lower financing costs (with risk shifting).
Estimating Merger Gains
Merger gains can be estimated by analyzing stock price changes around the announcement, considering factors like market efficiency and investor anticipation.
Merger Methods
Merging involves acquiring assets and liabilities, navigating antitrust laws, and addressing accounting and tax implications. Various methods exist, including mergers, stock purchases, and asset purchases.
Proxy Fights and Hostile Takeovers
Proxy fights and hostile takeovers are mechanisms to enact changes in a company’s management or direction, often involving acquiring voting control or launching tender offers.
Merger Gain Distribution
Studies suggest that target company stockholders typically benefit more from mergers than acquiring company stockholders, highlighting the role of competition in gain distribution.
Chapter 32: Corporate Restructuring
Restructuring Mechanisms
This chapter explores various methods for restructuring a company’s operations, including:
- Leveraged Buyouts (LBOs)
- Spin-offs and Carve-outs
- Nationalizations and Privatizations
- Workouts and Bankruptcies
Leveraged Buyouts (LBOs)
LBOs involve taking a company private using significant debt financing, often leading to cost-cutting measures and efficiency improvements. The goal is often to eventually take the company public again through an IPO.
Spin-offs and Carve-outs
Spin-offs and carve-outs involve separating a portion of a company’s assets or operations into an independent entity. Spin-offs distribute shares of the new company to existing stockholders, while carve-outs involve selling shares to new investors.
Asset Sales, Privatizations, and Nationalizations
Asset sales involve selling off non-core assets. Privatizations involve selling government-owned businesses to private investors, while nationalizations involve the government taking over private companies.
Private Equity
Private equity firms invest in private companies, often through LBOs or by funding young firms with the aim of eventually taking them public. They operate through limited partnerships with general partners managing the investments and limited partners providing capital.
Bankruptcies
Companies facing financial distress can pursue workouts with creditors or enter bankruptcy. Chapter 7 bankruptcies involve liquidating assets, while Chapter 11 bankruptcies aim to restructure the company’s debt and allow it to continue operating.
Bankruptcy Considerations
The choice between Chapter 7 and Chapter 11 bankruptcy depends on factors like asset valuation, tax implications, and creditor preferences. Bankruptcy laws and procedures vary across countries, with some favoring debtors and others favoring creditors.