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n the last chapter we described how mergers and acquisitions

enable companies to change their ownership and management

teams, and often force major shifts in corporate strategy. But this

is not the only way that company structure can be altered. In this

chapter we look at a variety of other mechanisms for changing

ownership and control, including leveraged buyouts (LBOs),

spin-offs and carve-outs, nationalizations and privatizations,

workouts, and bankruptcy.

The first section starts with a famous takeover battle, the

leveraged buyout of RJR Nabisco. The rest of Sections 32-1

and 32-2 offers a general review of LBOs, spin-offs, and

privatizations. The main point of these transactions is not just

to change control, although existing management is often

booted out, but also to change incentives for managers and

improve financial performance.

RJR Nabisco was an early example of a private-equity

deal. Section 32-3 takes a closer look at how private-equity

investment funds are structured and how the private-equity

business has developed since the 1980s.

Private-equity funds usually end up holding a portfolio of

companies in different industries. In this respect they resem-

ble the conglomerates that dominated takeover activity in the

1960s. These conglomerates are mostly gone—it seems that

private equity is a superior financial technology for doing the

tasks that conglomerates used to do. Our review of conglom-

erates’ weaknesses helps us to understand the strengths of

private equity.

Some companies choose to restructure but others have

it thrust upon them. None more so than those that fall on

hard times and can no longer service their debts. The chapter

therefore concludes by looking at how distressed companies

either work out a solution with their debtors or go through a

formal bankruptcy process.

Corporate Restructuring

32

CHAPTER

Leveraged buyouts (LBOs) differ from ordinary acquisitions in two immediately obvious

ways. First, a large fraction of the purchase price is financed by debt. Some, if not all, of this

debt is junk, that is, below investment-grade. Second, the company goes private and its shares

no longer trade on the open market. Equity financing for LBOs comes from private-equity

investment partnerships, which we describe later in this chapter. When a buyout is led by

existing management, the transaction is called a management buyout or MBO.

In the 1970s and 1980s, many MBOs were arranged for unwanted divisions of large diver-

sified companies. Smaller divisions outside the companies’ main line of business sometimes

failed to attract top management’s interest and commitment, and divisional management

chafed under corporate bureaucracy. Many such divisions flowered when spun off as MBOs.

32-1 Leveraged Buyouts

Part 10 Mergers, Corporate Control, and Governance