Saturday, 14 June 2014
Ownership Change Transactions
An ownership change transaction is exactly what it sounds like: a
transaction where the company’s ownership changes so the firm welcomes new
owners or a different composition of ownership stakes for its existing
shareholders.
§ Minority Share Sale & Venture Capital—A
private company can have a change in its ownership structure if it sells some
of its shares to an outside investor, such as an individual ("Angel")
or venture capital firm ("VC Firm"). Note that in the case of venture
capital deals, this often occurs in conjunction with a Change of Control since
the VC Firm will usually demand Board seats, preferred stock and dividend
rights in addition to other rights and terms.
§ Initial Public Offering (IPO)—By
going public via an Initial Public Offering (IPO), the company can change
control of the company from the private owners’, founders’, or controlling
family’s hands to partially (even a majority) public investors. An IPO often
has the added benefit of providing both expansion capital as well as liquidity
for the company.
§
Leveraged Buyout (LBO)—A leveraged buyout is a situation in which a group of investors
(usually a private equity firm) acquire a controlling interest in a given
private company's equity by borrowing a large portion of the capital necessary
to finance the transaction. The acquired private company's assets are often
used as collateral against the borrowed capital. In a leveraged buyout
situation, a combination of debt instruments from bank and capital markets are
deployed.
Leveraged buyouts use a
highly leveraged capital structure where the majority of the cash flow from the
acquired private company, division or subsidiary is used to service and repay
the loan. Leveraged buyouts may be used to enhance shareholder value, counter
takeover threats or realize the value of undervalued assets.
§ Employee Stock Ownership Plan (ESOP)—An
employee stock option plan is a transaction where a private company makes a tax
deductible contribution of cash or company stock into a trust. The trust's
assets are then allocated to employees through the use of stock options and are
not taxed until the employees exercise their option. Since the creation of an
ESOP concentrates a private company's ownership, they can be used as an
anti-takeover defense mechanism.
§ Leveraged ESOP—Although
uncommon, leveraged ESOPs are typically used to concentrate the ownership of a
private company into the employees’ hands, often to defend against a possible
takeover. An ESOP is an employee stock ownership plan where employees own a
piece of equity in the private company. Leveraged ESOPs are initiated by
borrowing capital to capture a majority of the equity at one time. This equity
can then be vested over a period of time to the employees. Leveraged ESOPs
drastically alter both the capital structure of a private company (by
increasing the liabilities), and the ownership concentration from the original
owners/management to the employees.
§ Share Repurchase—A
share repurchase program is a measure implemented by cash-rich corporations to
concentrate the ownership of the private company by purchasing equity shares at
a premium to market value. Private companies can use share repurchase programs
to accrete the ownership of upper level management, lever up the balance sheet
and thwart the threat of a takeover. Share repurchases lead to decreased equity
capital of the private company. While less rare for private companies than for
publicly traded ones, many private companies that have the cash to do so can
make a tender offer in order to reduce the number of shareholders and
concentrate ownership and control of the company.
§ Takeover—In
recent years there has been a high level of hostile takeovers. Takeovers can be
defined as acquiring control of the private company or management by stock
purchase or stock exchange. The majority of takeovers have come in the form of
leveraged buyouts, proxy battles, or forced internal restructuring by vocal
institutional investors who aim to maximize the shareholder value of their
clients. Hostile takeovers are relatively rare for private companies, but can
and do occur.
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