Leveraged buyout

The foreign ( capital) buyout ( leveraged buyout English, LBO ) is a funded highly leveraged corporate takeovers. Such leveraged buyouts are typical of so-called private equity investors.

General

The purchase price for the acquisition of a company ("Target " or called "Target Company " ) has to be financed by the buyer (investor). For equity, debt, share swaps, or a mixture thereof to him is available. Debt may consist of bank loans, specially issued bonds or other sources. Banks charge on credit- financed acquisitions usually an equity share of at least 20 % in order to minimize its credit risk. Since banktechnisch the company purchase as a project financing is to be classified, expects the financing bank that the cash flow of the target allows a permanent debt service ability. The loan financing resulting from the interest and principal (ie, the debt service ) must be denied as a rule from the cash flow of the target. If the foreign agent share above 80%, the debt service ability decreases with increasing credit risk. Here, the threshold of the leveraged buy-outs, the extreme case is the 100% debt financing of the corporate purchase price begins. Financing banks willing to go at a high loan to value ratio, a significantly higher credit risk than traditional debt financing, they are trying to minimize collateral of assets (through pledging of shares package ). Part of the literature assumes that a leveraged buyout begins with a debt financing share of 50 % of the purchase price. " Buyout " is the acquisition of a (usually listed ) target company, the term " leveraged finance " refers to a high loan to value ratio, which has a leverage effect result. Due to the low use of own resources can be high - achieving equity, as long as the return on assets is higher than the interest on borrowed capital - attractive for the investor. Requirement is that the target company is a sufficiently high free cash flow generated by which the liabilities are settled.

History

The term LBO is used consistently either in the literature or in practice. The LBO has emerged in the United States from the "bootstrap financings " of the 1930s, where an entrepreneur due to age sold his company to investors who financed the purchase price by a high proportion of loans. Spectacular single transactions with highly leveraged had caused in the 1980s for the conceptualization of the leveraged buy -out. There still were " bootstrap financings ," since the cash flow of the target company for debt of LBO is used and the LBO must be protected from its own assets of the target company with banks. The was performed by the financial investor KKR in November 1988 takeover of RJR Nabisco was conglomerate with $ 31.4 billion by 2006 the largest LBO in history. Largest "Mega" buyout of all time was then in November 2006, the takeover of the Hospital Corporation of America ( HCA) by the consortium Bain Capital / KKR / MLGPE for $ 33 billion as the banking giant Citigroup in September 2007, the corporate takeover of EMI Group by Terra Firma Capital Partners funded, the biggest bad investment began in the history of leveraged buyouts. The acquisition by Terra Firma in September 2007 at a purchase price of £ 4.2 billion, Citigroup had won £ 3.7 billion (88%) financed. After Terra Firma claiming credit for funding the purchase price could not muster (so was the capital 's ability to service no longer exists), Citigroup took over EMI shares in February 2011 by Terra Firma. By loan write-downs, Citigroup (£ 3.4 billion loans originally ), Terra Firma lost 2.2 billion pounds its equity share of £ 1.7 billion. The equity portion of this transaction, only 12% of the purchase price significantly increased their risks for banking and Terra Firma. The acquisition of EMI by Terra Firma turned out so as one of the greatest failures of the leveraged buy-outs of financial history.

Species

Depending on the purchaser, a distinction is management buy -out (MBO), management buy- in (MBI ), Employee Buyout ( EBO ), Owner buyout ( OBO ) and institutional buyout (IBO ). In MBO, the company was acquired by its all or part of its corporate governance, the MBI is buying an external management the target company, the EBO, the workforce of the target acquire the company. A previous co-partner buys from the OBO during the IBO is a holding company of the buyer. The investment is often after a holding period of sold usually 4 to 5 years from the investor (which received participation given the status exit). If the next buyer also a financial investor, so it is called a secondary buy -out, the resale to a third party financial investor of a tertiary buy -out.

Legal Issues

An LBO is regularly based on an asset purchase agreement. He belongs to the internationally most complex agreements. After the Anglo-Saxon legal maxim Caveat emptor, the buyer bears the risk that the purchased item is free of open material and legal defects. " May the careful buyer " is an Anglo-Saxon " common law " in particular on corporate acquisitions applied rule of law. After that, it is the buyer's risk, to capture all the goods concerned, the circumstances and to identify any deficiencies. The risk is thus initially with the purchaser, who enjoys no legal protection. Therefore, it is international practice of minimizing the due diligence the buyer risk or even mutually exclusive. Here, the seller may the circumstances known to him - as in German law - but not silent. Even in Germany, see Acquisitions usually not without due diligence tests. According to the prevailing opinion and held that the due diligence therefore not part of common usage. You should also not just turn off the supposed buyer risk, but is primarily determining the purchase price.

The purchase agreement is not bound in Germany on a special form, but there are regulations, which establish the need for notarization of the business purchase agreement in individual cases. Thus, the acquisition of shares in a GmbH regularly notary to record that ( § 15 para 4 Limited Liability Companies Act ). This is especially true when a plot of the assets of the company belongs ( § 311b para 1 BGB). A purchase agreement must be in accordance with § 311b para 3 BGB also in the sense of § 128 BGB be notarized in conjunction with § § 1 et seq BeurkG if he has a lump sum to the current assets of the acquiring firm to content. According to the jurisprudence of the Supreme Court and the Federal notarization can be avoided if the individual asset components are specifically named and fully listed in the purchase agreement. However, this requires a seamless contracts, to avoid the risk of missing a notarization and nullity. The OLG Hamm has stated in the cited decision of 26 March 2010 contract of sale in a specific case for lack notarized void. The parties had been included in the share purchase agreement, a list of inventory and inventory items as well as various, precisely designated claims, but in addition also the acquisition of "all assets" agreed and not specifically included trademark and various furnishings from the assets of the GmbH in the acquisition agreement. Unlike land sale contracts and assignments of the shares according to § 15 para 4 Limited Liability Companies Act could in this case the lack of notarial form can not be cured by the execution of the purchase contract. missing it at these contractual requirements, the asset purchase agreement 125 BGB is due to procedural defect under § void.

According to § 71a AktG transactions are void in which a corporation or a partnership limited by shares granted loans or provides collateral, so that a third party may acquire their shares (prohibition of so-called financial support, "financial assistance" ). This provides (§ 71 AktG) to bypass the banned purchase of own shares. Excluded are transactions with credit institutions and employees (employee shares). Thus, § 71a AktG prohibits a secured through the AG Financing in corporate takeover, especially when LBO. Directive 2006/68/EC provides, since October 2006, though, that these transactions are permitted if at arm's length within the arm's length principle were agreed and a reasonable price paid for the shares (Art. 23 para 1 Capital Directive ). You now provides the ability to allow public companies under certain conditions, to be paid in respect of the purchase of its shares by a third party financial support. The German law for the time being, however, makes use of the possibility of Articles 23 et seq of the Capital Directive no use. F For the ratio of § 71a AktG and Article 23 of the Capital Directive this has the consequence that all cases in which Article 23 et seq of the Capital Directive financial support might be allowed under national law pursuant to § 71a AktG remain prohibited.

Some courts in the U.S. have LBOs stated in the insolvency due to constructive fraud or actual fraud due to be ineffective. Was applied U.S. Bankruptcy Code, 11 U.S.C. § 548 ( a) (1 ). Similar provisions also knows the German insolvency law ( Voidable ). The reason for the contestability lies in the shift of assets of the Company without consideration for the company itself Therein lies one the other company's creditors discriminatory power that can subject under bankruptcy laws, under certain conditions of unwinding.