F3 - 10. Business Re-organisation

Question 1

What are 3 reasons that a business might want to divest some or all of a business?

Answer 1

1. Shift in strategic emphasis
2. Poor results
3. Need for cash

Question 2

What are the 2 main benefits of a demerger/spin off?

Answer 2

1. Concentrate on core business
2. Easier for investors to analyse

Question 3

What is the pro and con of a sell off?

Answer 3

1. Receive cash
2. Retain no further stake

Question 4

What is the benefit of liquidation?

Answer 4

Obtains some value for shareholders when dissolving an unprofitable company

Question 5

What is a management buyout?

Answer 5

Team of managers from within buy out part of the business

Question 6

What are the motivations (2) of an MBO for the managers?

Answer 6

1. Own and run own business
2. Benefit from potential large equity gains

Question 7

What are the motivations (3) of an MBO for the existing owners?

Answer 7

1. Can dispose of non core operations
2. Can raise cash
3. Quicker than sale to 3rd party

Question 8

How is an MBO typically financed?

Answer 8

~5% cash from management team
~ 30% bank debt
~ 30% mezzanine debt
~ 30% venture capital

Question 9

When will a venture capital firm be happy to invest in an MBO? (2)

Answer 9

1. Management have proven skills and track record
2. High potential growth

Question 10

What 3 things will a VC firm want when assisting an MBO?

Answer 10

1. ~30% average annual return (cap gain + dividend)
2. Board presence and decision making input
3. Clear exit plan (3-7 yrs)