Apr 18, 2016

Finance English practice: Unit 40 — Leveraged Buyouts

14 cards
, 56 answers
  • Complete the sentences below. Use the key words if necessary.
    • Conglomerates

      key words
      parent company      ○      subsidiaries      ○      conglomerate      ○      core business      ○      synergy      ○      market capitalization      ○      asset-stripping      ○      undervalued      ○      underpriced


      A series of takeovers can result in a controlling a number of — smaller companies that it owns. When the subsidiaries operate in many different business areas, the company is known as a .

      But large conglomerates can become inefficient. Top executives often leave after hostile takeovers, and too much diversification means the company is no longer concentrating on its — its central and most important activity. Takeovers do not always result in — combined production or productivity that is greater than the sum of the separate parts. In facts, statistics show that most mergers and acquisitions reduce rather than increase a company’s value.

      An inefficient conglomerate whose profits are too low can have a low stock price, and its — the total market price of all its ordinary shares — can fall below the value of its assets, including land, buildings and pension funds. If this happens, it becomes profitable for another company to buy the conglomerate and either split it up and sell it as individual companies, or close the companies and sell the assets. This practice, common in the USA but rare in Europe or Asia, is called . It shows that stock markets are not always efficient, and that companies can sometimes be or — the price of their shares on the stock market can be too low. Some people argue that asset-stripping is a good way of using capital more efficiently; others argue that it is an unfortunate activity that destroys companies and jobs.

      Raiders

      key words
      corporate raiders      ○      leveraged buyout      ○      junk bonds      ○      management buyout      ○      mezzanine financing


      If — individuals or companies that want to take over other companies — borrow money to do s, usually by issuing bonds, the takeover is called a or LBO. Leveraged means largely financed by borrowed capital. After the takeover, the raider sells subsidiaries of the company in order to pay back the bondholders.

      Bonds issued to pay for takeovers are usually called because they are risky: it may not be possible to sell the subsidiaries at a profit. But, because of the risk, these bonds pay a high interest rate, so some investors are happy to buy them.

      Sometimes a company’s own managers want to buy the company, and re-organize it. This is a or MBO. If the buyout is financed by issuing preference shares and convertibles, this is called as it is, in a sense, halfway between debt and equity.

    • Match the definitions with the words below.
      • a company that owns or controls one or more other companies —  . . . 
        parent company
        • parent company
        • subsidiary company

      • the main activity of a company —  . . . 
        core business
        • auxiliary activities
        • core business

      • buying a company in order to sell some of its assets —  . . . 
        asset-stripping
        • asset stripper
        • asset-stripping

      • companies partly or wholly owned by another company —  . . . 
        subsidiaries
        • subsidiaries
        • parent companies

      • having a lot of borrowed money compared to one’s own funds —  . . . 
        leveraged
        • leveraged
        • unleveraged

      • the total value of a company on the stock exchange —  . . . 
        market capitalization
        • total capitalization
        • market capitalization

      • two things working together that produce an effect greater than the sum of their individual effects —  . . . 
        synergy
        • synergy
        • takeover

    • Match the two parts of the sentences.
      • Large conglomerates formed by takeovers  . . . 
        can become inefficient, especially if they are very diversified.
        • can become inefficient, especially if they are very diversified.
        • you can make a profit by buying it and selling the parts.
        • can be less than the sale value of all its assets.
        • they use leverage, and issue junk bonds.
        • there might not be synergies among all its different activities.

      • If a conglomerate diversifies and doesn’t concentrate on its core business,  . . . 
        there might not be synergies among all its different activities.
        • there might not be synergies among all its different activities.
        • can be less than the sale value of all its assets.
        • they use leverage, and issue junk bonds.
        • can become inefficient, especially if they are very diversified.
        • you can make a profit by buying it and selling the parts.

      • An inefficient conglomerate’s stock market value  . . . 
        can be less than the sale value of all its assets.
        • they use leverage, and issue junk bonds.
        • there might not be synergies among all its different activities.
        • can become inefficient, especially if they are very diversified.
        • can be less than the sale value of all its assets.
        • you can make a profit by buying it and selling the parts.

      • If a company is worth less than its assets,  . . . 
        you can make a profit by buying it and selling the parts.
        • you can make a profit by buying it and selling the parts.
        • there might not be synergies among all its different activities.
        • can be less than the sale value of all its assets.
        • they use leverage, and issue junk bonds.
        • can become inefficient, especially if they are very diversified.

      • Raiders do not need to have very much money of their own if  . . . 
        they use leverage, and issue junk bonds.
        • they use leverage, and issue junk bonds.
        • can be less than the sale value of all its assets.
        • can become inefficient, especially if they are very diversified.
        • there might not be synergies among all its different activities.
        • you can make a profit by buying it and selling the parts.

    • Put the sequence of events in the correct order. The first stage is a.
      • 1 — Corporate raiders calculate that a large company is undervalued.
        2 — Investors buy the bonds because they pay a high interest rate.
        3 — The new owners sell some of the company’s subsidiaries.
        4 — The new owners repay the bondholders.
        5 — The raiders buy the company.
        6 — The raiders issue bonds to raise capital to buy the company.
        • 1, 6, 2, 3, 5, 4
        • 1, 2, 6, 3, 5, 4
        • 1, 6, 2, 5, 3, 4

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