What are the primary objective of leveraged recapitalization?
A leverage recapitalization or “recap” offers owners an opportunity to achieve two often conflicting objectives: (a) satisfying the business’ need for capital to fund its continued growth and (b) reducing the owner’s personal risk.
What are effects of using leveraged recapitalization?
A leveraged recapitalization often takes into account the current debt environment, which may not stay fixed forever. In other words, if interest rates change, a leveraged recapitalization may provide a negative effect on the company in the form of increased interest expense.
What is a PE recap?
A recap is where business owners can sell a portion of their business to Private Equity (PE) firm/partner. This gives them a cash reward, whilst still giving them the benefit of forecasted growth, or a turnaround in the economy. More so, PE firms not only provide capital they can add value as a business partner.
How does leverage recapitalization used for defending the hostile takeover?
The technique can be used, and has been used, as a “shark repellant” to ward off a hostile takeover, actual or potential. This is done by adding debt, eliminating idle cash and debt capacity. Although such recaps are designed as a takeover defense, a high percentage of firms that adopt them are subsequently acquired.
Why do a leveraged recap?
A leveraged recapitalization is also referred to as leveraged recap. Usually, a leveraged recapitalization is used to prepare the company for a period of growth, since a capitalization structure that leverages debt is more beneficial to a company during growth periods.
What does it mean when a company recapitalizes?
Recapitalization is the process of restructuring a company’s debt and equity mixture, often to stabilize a company’s capital structure. The process mainly involves the exchange of one form of financing for another, such as removing preferred shares from the company’s capital structure and replacing them with bonds.
Why would a company recapitalizes?
Recapitalization is the restructuring of a company’s debt and equity ratio. The purpose of recapitalization is to stabilize a company’s capital structure. Some of the reasons a company may consider recapitalization include a drop in its share price, to defend against a hostile takeover, or bankruptcy.
How do you recap a cap table?
We’ve done it a few times, but it rarely works out very well. Often times we just end up throwing more good money after bad. Occasionally if the ratio isn’t too bad, we might participate. On a few occasions, I’ve actually used the *threat* of a recap to get earlier investors to participate in a new round.
Why do companies do leveraged recapitalization?
Who benefits from leveraged recapitalization?
Beyond providing liquidity or diversifying one’s wealth, a leveraged recapitalization offers numerous benefits to selling shareholders who are not ready to retire including the opportunity to share in the future success of the business.
Why would a company recapitalize?
What is equity capitalization?
Equity market capitalization refers to the total value of all shares traded on the equity market. It is derived by adding up the individual market caps of all stocks in the market, providing an aggregate figure.
What does it mean when a company does a leveraged recap?
A leveraged recapitalization is also referred to as leveraged recap. In other words, the company will borrow money in order to buy back shares that were previously issued, and reduce the amount of equity in its capital structure.
How are leveraged recapitalizations different from new stock issuances?
Shareholders are less likely to be impacted by leveraged recapitalizations as compared to new stock issuances because issuing new stocks can dilute the value of existing shares, while borrowing money does not. For this reason, leveraged recapitalizations are looked upon more favorably by shareholders.
How does a leveraged recapitalization differ from a LBO?
In dividend recapitalizations, the capital structure remains unchanged because only a special dividend is paid. Leveraged recapitalizations have a similar structure to that employed in leveraged buyouts (LBO), to the extent that they significantly increase financial leverage. But unlike LBOs, they may remain publicly traded.
Are there any mathematical proofs for leveraged recapitalizations?
There are several mathematical proofs for the benefit of leveraged recapitalizations. One of these, for example, is the Modigliani-Miller theorem, which forms the basis of modern thought on capital structure. This theorem describes how debt provides a tax benefit or interest tax shield that equity does not.