Question 5 \"Educational publisher HMH eyes lPO Houghton Mifflin Harcourt, the U

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Question 5 "Educational publisher HMH eyes lPO Houghton Mifflin Harcourt, the US educational publisher that emerged from bankruptcy proceedings last year, is preparing to file for an initial public offering that could raise $250m, people familiar with its plans said. An IPO would cap a tumultuous period for the company that was put together by lrish entrepreneur Barry O'Callaghan through two leveraged buyouts in the middle of the last decade", Arash Massoudi and Andrew Edgecliffe-Johnson, Financial Times, July 25, 2013. a) Discuss the potential effects of a leveraged buyout (LBo) on four of the relevant stakeholder groups in a firm. (7 marks) b) Discuss why empirical studies might seem to suggest that returns to the firm that engages in a takeover is value destructive to its original shareholders. (8 marks) (15 marks in total) ***End-of-Paper***

Explanation / Answer

Answer:(a)Answers should outline the potential effects of a leveraged buyout (LBO) on FOUR of the various stakeholder groups in a firm as listed by Arthur D. Sharplin (Strategic management) as follows.

•Common (equity) shareholders

•Preferred shareholders

•Trade creditors

•Holders of unsecured debt securities

•Holders of secured debt securities

•Intermediate (business) customers

•Final (consumer) customers

•Suppliers

•Employees

•Past employees

•Retirees

•Competitors

•Neighbours

•The immediate community

•The national society

•The world society

•Corporate management

•Organisational strategists

•The chief executive

•The board of directors

•Government

•Special interest groups

Effects on relevant stakeholders

The incumbent shareholders:

•can make huge gains in the market as their share price can increase dramatically.

The incumbent holders of unsecured debt securities:

•as the leverage increases the risk of the firm going bankrupt increases. Hence the risk to incumbent holders of unsecured debt securities increases.

Past employees / Retirees

•as the risk of the firm going bankrupt increases, the risk to past employees / retirees losing their pensions may increase.

The incumbent managers:

•if it is an MBO there should be a reduction in agency costs as the managers will have a much larger stake in the firm and a much larger incentive to maximise return

•if it is not an MBO then the potential new owners may use new managers and replace the current managers

The incumbent workers in / suppliers to the firm:

•Due to large interest payments the new management may be forced to cut back on waste and inefficiency” and make the highly leveraged company “lean and mean”.

Hence they will be looking for savings in wages and / or staff numbers and / or the cost of supplies.

The Government:

•Part of the value created by leverage comes from the reductions in tax due to higher

interest payments.Empirical evidence supports the view that LBOs and MBOs make the companies more efficient and create value and not just transfer wealth from one group of stakeholders to another.

Answer:(b)It is widely reported that the level of failures in corporate acquisitions is high. Candidates are required to discuss the reasons for such a high failure rate and their answer shouldrefer to examples of such ‘failed’ mergers and acquisitions.Based on the most recent survey in this area, the leading reasons that so many deals in the past have failed are now widely known. P oint should include the following:

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