When two companies get involved in each other\'s business in any form, structura

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When two companies get involved in each other's business in any form, structural changes take place in both companies. The following is one way that companies join forces: Using a large amount of borrowed funds, a private group acquires a publicly traded firm in the expectation of changing the firm's management and operations. The preceding statement best describes a The employees and a small group of managers of Allied Biscuit Company borrowed $23.75 million and purchased its outstanding common stock, with the expectation of making the company more profitable and themselves wealthy This activity best describes a: O Leveraged buyout O Spin-off Digicon Inc. has been a leading producer of computer hardware, including hard drives and CD-ROM drives, for a couple of decades. More recently, Digicon entered the software market, and this division has grown to be a major part of Digicon's overall corporate structure. The hardware and software markets are very different lines of business, and the firm has struggled at times when making strategic decisions that affect both lines. Digicon is now in the process of spinning off its software division. Which method of changing corporate control does this example illustrate? O A leveraged buyout O A divestiture O A joint venture O A consolidation If Digicon proceeds with the spin-off, how will shares in the new software company likely be apportioned? Shares in the new company will be sold in a public offering. O Shares in the new company will be distributed to shareholders in Digicon. 11.34.1 2004-2016 Apu rghts reserved. 2013 Cengae Lesming exrept as noted. As ights reserved Grade It Now Save & Continue

Explanation / Answer

"Using a large amount of borrowed funds, a private group purchases a public traded firm in expectation of changing the firm's management and operations". This process is popularly known as a Leveraged Buyout (LBO) . In a LBO a private equity or a private group of investors or even another public company purchase a target firm using a large amount of borrowings for the purchase. Most often such huge borrowings are funded by keeping the assets and expected future cash flows of the target firm as collateral. The target firm takes the pruchase funding borrowings onto its balance sheet and the buyer aims at paring down the highly leveraged target firm balance sheet over a period of time.

The purchase of the outstanding common stock of Allied Biscuit Company by its managers and employees is an example of a Management Buyout (MBO) which is the purchase of controlling stake in a firm by its employees, executives, board of directors, managers or all of them in the hope of enhancing the business' profitability and their own wealth through being a part owner of the business.

Digicon's initiative of separating its software business is an example of a divestiture in general and a spinoff in particular. A spinoff is the act of creating a new and independent company through either selling off or issuing new shares of an existing business or division of the original parent company. It is usually undertaken to streamline operations, unlock the value (through subsequent IPO of the spinned off netity) of a particularly lucrative division, focus on core competency and more.

Digicon's spinoff will result in the entire existing ownership being distributed to existing shareholders in the form of stock dividends through issue of new shares in the new spun off entity.

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