Читать книгу Leveraged Buyouts - David Pilger - Страница 15

Now that the leveraged buyout transaction has been completed the hard work begins for those tasked with the job of running the business and ultimately generating earnings. Business managers will focus on operating efficiency and try to identify areas within the company where unnecessary costs can be reduced. They will also try to identify additional revenue-generating opportunities.

“Faced with a bleak economic horizon, and all of its available cash paying down large interest expenses, a company can find itself in serious trouble.”

The greater economy stalls and businesses are not shipping as many goods as they do under normal economic circumstances. The weakening demand for new trains and less expensive alternatives from overseas result in significantly weaker demand for the company’s engine parts. Revenues decrease on average by 5%, annually, over the next five years.

The company’s cash flow and earnings shrink with the decreasing revenue. The company is faced with difficult decisions – whether, for instance, to make certain capital expenditures, and whether or not to lay off staff. The company is now feeling the weight of the debt burden. All of the company’s available cash is going towards paying the large interest expense. Eventually, available cash runs out, the company misses a payment and defaults on its debt.

Faced with a bleak economic horizon and stiff, less expensive competition overseas, the company decides to file for Chapter 7 bankruptcy and is liquidated through the sale of its assets. The lenders are first in line to receive any proceeds from the sale of the company’s assets. The company made few capital investments due to economic uncertainty and many of the large corporate assets such as plant property and equipment have approached the end of their useful lives, which translates into the assets fetching very little at the time of sale in bankruptcy. The lenders recoup a portion of the debt they extended the company in the leveraged transaction and the equity investor is wiped out of his original 10% equity investment.