Leveraged Buyout
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During the 1980s, corporate mergers and acquisitions occurred at historically high levels in the American economy.1 Prior significant episodes of merger and acquisition activity in the American economy were primarily motivated by corporate diversification strategies, in which the principal goal was growth.2 By contrast, the hostile takeover (wherein the strategic goal often had little relevance to the primary busi ness activity of the acquired corporation) characterized much of the merger and acquisition activity of the 1980s.3 As the decade of the eighties progressed, an increasing proportion of the acquisition and merger activity was of the leveraged buyout (LBO) variety. A leveraged buyout is one in which the cost of the purchase is largely borne by the firm being acquired. In most instances, these deals were structured to be financed by so called junk bonds. Junk bond is the term 1P. F. Drucker, "The Problem of Corporate Takeovers: What Is to Be Done?" The Public Interest (Winter 1986): 17. 2W. F. Glueck, Business Policy and Strategic Management, 5th ed. (New York: McGraw Hill Book Company, 1989), 274. used to describe an (1) original issue, (2) high yield, (3) low grade, (4) corporate bond.4 In the context of high and low grade, this definition is generally applied so that the lowest ranked bond which would be included in the high grade classification would be Moody's Baa.5 Serious questions have been raised ab
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ber 1989, 54.
10 11exercise ultimate control over the corporation through its board of directors. The day to day operational control of the corporation, however, is entrusted to the management team hired by the board of directors.
The theory of the firm is held to be the maximization of profit. Certainly, this theory of the firm expresses the goals of most corporate stockholders. Profitable firms are able to (1) return a part of the profits to the stockholders in the form of dividends, and (2) stimulate the market price of the corporation's common stock. Even when profit maximization is recognized as the goal of the firm, however, there may be disputes. For many stockholders, long run profit maximization is the goal. Long run profit maximization provides (in most instances) a greater increase in welfare for stockholders. For many managements, however, short run profit maximization is the goal. Short run profit maximization is important to contempor ary managers because (1) their earnings levels are often con tingent on short run financial performance results, and (2) they expect their tenure with a given corporation to be rela tively short.
Different perspectives with respect to profit maximization is but one diff
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Some common words found in the essay are:
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Approximate Word count = 4988
Approximate Pages = 20 (250 words per page)
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