Professional Documents
Culture Documents
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The firms are unable to go public for a number of
reasons.
The company may not be big enough;
The markets may not have an appetite for IPOs,
The company may be too young or not ready to be a
public company, or
The company may simply prefer not to have its stock be
publicly traded.
Such firms with solidly growing businesses make
excellent private placement candidates. Often, firms
wishing to go public may be advised by investment
bankers to first do a private placement, as they need
to gain critical mass or size to justify an IPO.
PP, aiming ultimately to go public.
The process of raising private equity or debt changes only
slightly from a public deal.
Private placements do not require any securities to be
registered with the SEC, nor do they involve a roadshow.
In place of the prospectus, I-banks draft a detailed
Private Placement Memorandum (PPM for short) which
divulges information similar to a prospectus.
Instead of a roadshow, companies looking to sell private
stock or debt will host potential investors as interest
arises, and give presentations.
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Fast and cost effective.
Choice of investors.
Flexibility in type and amount of
funding.
Easier to negotiate on return.
Less amount of scrutiny.
Difficult to find investors.
Danger of insufficient funds.
Limited investors.
Illiquidity.
Private placement of shares or of convertible
securities by a listed company to selected group
of investors is called preferential allotment.
Investors may have a lock-in period.
The listed companies has to abide by the
guidelines as per Chapter XIII of SEBI (DIP), in
addition to requirements in Companies Act,
1956.
QIP is another tool, whereby a listed
company can issue equity shares, fully
and partly convertible debentures, or any
securities other than warrants which are
convertible to equity shares to a QIB.
Listing
Investors
Pricing
Adjustments in price
Placement document
Number of allotees
Role of Merchant Bankers
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Case Study – TATA Tetley
Definitions
Real Life Examples
Characteristics
Methods of LBO
Financing LBO
Sources of Gain
Conclusion with help of Case solution.
Tata Tea one of the largest company in the world was
sheltered from competition by a protectionist Indian
government for most of its history.
In 1999, Tata Tea company faced several new
challenges:
Upcoming deregulation.
Changing consumer tastes.
Ban on tea imports scheduled to be lifted in 2001
Majority of the company’s tea is sold in India, with 12%
total international sales only.
Possibility of future stiff competition from Nestle, Sara
Lee Corporation, and Associated British Foods.
To enhance its position in the current brand
Some have “Mezzanine Funds” as well that can be used for junior
subordinated debt and preferred
New company can operate Tax free for as long as 4-5 years.
Often the LBO is sold after this time horizon or reverse LBO
is done.
Control and hence stakes are with few people.
Incentives of Management increases.
Dividends are not necessary.
Debt payment is effective substitute for dividend payment.
To save company from the Bankruptcy.
Restructuring of the acquired firm saves substantial amount
of costs.
Changes in marketing strategies.
Employee reduction
Economies of Scale.
Investors have more information on the value of firm than
public shareholders.
Investors buy firms that have low Q-Ratio.
Net value of the firm may still be higher than LBO price paid.
Such firms are generally resold at much higher price after the
new management brings the firm to its true value by
restructuring activities.
Example, Kohlberg Kravis Roberts and Thomas H Lee Company
started in 1970’s, seas opportunity in inefficient and undervalued
corporate.
March 2000
component of 70 mn pounds