Talk:Leveraged recapitalization

Misleading statement

The statement "This will cause the share price to increase significantly, making the company a less attractive takeover target." does not have any real basis and defies basic company valuation. The company's total value is for the most part independent of the capital structure. Take the example of a company with a total market capitalization of $400 million and a leverage ratio of 50% (thus carrying $200 million in debt and $200 million in shareholder equity). If management takes on $100 million more of debt and distributes the cash to the shareholders in a special dividend, the stock price should drop by approximately half (new equity market cap now $100 million). The company's valuation is still $400 million but it is now made up of $300 million in debt, $100 million in equity.

Shareholders may view this capital structure more favorably and be willing to pay a premium for the shares (after the adjustment for the special dividend but it is unlikely that that the net result will be an overall increase in the stock price.

Increasing the leverage will likely REDUCE the overall price a bidder will have to pay. In the case above, the bidder only has to pay $100 million in cash to buyout the target.

The higher leverage may make the company less attractive to a takeover target for several reasons but a higher stock price is not one of them. —Preceding unsigned comment added by Cdr ckharris (talk • contribs) 19:07, 1 August 2008 (UTC)

Merge

Deb indicates that her latest edits merge material from another article. Which article is that? ---Isaac R 16:46, 28 Apr 2005 (UTC)

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