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Capital Acquisition & Capital Structure

2012. Capital Acquisition & Capital Structure. BT 401-13. Capital Structure: Key Topics. Evaluation of Current Financial Obligations and Resources –  The Static View (Balance Sheet) Prioritizing Capital Structure Risks Evaluation of Capital Market Transactions

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Capital Acquisition & Capital Structure

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  1. 2012 Capital Acquisition&Capital Structure • BT 401-13

  2. Capital Structure: Key Topics • Evaluation of Current Financial Obligations and Resources –  • The Static View (Balance Sheet) • Prioritizing Capital Structure Risks • Evaluation of Capital Market Transactions • The Dynamic View (History & Prospects)

  3. 2010 Risk of Impairment Various Risks – Rates, Refinancing, Covenants, Accounting visibility, Consolidation, Credit ratings

  4. 2012 Capital Market Transactions • Potential Equity Transactions: • New Issuances of Equity • Conversions • Returns to Shareholders (Dividends & Buybacks) • Potential Debt Transactions & Credit Ratings • Banking Relationships • Capital Market Strategies • e.g., refinancing options, hedging strategies, dividend policies, etc. • Major Restructurings

  5. Equity structure looks pretty simple

  6. Common stock only • No preferred, converts, warrants • Par Value and “Paid-in Capital” • “Authorized” vs “Issued & Outstanding” • Treasury Stock

  7. Debt structure looks simple – but is not!

  8. p. 65

  9. 1916: Original incorporation • 1979: Acquired by RJR Nabisco • 1990: Sold to Merrill Lynch investors • Recapitalized by Texas Pacific Group ?

  10. 1999: New IPO (NYSE: DLM) • 1997-2001: Deals with Nestlé, Contadina, SunFresh • 2002: Major deal with Heinz • 2006: Acquisition of Meow Mix

  11. Buybacks

  12. 2011 DJIA Buyback Results

  13. Other Key Headings

  14. Other Key Headings

  15. Capital Acquisition The Original Issuer Paradigm

  16. “Where does Money Come From?”A Parable

  17. The Great Counterexample

  18. Henry Ford & the Invention of “Retained Earnings” Most businesses can’t do this

  19. Capitalism:Other People’s Money “Original Capitalism”

  20. Capitalism:Other People’s Money

  21. The “Rich Uncle” Phase of Capitalism 1850-1950

  22. The “Finance Revolution” (since 1950...) • Tremendous quantitative expansion of capital markets • Tremendous qualitative development of • new financial players • new financial instruments • Development of “Modern Finance Theory”

  23. Growth of Global Financial Markets Source: The McKinsey Quarterly (2005)

  24. The Mutual Fund Explosion Source: The Wall Street Journal (2005)

  25. A Change in Thinking About Capital & Investment • The old mindset – • “return on investment” • The new mindset – • value creation

  26. “Return on Investment” • Dividends, Coupons • A “Bond” mentality Pennsylvania RR merges with NY Central (1968) Penn Central goes bankrupt (1970)

  27. ROI Mindset • Based on direct claims on the cash flows from the business • Claimed to be the basis of market value by early theorists

  28. Value Creation • Based on Market Value directly • Market value is influenced by many things other than cash flow per se

  29. Starting Up

  30. What are yourStart-Up Needs?

  31. Assets to be Acquired • Inventory • Trained Personnel • Parts • Building • Supplies • Tools...

  32. How do you acquire these Assets?

  33. ...with a piece of paper... How do you acquire Cash?

  34. Acquiring Capital

  35. The Fundamental Question Why would you exchange your piece of paper for my piece of paper?

  36. What terms do I need to include on my piece of paper? • Make it a Contract • ...give it the status of a Legal Instrument • Enforceable in court

  37. What else? Attach “rights” that create value • Promises to Pay Cash in the Future • Periodic payments • Repayment of the Entire Amount Like what?

  38. What else? • Claims on other Assets • “Collateral”, “security interest” • “Liquidation preference”

  39. What else? • Right to Re-sell my Paper to someone else • ...to get cash from someone else (not me)

  40. Two Broad Classes of “Rights”that create Value for the Investor • Intrinsic Value • Extrinsic Value Almost every successful “financial instrument” has both intrinsic and extrinsic value

  41. Intrinsic Value • Created by specific provisions in the “contract” What is “within the four corners of the document”

  42. Extrinsic Value? • Not a part of the “contract” • Not enforceable in court!! • Created from “outside”... • ...by “the Market”

  43. Building a Financial Instrument • Every successful “piece of paper” is a mixture of intrinsic and extrinsic value features

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