Solution Pages: 5
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Questions Covered in the Solution
1. Explanation of the essence of this deal as how it works.
2. If you are Sam Mencoff would you join the deal or not? Explain why in detail, including all relevant considerations he must take into account.
3. If you are Bernie Sanders, would you propose legislation to out law such deals? Explain why.
4. If you are are Mitt Romney, would you propose legislation to outlaw such deals? Explain why. If you don’t know who Mitt Romney is, use Google
Sample of Solution
- Explanation of the essence of this deal as how it works.
The deal under concern is, in essence, a leveraged buyout by the management of Norris Industries which involves, the attainment of the fund from different sources (effectively as debt) and then use that funds to buy all the outstanding shares of the corporation. The mechanism for raising all the required funds and their respective allocations for the leveraged buyout was structured by Kohlberg, Kravis, Roberts and Co. (KKR) which was the market leader for leveraged buyouts. Since, the deal invigorates the purchase of 9.8 Million outstanding shares of Norris Industries, at the price of $ 43.05 per share. The total funds needed for the execution of this deal was around $ 420.1 Million, which was 10.6 times of the earnings in the last fiscal year. Since, the purchase price was exceptionally large, First Chicago Investment Corporation (FCIC) which was a partner in this deal and has to pay $ 9 Million for the strip of investment instruments to fund this deal.
- If you are Sam Mencoff would you join the deal or not? Explain why in detail, including all relevant considerations he must take into account.
Sam Mencoff, an investment manager of FCIC, has to scrutinize the forecasted position of the company in order to realize the potential risks associated with the investment in leveraged buyout of Norris Industries. Although, FCIC has the portfolio of startup ventures and the leveraged buyout. But as the investment in Norris Industries was exceptionally larger relative the FCIC’s previous investments. The investment group has to be more conscious before making this investment. For evaluating any investment, FCIC has always emphasized the strength of the management team, the market value of that investment or competitive advantage and the potential returns in compensation to the risks involved in that particular investment.
- If you are Mitt Romney, would you propose legislation to outlaw such deals? Explain why.
Mitt Romney, a pertinent Republican and admired businessman, has the history of leveraging. While being in the Bain Capital, a private equity firm, Mitt executed an aggressive strategy of acquiring the stumbling firms through leveraged buyouts. Since, Mitt was of the view, that startups are riskier than the established firms. He invested in the floundering firms, which may have lucrative cash flows, mainly by borrowing the required capital from the banks like Goldman Sachs or Citigroup. While taking over the management, Bain was able to direct the core strategies of the companies which may even contradict the standing progressions.