The Analysis Of The Relationship Between Leveraged Buyout And Capital Market

Leveraged buyout is a special form of raising large amount of money to acquire or merge the target company in the capital market by way of debt capital, equity capital and various financial derivative tools. Its character of higher liability can help to meet the capital requirement in the reforming wave of Chinese national companies; its higher return can bring more motivations, competitions and energies into the national companies. The development of leveraged buyout in China will improve the competence, expand companies'size, optimize the industrial structure and resource distribution, and consummate the corporate governance. Because of the close relationship between leveraged buyout and capital market, it is of special significance to consider about the capital market environment in the research of leveraged buyout.This paper first describes the developing history of leveraged buyout abroad, and then concluded its required capital market environment, i.e. general application of junk bond, the release of financial governance, and the appearance and prevailing of multilayered financial tools. Then it examines the relationship between the capital market and leveraged buyout, and get to know the high reliance on capital market of leveraged buyout in the processes of financing and exiting. Besides, there a mutual affect and effect between them.Secondly, this paper analyses the restricting effect on leveraged buyout of the capital market, from loan financing, debenture financing, equity financing, convertible note financing, investment restriction, and exit approach. For loan financing, commercial banks are not allowed to provide the capital to fund the acquisition in equity trading; for debenture financing, it has many limitations, and there haven't been any corporate debentures in reality, not even to say the issuing of junk bound with higher risks and higher returns; for equity financing, it has an extremely high legal requests for the issuing entity and the relevant terms; however, with the increasingly more generous investment requirements in the new"corporate law", the proportion limit in convertible notes is cancelled, which improve the possibility of the leveraged buyout; moreover, in the absence of mixed financing tools, the singleness of exiting approach for leveraged buyout in China has limited the further development of leveraged buyout.From the above aspects, in conjunction with the practice in our country, this paper brings forward 5 ways below to improve the capital market gradually, and to offer a comfortable developing environment for leveraged buyout: firstly, escalate the capital market's volume; secondly, adjust the legal requirements, offer a more generous terms for debenture issues, and complete the relevant legal system; thirdly, adjust and innovate the financial tools on the market, and add multilayered financial tools; fourthly, encourage the agency institutions'expanding; fifthly, enhance the opening of capital market.Next, it analyses and compares the domestic and foreign leveraged buyout cases, including MBO of Vicome, acquisition of RJR Nabisco, and deduces that the main differences are due to: unclear capital resources, ambiguous operations; and in practice, the single financing tools, approach and schedule by way of debenture; and the illegal manipulation in risk to some extent.According to the above research, this paper brings forward how to improve the feasibility of leveraged buyout in current capital market environment. The analysis and research of this paper is consisted of three parts including; preparation, versatility in financing, risk control in operation. In preparation part, it makes a comprehensive survey on the company itself and the target company by trial and error; in financing process, it states utilizing the existing and trying the new financing tools to raise the capital necessary; in the operation process, it is essential to introduce some models to control the financial risks effectively. This paper is constructed as below:Part One summarizes the necessity of the research, including Chapter One, which presents the concepts, types and characteristics of leverage financing and Chapter Two, which expatiates on the necessity of the research on leveraged buyout.Part Two states the relationship between leveraged buyout and capital market, and discusses the relevant practical situations in our country, which includes Chapter Three, Four, and Five. Chapter Three illustrates the relationships between each process in leveraged buyout and capital market; Chapter Four is mainly on analyzing the feasibility of leveraged buyout in our country; Chapter Five discusses how to increase the feasibility by improving the capital market environment.Part Three discusses how to improve the success probability and the yield, and control the risk effectively in present capital market environment, including Chapter Six and SevenThe innovations of this paper are mainly on:Firstly, it discusses the leveraged buyout together with capital market. The previous researches used to examine them separately. The special operational method of leveraged buyout only exists in specified capital market environment, thus, it is not recommendable to discuss the operation without considering the macro market environment; otherwise, we cannot reach the deficiencies of our capital market and find out the way to make any remedies.Secondly, to make the problems legible, it discusses the relationship between leveraged buyout and capital market in detailed processes.Thirdly, it collects the domestic and foreign cases to compare and analyze them in the course of research, which makes more straightforward and detailed analysis of the deficiencies of leveraged buyout in current capital market environment, and the remedies.Fourthly, it applies the model analysis in examining how to carry through the leveraged buyout efficiently in order to control the financial risk more effectively.