Study On The Financial Risk And Prevention Of Leveraged Buyout

In recent years,leveraged buyout has gradually become an important way in mergers and acquisitions between companies.The development of leveraged buyout business in China appeared late,and the scale of leveraged buyout still has a large disparity compared with developed countries,such as the United States.Although leveraged buyout enables acquisition entities to acquire target companies at a lower price,there are high financial risks at all stages of leveraged buyout.It is not good for the successful completion of mergers and acquisitions activities.In addition,financial institutions such as banks act as funds in leveraged buyout activities.Their behaviors of lending to acquisition entities are not in line with the macro requirements of “structural de-leverage” in China.Consequently,from the perspective of the financial risk of leveraged buyout,this paper conducts an in-depth study on the financial risks and preventions of leveraged buyouts in China.This paper takes Long Wei Media's leveraged acquisition of Wan Jia Culture in 2016 as an example,based on capital structure theory,undervalued theory,cash flow theory,information asymmetry theory and risk-based financial management theory.Firstly,it briefly reviews the whole process of the leveraged buyout and analyzes the financial risks of Long Wei Media and Wan Jia Culture in each stage of the leveraged buyout.It believes that the financial risks are mainly reflected on the information asymmetry risk and undervalued risk during the planned acquisition phase;the financing risk,the risk of fund payment and short-term debt repayment during the fund payment phase and the risk of stock price fluctuation during the termination phase.The F-score model is also used to quantitatively evaluate the financial risks of Wan Jia Culture.Secondly,on the basis of the research on the financial risks of the above-mentioned leveraged buyout and combined with the business model of the leveraged buyout in the United States,the precautionary measures for the financial risks of the various stages of the leveraged buyout are as follows: attach much importance to the investigation and analysis before M&A and make a better understanding of the mergers and acquisitions;use a combination of various assessment methods to value the target enterprise scientifically;enrich financing channels and choose the financing methodsrationally;optimize the capital structure and select the fund payment methods flexibly;control the size of borrowings of acquisition entities and construct a dynamic model of the financial risk control;identify the rights and obligations of both parties clearly and strengthen the risk management of the capital market.Finally,the conclusions of this paper are: first,the acquisition entity can't carry out the leveraged buyout blindly.They should conduct a comprehensive and systematic analysis of the acquired companies before the acquisition and reasonably control their own financial leverage multiples.Otherwise,it will have a serious adverse impact on both parties.Second,the acquired company should fully understand the borrowing ability and qualification level of the acquisition entity to determine whether there is a “hostile takeover”.Third,the relevant departments should improve the laws and regulations related to the leveraged buyout and increase the penalties for the “hostile takeover”behavior.Fourth,whether from the leveraged buyout process and its final results,or from the evaluation of financial indicators and financial risk models,Long Wei Media didn't successfully acquire the shares of Wan Jia Culture,the entire acquisition process existed high financial risks.