Morgan Stanley

The Journal of Applied Corporate Finance

Private Equity
Summer 2006, Volume 18.3

Morgan Stanley Roundtable on Private Equity and Its Import for Public Companies
The roundtable participants discuss how private equity adds value, pointing to the aggressive use of leverage, powerful equity incentives, and small active boards made up of the firm's largest shareholders. Successful private equity investors now complement these standard features with operational expertise. Public companies can replicate the financial and incentive benefits, but translating board-level expertise and engagement will be a bigger challenge.

Leveraged Buyouts in the U.K. and Continental Europe: Retrospect and Prospect
Buyouts in the U.K. and Continental Europe have grown dramatically in the past ten years. Prospects in the latter remain especially strong, as shareholder pressure has increased and opportunities for restructuring conglomerates are abundant. Buyouts of entire public companies are growing, adding to buyouts of divisions and family-owned businesses. Increased competition from new entrants and finding value-preserving exit vehicles are two challenges facing private equity firms.

The Financial and Economic Lessons of Italy's Privatization Program
Italy's privatization of state-owned enterprises has led to dramatic increases in the size and efficiency of the nation's stock markets and in the safety and stability of its banking system. The main lesson from this experience is that privatization is likely to yield decisive benefits only if the program is properly designed and sequenced, beginning with financial institutions, and emphasizes share issuances rather than asset sales.

Canadian Business Trusts: A New Organizational Structure
Canadian business trusts are a tax-efficient way for companies to pay out most of the cash flow. Public corporations converting to a trust have increased shareholder value 20 percent on average. The units in the trust are a "stapled" security, combining subordinated, high-yield debt and equity. Consequently, financial distress is reduced because unit holders are more willing to renegotiate than regular debt holders.

Public vs. Private Equity
Many corporate executives view private equity as expensive relative to public equity. But stock markets occasionally become "closed" and public equity can involve significant information costs. Private equity partially overcomes these costs by relying on the oversight of well-informed and highly motivated owners. Moreover, research suggests that the best private equity firms consistently add value.

Avoiding "The Synergy Trap": Practical Guidance on M&A Decisions for CEOs and Boards
To justify acquisition premiums, CEOs must demonstrate the source of expected synergy gains. The authors present an "earnings"-based model for the target that yields combinations of cost reductions and revenue enhancements that justify the premium and a capabilities/market access matrix for assessing potential synergies. The method translates DCF merger criteria into a language familiar to managers and investors.

Demutualization and Public Offerings of Financial Exchanges
By the end of 2006, most major stock exchanges will have adopted a for-profit, publicly listed organizational form. This article discusses the forces that are driving such change and offers early evidence on the significant increases in operating performance and share values of listed exchanges. The next wave of transformation is likely to produce geographical as well as product line consolidation.

Evidence on What CFOs Think About the IPO Process
The authors surveyed hundreds of CFOs on their perceptions of the IPO process. They revealed that the primary motive for going public is to create a liquid stock to fund acquisitions and that stock market conditions drive the IPO timing decision. Underwriters are selected on their reputation and industry expertise, not fee structure. Moderate underpricing is an acceptable cost given the IPO risk for investors.

The views and opinions expressed in the Journal do not necessarily represent those of Morgan Stanley or its affiliates.



		Overview

For close to 20 years, the Journal of Applied Corporate Finance has distinguished itself as a unique forum for addressing the topics that drive corporate value. Featuring articles by top academic thinkers and financial practitioners, this quarterly publication presents the practical application of the best current research in finance.