Private Equity Essay Example | Topics and Well Written Essays - 3000 words

Private Equity - Essay ExampleThis process normally involves substantial borrowings and is therefore described as Leveraged buy step forwards (LBO). A nonher full term which is normally used is taken common soldier which relates to a buyout of a commonplace company and in the process removing it from the contrast exchange listing, and therefore transforming it into a private firm (Fraser-Sampson, 2007). Public companies are normally taken private because they chip in the potential of providing substantial cash flows to investors as the shares are currently undervalued on the stock market. The managers see the potential of significantly boosting the firms value under private ownership (Brigham and Ehrhardt 2005, p. 664). This means that companies taken private have the potential of enriching not only the managers who take part in the buyout but the public shareholders who are often offered prices higher than the going market price to sell their shares. slightlytimes these shareh olders hold firm but in the end they have to sell their shares because the buyers have enough of the companys shares to sufficiently influence the takeover of the public company. A wide-ranging lean of public companies have been taken private over the years. A list of some of these companies is provided in Appendix 1 and 2. This list is by no means exhaustive but gives an indication as to the level of activities taking place as it relates to these types of transactions. Arguments for and against public to private transactions A number of arguments have been levelled against public to private transactions. However, there have withal been several arguments in its favour. According to Becky (2002, Private vs. Public ) in the 1980s a lot of public companies were taken private through a process called a leveraged buyout. That trend may have benefited the entire economy by making the companies a trusty deal more efficient. Arguments against public to private transactions Opponents t o public companies being taken over by private uprightness have levelled a number of criticisms against these types of transactions. They believe that some of these private equity managers actually buy public companies, reduce employees, strip the companies of assets and then sell them in secondary buy-out deals. Some also indicate that they are allowed to set off participation payments against income and in the process paying less tax. According to Wiley (2007, p.79) some countries are pursuing tougher and tighter thin equity tax rules under which it can be difficult to make loan interest fully deductible. Adding value by increasing earnings multiple Some of the opponents of these types of transactions have indicated that there are many ways the managers of public companies could add value to the company instead of allowing them to go private. These include taking out loans instead of issuing more shares which would be favourable to shareholders as they would see their earnings p er share increase. These companies would also pay less tax because the interest on these loans is tax deductible. Increasing the cash flow of the Company Cash flow can be improved through proper management of public companies. in that respect is normally unpredictability in the levels of cash flow in public companies that have been taken private and which therefore need to make regular interest payments. Debt added to private company These purchases normally take place with the use of large amounts of debt, referred to as leveraged