Chapter 18 – Private Equity Impact on Corporations
Q1. What are some measurable benefits from private equity ownership of corporations?
A. Better management practices; higher productivity and correspondingly higher
Q2. What were the World Economic Forum’s principal conclusions regarding private
equity firms?
A. The World Economic Forum’s conclusions are that private equity firms do more
than apply financial engineering to their target companies. Research has
demonstrated that private equity-owned companies have high scores on a wide
Q3. What were the principal perceived benefits for the PE consortium’s acquisition of
TXU?
A. Low-beta industry; solid historical returns; strong projected industry growth;
Q4. In hindsight, what were some of the errors committed by the buyout group for TXU?
A. They bought TXU at a time when energy costs were at an all time high and
Q5. What were the principal risks faced by the PE consortium when they made their bid
to acquire HCA?
A. Whether the capital markets would allow $27 billion of new debt; whether the
targeted IRR was achievable, given the possibility of margin contraction due to
Q6. What aspect of Harrah’s business makes it not a good buyout target?
A. Large casino operators often grow by expanding their footprint, which requires
Q7. What is the impact of highly leveraged deals on the por<olio companies’ ability to
compete in their industries?
A. High leverage decreases the operating ;exibility of a company. Cash ;ow that
otherwise would have gone to maintenance or expansion CapEx is instead
Q8. Describe the three main areas where private equity investments may bring value to
corporations.
A. The three areas are:
i. Financial engineering: refers to e?orts to add value by improving a
company’s capital structure. Improvement means making the capital
ii. Operational engineering: refers to e?orts by private equity firms to
improve their por<olio companies through formal and informal
iii. Governance engineering: refers to initiatives by private equity firms to
create value in por<olio companies by improving incentives and creating
Q9. Which of the three private equity value propositions for corporations has become
most problematic in recent years?
A. Financial engineering: while prudent debt can lower the overall cost of capital for
a company, extreme levels of debt can become harmful, diverting management
Q10. What is a benefit of having a financial buyer versus a strategic buyer in an M&A
transaction?
A. No anti-trust issues (assuming the Target is not being merged with another
Q11. Describe the benefits of the private-equity ownership model versus public ownership
and family-ownership.
A. Private Equity owned companies are more likely to expose and reconfigure or sell
suboptimal business segments, compared to large public companies. Companies
