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Finance 448

Entrepreneurial Family Firms,


Equity Growth and Global Corporate Restructuring
Winter 2016

Who am I?
Course Basics and Housekeeping
Introduction
Jos Mara Liberti
Global Corporate Restructuring, Winter 2016 Jos Liberti

Who am I?

Jos Mara Liberti

From
Buenos Aires, Argentina

Education
Ph. D. in Economics, University of Chicago.
BA and MA in Economics, Universidad de San Andrs, Buenos
Aires.

Academic Experience at University of Chicago Booth


Visiting Associate Professor; 2012-2013
Cases in Financial Management

Global Corporate Restructuring, Winter 2016 Jos Liberti

Who am I? (cont.)

Academic Experience at London Business School

Assistant Professor of Finance; 2003-2005


Advanced Corporate Finance
Finance II

Academic Experience at Kellogg School of Management


Visiting Assistant Professor of Finance; 2005-2007
Visiting Associate Professor of Finance; 2011-2015
Clinical Professor of Finance; 2016

Corporate Restructuring
Global Entrepreneurial Finance (New!)
Financial Decisions
Finance I/II (Turbo)
Finance I

Global Corporate Restructuring, Winter 2016 Jos Liberti

Who am I? (cont.)

Academic Experience at DePaul University


Assistant Professor of Finance; 2007-2012
Associate Professor of Finance; 2012-2016
Problems In Corporate Financial Policy
Special Topics In Corporate Finance
Mergers & Acquisitions

Global Corporate Restructuring, Winter 2016 Jos Liberti

Who am I? (cont.)

Work Experience at Citigroup/Citibank


Offices: Buenos Aires and New York
Strategic Business Planning Group; 1999-2002
Investment Banking: M&A Latin America 1995-1998
Management Associate; 1995

The Rolling Stones (fanatic), used to play rugby for the Kellogg
Rhinos (Im too old and my bones are all broken now!) and
avid soccer fan!

Bio-Information Sheet: Who are you?


Fill out the information sheet and hand it back during the first
session. Thanks!
I have your basic Bio but would like to now why you are
taking the course!

Global Corporate Restructuring, Winter 2016 Jos Liberti

Useful forAbsolutely Everyone!

Anyone interested in working and/or dealing with ventures,


family firms and closely held firms in an international context.
Understanding the dynamics and country dimensions in terms of:
Strategy, Operations and Access to Finance

CFOs and finance professionals at non-financial companies


dealing with businesses around the world.

Even students who work on their own country may find the
course extremely useful:
Comparing and contrasting opportunities, financing contexts,
governance and legal structures across countries.

Family firms and closely held companies in a variety of roles:


Founders, shareholders or managers of their own familys firm
Non-family managers and employees, investor partners (i.e.,
financial sponsors, strategic investors and advisors of any kind).

Global Corporate Restructuring, Winter 2016 Jos Liberti

Useful forAbsolutely Everyone! (cont.)

Future senior executives that manage global financial


operations, general managers working within these firms and
the intermediaries advising or providing capital to these firms.

Bottom Line I: Beautiful course for those who want to be


challenged!
The downside is I will not cover the material from your
basic/core Corporate Finance courses.
I assume you know the basics and we will move fast.
Financial Management I and II under your belt. It is preferred
if you also have under your belt Financial Management III.

Bottom Line II: Just to be clearand set up expectations. It


is an advanced course in corporate finance.

Global Corporate Restructuring, Winter 2016 Jos Liberti

About The Course

Question: What can you expect?


I have very high expectations on your work.
The class (hopefully) requires a lot of work.
Seriously, the course is a lot of work, we will hopefully go over 5
cases. 4 of which are graded!
How much work? This amount

Global Corporate Restructuring, Winter 2016 Jos Liberti

Teaching Style

Interactive, fun (hopefully!) and very Informal:


Do not be shy about asking questions.
If you knew everything you would not be here.
Be honest with yourself about what you do/dont know.
Feel free to interrupt and share your insights/experiences.
Feel free to interrupt to share any funny thoughts.
Be nice and polite to other students be patient when they ask
questions.
Complain when you disagree with something I do/say.
I would prefer if you do not call me Professor Liberti. Just Jos!

Cold-Calling: A lot! Preparing for class and the case is


essential.
Class-grade participation each class (Out of 3).
Only one 5 to the best of the day. Do not play the guitar

Global Corporate Restructuring, Winter 2016 Jos Liberti

Dropbox

Course web page on Dropbox: (I do NOT use Canvas)

Announcements
Lecture Outlines
Exhibits and Case Study Questions
Case Material
Supplementary Material/Readings
Solutions to cases will only be distributed in class.
Everything will have an electronic copy except the case
solutions.

Weekly updates and announcements.

Be sure you have access to Dropbox and to be in the e-mail


distribution list:
Let me know if you are having problems accessing the system.
This is my main source of communication!

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Course Philosophy: Expectations

Very Practical Course! No chit-chat! Justify!


Using Cases and Valuation Models to understand the problem
Real World Examples
Practical Explanations

What I expect from you?

Preparation for class: we will move very quickly!


Class engagement & participation
Making up missed work
Strict application of the Honor Code

Classroom Etiquette:
Laptop Policy: I will let you know when you should bring your
laptop to class to go over my valuation models.
If you are checking a valuation model, then I do not have any
problem, but I prefer if you are engaged in the discussion.

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Contact Information

Joses appointment/office hours


I am very flexible. You can either e-mail or call me
Phone: 847.467.4524
E-mail: j-liberti@kellogg.northwestern.edu

In connection with class, or whatever you want to speak about,


career plans, job offers, etc.

However, I will NOT discuss specific aspects of a case analysis


until covered the case in class.

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Housekeeping

Please sit in the same place. Crucial!


We are a lot in the class! Really too many for a case-based course.

Please dont come late and turn-off your cell phones.

I hand in solutions, so do not look for them somewhere around


KSM/DP/Booth. I will realize given the quality of your writeups!
I will find out and get &^%$%$#$!!!

Let me know if you think I am not doing a good job, not


clear
Im Latin, so I speak very fast and get excited with the material.
Help me fix mistakes early and feel free to correct my mistakes.

Bottom Line: Dont worry too much, but WORK A LOT!

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Remarks about the Course

I will try to make the course as practical as possible.


The course assumes you have a strong knowledge of finance.
I will try my best to keep it active and dynamic.
Case Discussion will give me that option.
There will be a minimum of lecturing.

It is very important that you come prepare for the class!

This is a case-based course so a crucial part of the learning is


your preparation for each of the classes.
All the material of the course is available on Dropbox and the
case packet.
I will post lecture slides (if any) and sometimes class-case
solutions in Dropbox.

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How to Attack a Case ? For Your Future

Strategy Part: Economics of the business?

Finance Part: Apply these factors to questions like:

Environment? Life-cycle?
Competitors? Risks?
Key Success Factors?

What assumptions make sense?


What assumptions are important?

Economics and Common Sense should guide the numbers and


valuation:

Do numbers reflect economics?


Do numbers make sense? Reality check!
Sensitivity Analysis! How do main drivers affect the valuation?

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How Did I Come Up With the Idea of the


Course?

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Three Building Blocks

The course has been designed to be at the intersection of three


different areas of interest including:
Entrepreneurial Finance and the Role of Private Equity.
Family and Closely-Held Firms.
Corporate Restructuring.
Emphasis on cross-border valuation and access to finance in
an international setting.

The core question behind GEF is:


How do entrepreneurial managers, family firms, closely-held
firms and those who finance them design and execute ventures
that effectively match opportunities and resources in an
international context?
The course will provide with the tools necessary to value
these ventures domiciled in countries around the world.

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Building Block I: EF and Private Equity

Determine the optimal venture structure considering the


constraints of the national context.
Detailed understanding of the opportunity at hand and the
resources potentially available to the venture.
Action plan to bring the venture to life and to grow it domestically
and across borders.
Contingency plans if the initial scenario for the venture does not
work out.

Explore contextual differences across countries is critical to


learning about companies in an international context.
Such differences can occur on many dimensions:
Nature of the entrepreneurial opportunity, accessibility of
resources, property rights and institutional environment and
the quality of the local legal context.

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Building Block I: EF and Private Equity

Building Block I will provide you with:


A framework for analyzing country context.
A strategy map to support the pursuit of entrepreneurial
opportunities in challenging country contexts;
A framework for describing and managing cross-border
expansion of ventures.
A framework to appreciate the challenges and opportunities of
doing business in different countries and across borders.

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Building Block II: Family and Closely-Held Firms

Most companies around the world are controlled by their


founding families:
Including more than half of all public corporations in Europe, and
more than two thirds of those in Asia.
Even in the US, where ownership dispersion is at its highest,
founding families exercise a significant degree of control over
more than half of all public corporations.

Remark: Two empirical facts motivate the study of family


firms:
Worldwide prevalence of family firms.
Uniqueness of the financial, governance and management issues.
Question: How do they/we address them?

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Building Block II: Family and Closely-Held Firms

Building Block II will provide with:


The tools to analyze how family ownership, control, and
management affect value.
Question: What type of value?
As a controlling shareholder do you need to create value for all
stakeholders? If so, who are those stakeholders?
Minority Shareholders vs. Control Issues!

Caveat: We define family firms as those in which one or more


members of the founding family exercise significant influence
through either their:
Share Ownership, voting control, board control, and/or
management.
We will also include in the definition closely held firms. Why?
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Global Corporate Restructuring, Winter 2016 Jos Liberti

Building Block II: Family and Closely-Held Firms


FAMILY FIRMS

NON-FAMILY FIRMS
Owners Preferences

Control rights and cash-flow rights


Private benefits of control
Long investment and profit horizons

Cash-flow rights
No private benefits of control
Short investment and profit horizons

Financial and Governance Issues


Trade-offs between control, liquidity and growth
Agency conflicts between controlling (family) and
minority (non-family) shareholders

No such trade-offs
Agency conflict between shareholders and managers

Management Decisions
Investment decisions with long payback periods
Setting up a dual-class share structures and use of ADRs

Cutting costs to maximize short-term profits


Adopting anti-takeover provisions

Structural Characteristics
Larger
Higher dividend payout
Higher leverage
Control rights = Cash flow rights
More anti-takeover provisions

Smaller
Lower dividend payout
Lower leverage
Control rights > Cash flow rights (often?)
Less-anti takeover provisions

Firm Performance
Higher if founder is CEO or Chairman, especially with
dual class stock
Lower if descendant is CEO or Chairman

Lower than in founder-led firms


Higher than in descendent-led family firms

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Building Block III: Corporate Restructuring

An important aspect of todays M&A and LBO environment is


designing, implementing and executing corporate restructuring
transactions.

Identify what issues and challenges managers have to deal with


when implementing a restructuring and to ensure the goals of
the restructuring strategies are achieved.

Analyze various corporate governance structures and agency


conflicts and their implications for corporate investors and
hence market value of the firm in question.

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Building Block III: Corporate Restructuring (cont.)

Design and implement going private/ leveraged buyout


transactions including being able to identify alternative sources
of capital and planning post LBO reorganization plan.

Questions:
How does corporate restructuring create value?
When does it make sense for a company to restructure?
What kind of restructuring is most appropriate for dealing with a
given problem?

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Building Blocks: Bottom Line

None of the cases in this course is purely neither an


entrepreneurship or a corporate restructuring case or a pure
family business case.

Cases have been selected where the three areas of interest


intersect.
Understand incentives behind decisions.
Cases span such a variety of entrepreneurs, families, industries,
sponsors, countries, and different stages in the life-cycle of a
company.
Learn from the variance of the course and develop your own
views of the spectrum of country contexts and different
companies challenges.

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What Will We Do?


Course is Structured in Four Different Modules

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Global Corporate Restructuring: Topics

Module A: Valuation Methods Where Is Enterprise Value


Coming From?
Unlocking Hidden Value
Left Hand Side and Right Hand Side of the Balance Sheet.
Weighted Average Cost of Capital (WACC)
Adjusted Present Value (APV)
Discounted Cash Flows Modelling
Free Cash Flows or Unlevered Cash Flows
Capital Cash Flows or Levered Cash Flows
Equity Cash Flows or Residual Cash Flows
Relative Valuation Analysis: Transaction and Trading Multiples
Developing Break-Up Analysis and Sensitivity Tables

Caveat: We will meet in the tutorial to continue covering


concepts that we will need in the course.

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Global Corporate Restructuring: Topics (cont.)

Part B: Corporate Restructuring and Conflicts of Interest


Conflict of interests:
Equity vs. Debt-holders
Between Management and other Stakeholders.
Between Controlling Family and other Shareholders
Fiduciary Duty Roles.
Shareholders (Delaware) vs. Corporation (Pennsylvania).
The Board of Directors and the Business Judgement Rule.
Spin-off vs. Carve-Outs.
Value creation on the LHS and RHS of the Balance Sheet.
PV(A + B) < PV(A) + PV(B). Diversification discount?
An introduction to Section 368(a) of corporate reorganization.
Tax-free reorganizations and other methods of divesture
Event Studies

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Global Corporate Restructuring: Topics (cont.)

Part C: Entrepreneurial Buyouts (LBOs)


Logic and Mechanics of Entrepreneurial Buyouts
Deal Structuring of LBOs
The Role of Auctions in Buyouts
Access to Mezzanine Financing
Strategic and Financial Sponsors
Pros and Cons of Different Sponsors

Sources of Values in LBOs:


Operating Engineering
Financial Engineering
Governance Engineering
Financial Modeling of LBOs:: The Iterative Process of LBOs
The Problem of Changing Capital Structure
Strategic Positioning of Firms.
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Global Corporate Restructuring: Topics (cont.)

Part D: Family and Closely-Held Firms


Valuation of Private Companies:
Total vs. Market Beta
The Role of Controlling vs. Minority Shareholders
Private Benefits of Control
Valuing Control and Liquidity
Measuring Ownership, Voting and Control Rights
Adjusting for:
Control Premium and Minority Discount
Lack of Marketability/Illiquidity
Lack of Diversification
Partnering with Strategic and Public Investors
Impact of Dual-Class Stock on Voting Control
Voting Premium and the Value of a Vote
Diversification in Family Firms

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Pre-Requisites

Understanding of basic finance theory (and more...)


If you have forgotten this, please review your notes from previous
finance classes. This is hard-work for those of you have taken
your last finance class a long time ago or those who have not
taken many of them.

Willingness to participate actively and to be well-prepared for


class.
Cases & Readings!

Be:
Curious!
Collegial!
Respectful to your classmates! No cell phones, no laptops except
when indicated.

Same place sitting policy. Crucial!

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Pre-Requisites (cont)

Groups should be well-balanced: Diversify! Max. 5 students!

Male/Female
Single/Married
Marketing/Finance
Lyrics/Non-Lyrics

Join a learning team to prepare for class.


Group should be eager to work and accept the challenge.
Readings for class are deep. Better to discuss them.
The analysis of the cases will get complex! You have my word

Follow your interest!


I will post lots and lots of supplementary readings for each topic
in Dropbox. Feel free to send me articles and news you consider
relevant to the topics we are discussing in class.

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Commit to the Class and your Team!


Best Source: Former students who took FINC 442 or
FINC 448 or FINC 945 or FINCX 448

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Global Corporate Restructuring, Winter 2016 Jos Liberti

Assessment Of Course Grade

Class Participation:

Based both on the quality and the number of your comments.


If you are uncomfortable with such a heavy weight on class
participation, this class may not be for you.

Group Case Write-Ups:

35%

45%

This grade will be based on your 3 group case write-ups.


Case-write ups:
Memo style. Indicate with a number at the beginning of a
paragraph the question you are referring to.
3-page max + exhibits and attachments.
Do not do crazy things! Times New Roman, letter-size 1112, single-space and standard margins.
Do not free-ride! The purpose is to learn!

Peer-Review Evaluation:

Global Corporate Restructuring, Winter 2016 Jos Liberti

20%

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Final Remark

Remark: Have fun and learn! This is the reason why you are
here!

Any questions?

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