Monday, November 2, 2015

Stronger capital structure: The need for a leveraged recapitalization

In a leveraged recapitalization, a company changes its capital structure by replacing equity (stocks) with increased debt. The transaction becomes “leveraged” because the company issues bonds to pay dividends and provide cash to shareholders without requiring a total sale of the company.

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Companies that implement leveraged recapitalization benefit from some kind of tax shield and cash discipline as this would effect a significant reduction in active cash flow. Moreover, it makes the firm less vulnerable to a hostile takeover.

Leveraged recapitalization can serve as a turning point in the business process, in which internal change is an inevitable result. This includes the establishment of a new objective, changes in compensation systems, and reorganization of manufacturing and capital budgeting processes. The system effectively illustrates how financing decisions can impact organizational structure, management decision making, and business value.

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To speed up approval from the board for leveraged recapitalization, owners often offer investors the option to trade their holdings for a different class of securities of the firm. The only downside of this system is that the company might lose its strategic focus as stronger emphasis on bonds normally addresses “current” challenges and generates income from short-term projects.

Amit Raizada, CEO and founder of Spectrum Business Ventures, designs and builds business plans and growth strategies. His company’s holdings include assets and investments from a wide range of industries. For more about the company, follow this link.