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2012. Capital Acquisition & Capital Structure. BT 401-13. Capital Structure: Key Topics. Evaluation of Current Financial Obligations and Resources –  The Static View (Balance Sheet) Prioritizing Capital Structure Risks Evaluation of Capital Market Transactions

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capital structure key topics
Capital Structure: Key Topics
  • Evaluation of Current Financial Obligations and Resources – 
      • The Static View (Balance Sheet)
  • Prioritizing Capital Structure Risks
  • Evaluation of Capital Market Transactions
      • The Dynamic View (History & Prospects)
slide3

2010

Risk of Impairment

Various Risks – Rates, Refinancing, Covenants, Accounting visibility, Consolidation, Credit ratings

capital market transactions

2012

Capital Market Transactions
  • Potential Equity Transactions:
    • New Issuances of Equity
    • Conversions
    • Returns to Shareholders (Dividends & Buybacks)
  • Potential Debt Transactions & Credit Ratings
  • Banking Relationships
  • Capital Market Strategies
      • e.g., refinancing options, hedging strategies, dividend policies, etc.
  • Major Restructurings
slide9
Common stock only
    • No preferred, converts, warrants
    • Par Value and “Paid-in Capital”
    • “Authorized” vs “Issued & Outstanding”
    • Treasury Stock
slide13
1916: Original incorporation
  • 1979: Acquired by RJR Nabisco
  • 1990: Sold to Merrill Lynch investors
  • Recapitalized by Texas Pacific Group

?

slide14
1999: New IPO (NYSE: DLM)
  • 1997-2001: Deals with Nestlé, Contadina, SunFresh
  • 2002: Major deal with Heinz
  • 2006: Acquisition of Meow Mix
slide17

2011

DJIA

Buyback Results

capital acquisition
Capital Acquisition

The Original Issuer Paradigm

capitalism other people s money
Capitalism:Other People’s Money

“Original Capitalism”

the finance revolution since 1950
The “Finance Revolution” (since 1950...)
  • Tremendous quantitative expansion of capital markets
  • Tremendous qualitative development of
    • new financial players
    • new financial instruments
  • Development of “Modern Finance Theory”
growth of global financial markets
Growth of Global Financial Markets

Source: The McKinsey Quarterly (2005)

the mutual fund explosion
The Mutual Fund Explosion

Source: The Wall Street Journal (2005)

a change in thinking about capital investment
A Change in Thinking About Capital & Investment
  • The old mindset –
    • “return on investment”
  • The new mindset –
    • value creation
return on investment
“Return on Investment”
  • Dividends, Coupons
  • A “Bond” mentality

Pennsylvania RR merges with NY Central (1968)

Penn Central goes bankrupt (1970)

roi mindset
ROI Mindset
  • Based on direct claims on the cash flows from the business
  • Claimed to be the basis of market value by early theorists
value creation
Value Creation
  • Based on Market Value directly
  • Market value is influenced by many things other than cash flow per se
assets to be acquired
Assets to be Acquired
  • Inventory
  • Trained Personnel
  • Parts
  • Building
  • Supplies
  • Tools...
the fundamental question
The Fundamental Question

Why would you exchange

your piece of paper for my piece of paper?

what terms do i need to include on my piece of paper
What terms do I need to include on my piece of paper?
  • Make it a Contract
      • ...give it the status of a Legal Instrument
      • Enforceable in court
what else
What else?

Attach “rights” that create value

  • Promises to Pay Cash in the Future
    • Periodic payments
    • Repayment of the Entire Amount

Like what?

what else1
What else?
  • Claims on other Assets
    • “Collateral”, “security interest”
    • “Liquidation preference”
what else2
What else?
  • Right to Re-sell my Paper to someone else
    • ...to get cash from someone else (not me)
two broad classes of rights that create value for the investor
Two Broad Classes of “Rights”that create Value for the Investor
  • Intrinsic Value
  • Extrinsic Value

Almost every successful

“financial instrument” has both

intrinsic and extrinsic value

intrinsic value
Intrinsic Value
  • Created by specific provisions in the “contract”

What is “within the four corners of the document”

extrinsic value
Extrinsic Value?
  • Not a part of the “contract”
    • Not enforceable in court!!
  • Created from “outside”...
    • ...by “the Market”
building a financial instrument
Building a Financial Instrument
  • Every successful “piece of paper” is a mixture of intrinsic and extrinsic value features
take aways

2012

Take-aways
  • The Finance Revolution
    • Quantitative & qualitative transformation of Market Capitalism
  • The “Value Creation” Mindset displacing the older ROI Mindset
take aways1

2012

Take-aways
  • Intrinsic and Extrinsic Value Features
  • The Liability Side of the Capital Structure is defined by:
      • the List of Financial Instruments Issued by the Company, and
      • the cash flow claims and commitments entailed by those instruments