Why do a leveraged recap

Exchange Offers involve giving one or more classes of claimholders the option to trade their holdings for a different class of securities of the firm. Typical examples are allowing common shareholders to exchange their shares for bonds or preferred stock, or vice-versa. Exchange offers may have motivations similar to those of leveraged recapitalizations, taking advantage of free cash flows or altering management's share of control, or they may be distress-induced workouts.

Most of us would suppose that nobody would elect to exchange one security for another unless the latter was more valuable than the first, giving the investor a positive return. Yet according to research studies, some types of exchange offers result in negative returns, while others produce positive net returns. The effects seem to depend on whether the exchanges have one or more of the following consequences:.

Based on these, one should be able to evaluate the net effect, positive or negative, of the following types of exchange offers:. Dual-Class Recapitalizations entail the creation of a second class of common stock that has limited voting rights but typically a preferential claim on the company's cash flows, in the form of a higher dividend.

For example, the company proposes to create a Class A share with one-share-one-vote, and Class B with 5 votes per share. Class A shares carry a higher dividend rate than Class B, perhaps double. As a result of a DCR, officers and directors will usually end up with 55 to 65 percent of common stock voting rights.

In a high percentage of dual-class firms, the control group represents founding families or their decendants. In most cases the firm creates the new class by distributing limited voting shares pro rata to current shareholders. Corporate Finance. Corporate Bonds. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.

We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. What Is Leveraged Recapitalization? Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Takeover Artist A takeover artist is an investor whose primary goal is to identify companies that are attractive to buy and that can be turned around to make a profit. Lock-Up Option A lock-up option is a stock option offered by a target company in a takeover battle to a white knight for some of the company's shares or best assets.

Macaroni Defense Definition The macaroni defense is an anti-takeover measure whereby a company issues a large number of bonds that must be redeemed at a high price if it is acquired. But what if a third option existed? What if you could hedge your bet? What if you could grab the majority of your chips off the felt, dump them into both pockets and THEN call the bet? Would that make your decision easier?

For most business owners who have spent their entire lives building and growing their companies, seeking liquidity is a lot like sitting at the final table.

You hesitate to put all your chips at risk as you have already taken significant risks in earning this seat next to pokers elite, but you still want to have the opportunity to win the big pot in the center of the table. A leveraged recapitalization is a transaction that introduces outside capital from an equity sponsor i.

For an in-depth description and an example of a leveraged recapitalization please refer to the anatomy of a leveraged recapitalization white paper. Post transaction an entrepreneur will maintain continued equity ownership in an amount suitable to their personal desires. Some other benefits of a leveraged recapitalization include:. A leveraged recapitalization is a great alternative liquidity play for private owners seeking to maximize the value of their business and still remain in the hand.