Kmart, Sears and ESL: How a Hedge Fund became one of the World’s Largest Retailers
1. Describe recent trends in the hedge fund and private equity industry and the growing overlap between the two.
- The line between some types of hedge funds and private equity LBO funds are being blurred in recent times. But most hedge fund strategies are still quite distinct from the LBO investing model.
- In the early year’s hedge funds active in the LBO arena would try to buy defaulted or near default bonds and then resell them in weeks or months later at a profit. But in recent times hedge funds have started to hang onto the distressed investments through the whole bankruptcy process, leaving them with substantial and sometimes controlling stakes in the companies. When the companies come out of bankruptcy the hedge funds claims are transformed into equity in the new entity.
2. Analyze different issues surrounding a purchase by a financial or strategic buyer and their respective strengths and weaknesses.
- A financial buyer is a buyer that purchases a business solely interested in the return they can achieve by buying a business. Financial buyers are interested in the cash flow generated by a business and the future exit opportunities from the business. On the other hand strategic buyers are interested in how a company’s fit into their own long-term business plans. Their interest in acquiring a company has to do with synergies they can extract with their current business. Other reasons could be eliminating competition, or enhancing some of its own key weaknesses.
- Strategic Buyers should theoretically be able to pay a higher price for distressed or bankrupt assets because of the synergies that would come from merging them with similar operations. The problem lies that more strategic buyers are in the same industry and experience the same business cycle, so timing of a rivals bankruptcy often found the survivors in a weak position and unable or unwilling to commit cash for an acquisition. This timing mismatch encourages financial buyers to the
- The line between some types of hedge funds and private equity LBO funds are being blurred in recent times. But most hedge fund strategies are still quite distinct from the LBO investing model.
- In the early year’s hedge funds active in the LBO arena would try to buy defaulted or near default bonds and then resell them in weeks or months later at a profit. But in recent times hedge funds have started to hang onto the distressed investments through the whole bankruptcy process, leaving them with substantial and sometimes controlling stakes in the companies. When the companies come out of bankruptcy the hedge funds claims are transformed into equity in the new entity.
2. Analyze different issues surrounding a purchase by a financial or strategic buyer and their respective strengths and weaknesses.
- A financial buyer is a buyer that purchases a business solely interested in the return they can achieve by buying a business. Financial buyers are interested in the cash flow generated by a business and the future exit opportunities from the business. On the other hand strategic buyers are interested in how a company’s fit into their own long-term business plans. Their interest in acquiring a company has to do with synergies they can extract with their current business. Other reasons could be eliminating competition, or enhancing some of its own key weaknesses.
- Strategic Buyers should theoretically be able to pay a higher price for distressed or bankrupt assets because of the synergies that would come from merging them with similar operations. The problem lies that more strategic buyers are in the same industry and experience the same business cycle, so timing of a rivals bankruptcy often found the survivors in a weak position and unable or unwilling to commit cash for an acquisition. This timing mismatch encourages financial buyers to the