Ib Amce Buyout

1. Both the LBO environment and the returns generated from LBOs have decreased from the 1980’s to the present. During the 1970s and 1980s, many corporations focused on corporate diversification. This diversification was believed to increase the size of the corporation and smooth earnings but this excessive diversification and conglomeration proved to be too inefficient for the participating corporations. Firms engaging in LBOs saw these inefficiencies as growth opportunities and stepped in to carve these corporations apart. This spurred a wave of LBO activity, with a peak of around $76 billion in total U.S. leveraged buyout volume in 1989. Many of these early LBO participants used very high leverage, with firms using an average of 18% equity contribution from 1986-1990. Beginning in the early 1990s, the LBO market began to contract. Ideal targets began to be harder to find as corporations focused on displacing their inefficiencies and increasing shareholder value through things such as incentive-based compensation. More intense competition because of the growth of state pension systems has also helped to eliminate the “low-hanging fruit”. As mentioned earlier, LBO participants have had to use a less-leveraged capital structure in recent years, which has also helped to curtail returns. Creditors are no longer willing to accept such huge debt levels. By reducing leverage, returns are now much more reliant operating improvements. In my opinion, a lower acceptable amount of leverage has had and will have the greatest effect on returns going forward.

2. One positive aspect of conducting LBOs in the movie industry is that both box-office receipts and the number of admissions rose 74% and 21% respectively from 1995 to 2003. This indicates a growing and prospering industry. One negative aspect of conducting LBOs in this industry is that entertainment movies are hit-driven and volatile. Simply put, companies like AMCE are dependent on Hollywood to produce hit...