Berkshire Partners: Bidding for Carter's - A Case Study of a Leveraged Buyout
Berkshire Partners is a private equity firm that specializes in buying and growing mid-sized companies. In 2001, it faced a challenge of bidding for Carter's, a leading producer of children's apparel. Carter's was put up for auction by Investcorp, a global investment group that had acquired the company in 1990. Goldman Sachs, the investment bank that ran the auction, also offered a \"staple-on\" financing option, which meant that the winning bidder could use a prepackaged capital structure to finance the deal.
The case study of Berkshire Partners: Bidding for Carter's[^1^] [^2^] explores the process and challenges of a leveraged buyout (LBO), which is a type of acquisition where the buyer uses a large amount of debt to fund the purchase. The case study examines the following aspects of the LBO:
The valuation of Carter's based on its historical and projected financial performance, its growth opportunities, its competitive position, and its industry dynamics.
The financing structure of the LBO, including the sources and uses of funds, the debt capacity and terms, the equity contribution and returns, and the sensitivity analysis.
The negotiation strategy of Berkshire Partners, including its bidding approach, its due diligence process, its deal protection mechanisms, and its exit options.
The case study provides an opportunity to learn about the benefits and risks of LBOs, as well as the skills and techniques required to execute them successfully. The case study also illustrates how private equity firms create value for their investors and portfolio companies through operational improvements, strategic initiatives, and financial engineering.
Berkshire Partners: Bidding for Carter's is a relevant and engaging case study for students and practitioners who are interested in finance, accounting, mergers and acquisitions, negotiations, and private equity.
Benefits and Risks of Leveraged Buyouts
Leveraged buyouts offer a lot of benefits, starting with the fact that there is very little risk to the buyer. You donât have to put up all the cash to buy the business, while the company youâre buying owes the rest instead of you. Your personal finances are safe if the deal should fail[^4^].
Another benefit of leveraged buyouts is that they can increase the control and ownership of the buyer over the target company. By using debt instead of equity, the buyer can avoid diluting their stake or sharing decision-making power with other investors. This can enable the buyer to implement their vision and strategy for the company more effectively[^1^].
Leveraged buyouts can also provide tax advantages for both the buyer and the target company. The interest payments on the debt are tax-deductible, which reduces the taxable income and increases the cash flow of the company. The buyer can also use the depreciation and amortization of the assets to lower their tax burden[^1^].
Finally, leveraged buyouts can generate higher returns for the buyer and their investors. By using leverage, the buyer can magnify their return on equity (ROE), which is the ratio of net income to equity. The higher the ROE, the more profitable the investment. Leveraged buyouts can also create value by improving the operational efficiency, growth prospects, and competitive position of the target company[^1^].
However, leveraged buyouts also come with significant risks and challenges. One of the main risks is that the target company may take on too much debt and become over-leveraged. This can make it difficult for the company to meet its interest payments and principal repayments, especially if its cash flow declines or its operating costs increase. If the company defaults on its debt obligations, it may face bankruptcy or liquidation[^1^].
Another risk of leveraged buyouts is that they may face financing issues. It may be hard for the buyer to find suitable lenders or investors who are willing to provide debt or equity financing for the deal. The financing terms may also be unfavorable for the buyer, such as high interest rates, short maturities, or restrictive covenants. The financing costs may also reduce the net present value (NPV) of the deal, which is the difference between the present value of future cash flows and the initial investment[^1^].
A third risk of leveraged buyouts is that they may entail potential liabilities for both the buyer and the target company. The buyer may be liable for any legal or regulatory issues that arise from the deal, such as antitrust violations, environmental damages, or employee lawsuits. The target company may also face reputational damage or customer backlash from its stakeholders, such as suppliers, distributors, or consumers[^1^]. aa16f39245