Vanderbilt Law Review

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The name of the game in corporate America today is leverage.Whether through leveraged buyouts' or leveraged recapitalizations, many of the United States' largest corporations are rapidly trading equity capital for debt.' This trend began only a few years ago when a small group of financial entrepreneurs, which included Carl Icahn, T.Boone Pickens, Asher Edelman,' Irwin Jacobs, and Ronald Perelman,"found that they could finance large stock purchases of major corporations through the use of high-yield ("junk") bonds' leading to either an acquisition of the target or its forced restructuring. The general goal of these financiers was to force a reconciliation between what they perceived as low stock prices and corporate assets of far greater potential value. Their efforts have been tremendously profitable.

The corporate targets of these hostile share acquisitions, however,did not sit idly by and wait to have their shares gobbled up. The defenses they erected are now. famous because of their frequent use and colorful names: the "Pac-Man" defense, the "scorched earth" defense,"shark repellents" and "poison pills."' While these defenses proved to be an initial deterrent to hostile acquisitions, more creative financing techniques and other offensive weapons have rendered these defenses something of a Maginot Line. Target managements, searching for away to protect their shareholders, their jobs, or both, increasingly have taken the approach of fighting fire with fire-that is, using leverage and redeployment of assets in an attempt to create for themselves the same profits sought by the hostile bidder.

The present-day management buyout developed primarily as a defensive response to the attacks of the financial entrepreneurs and other acquisition hungry companies. Top executives who became the equity holders in the private companies that followed buyouts generally have found this new defense as enormously profitable as the comparable offensive purchases of the financiers who initiated the first round of lever-aged stock acquisitions. Likewise, the leveraged recapitalization can be viewed largely as management's attempt to effect the same reconciliation of values between stock prices and corporate assets by which a hostile bidder seeks to profit, while keeping the company independent with ownership continuing in the hands of the public shareholders.Here too, however, management will often grab a slice of the equity pie as an "incentive booster" in the course of revamping the corporation's capital structure. It appears that like buyouts, top executives find the leveraged recapitalization quite profitable.

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