Case Questions #1
Most hedge fund strategies are still quite different from the LBO investing model. In the early year’s active in the LBO arena would try to buy defaulted or near default bonds and then resell them in a short time later with a profit. But in recent times hedge funds have started to stick to 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.
A financial buyer is the buyer who purchases a business only interested in the return they can achieve by buying a business. Financial buyers are also the buyer who interested in the cash flow generated by a business and the future exit opportunities from the business. On the other hand strategic buyers are more interested in how a company’s fit into their own long-term business plans. The strategic buyers’ interest in acquiring a company has to do with synergies they can extract with their current business. Strategic Buyers should 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 bankruptcy-related activities.
Sears strategy was based in malls, but after seeing the increasing sales of its competitor’s stand-alone “big box” retail model. Soon after Sear’s management started experimenting with an “off-mall” concept called Sears Grand. Sears experiment was successful and management wanted to roll out the off-mall Sears Grand concept nationwide quickly and at the same time Kmart wanted to