BOUGHT OUT DEALS

Presented By :Neelam Kushwaha

Bought out deal (BOD) is a process of investment by a sponsor or a syndicate of investors / sponsors directly in a company. Such direct investment is being made with an understanding between the company and the sponsor to go for public offering in a mutually agreed time. Bought out deal, as the very name suggests, is a type of wholesale of equities by a company.

Bought out deals

A company allots shares in full or in lots to sponsors at a price negotiated between company and the sponsors.

After a particular period of agreed upon between the sponsor and the company the shares are issued to the public by the sponsor with a premium.

The holding cost of such shares by the sponsors may either be reimbursed by the company , or the sponsor may absorb the profit in part or full as per the agreement , arising out of the public offering at a premium .After the public offering , the shares are listed in one or more stock exchanges.

FEATURES Parties : There are three parties involved in the bought out deals . They are promoters of the company , sponsors and co- sponsors who are generally merchant bankers and investors .

Outright sale : Under this arrangement , there is an outright sale of a chunk of equity shares to a single sponsor or the lead sponsor.

Syndicate : Sponsor forms a syndicate with other merchant bankers for meeting the resource requirements and for distributing the risk .

Sale price : The sale price is finalized through negotiations between the issuing company and the purchaser, the sale being influenced by such factors as project evaluation , promoters image and reputation , current market sentiments, prospects of off- loading these shares at a future date ,etc.

Fund based : Bought out deals are in the nature of fund – based activity where the funds of the merchant bankers get locked in for at least the prescribed minimum period.

Listing : The investor sponsors make a profit , when at a future date , the shares get listed and higher prices prevail. Listing generally takes place at a time when the company is performing well in terms of higher profits and larger

Cash generations from projects.

OTCEI: Sale of these shares at the Over-the-Counter Exchange of India (OTCEI) or at a recognized stock exchanges, the time of listing these securities and off-loading them simultaneously are being generally decided in advance.

ADVANTAGE OF BOUGHT OUT DEAL

Bought out deal is not only advantageous to the company going for it, but also it is advantageous to sponsors and common investors.

The company has the advantage of using the fund immediately without waiting as in the case of direct public issue. In case of BOD, the company instantly obtain funds and is able to focus its attention on project implementation without worrying about the source of investment. Bought out deals are ideally suited for circumstances when money needs to be arranged quickly , without which the project may suffer. Lowering or eliminating issue cost from the preliminary expense is another advantage to the company

The time taken to raise money in the capital market by a company can be as much as six months and this time is very high for a company in a stage of infancy . The waste of time at the initial stage can be avoided by going for BOD.

In case of a new and untried product it is easier to convince an investment banker for an investment in the company rather than the general public. Thus, BOD is an innovative method of financing for such companies .

When the market sentiment is low and the secondary market is undergoing a bear phase , a company may not like to come to the market with a public issue. In such a case, BOD is a superior process to obtain funds for the company .

The merchant bankers also gain handsomely from a BOD. The merchant banks expect a return of around 30% from a BOD whereas private financing institutions expect a return of 40% to 60% from a BOD . The gains can be tremendous, provided the sponsors select proper issues and price it attractively to the investors.

The investors also gain from the BOD in a way that they get good issues where some merchant banker has already invested in it . The common investors do not have enough scope and information for proper evaluation of a company . The merchant bankers are professionals and can make proper appraisal of a company.

DISADVANTAGES OF BOUGHT OUT DEALS

A BOD may also disadvantageous to a merchant banker as well to the promoter.

There is a fear of loss of control of management because the sponsor is a holder of a large chunk of equities at one time. The sponsor may also influence the policy decision , which may affect the functioning of the company.

The investment banker who has to off-load the equities in the primary market at a later date is entitled to ask for a higher price for the risk taken by him. But this price may scarce away the common investors.

If a company does not perform as per the expectation of sponsor, or if the promoter does not cooperate with the sponsor later, the sponsor may have a tough time and may finds that its entire investment has been eroded.

If a merchant banker does not make proper analysis of the company , it may face a lot of problems with the BOD. Unless it evaluates all the risks associated with the project, there is every chance that the sponsor may burn its figures