The Financial Reporting Blog

Leveraged dividend recapitalizations and leveraged share repurchases are two corporate finance tools that are available to owners of private companies. These tools can be used to create liquidity outside the ownership of private businesses. In this post, we will illustrate the impact of a leveraged share repurchase and a leveraged dividend on the same company. This analysis will enable us to see the impact leverage has on the company and also, the different impacts the transactions have on owners.

Appraisal arbitrage cases have been around for years but they have become more common lately, led by hedge funds looking to profit from mergers and acquisitions. In an “appraisal arbitrage”, investors in a company vote against a proposed deal and then appeal to a judge to determine and award them the statutory fair value of the stock after the deal has closed. In recent years, a number of hedge funds have seen the opportunity to accumulate shares of a company on the eve of a buyout and attempt to profit from this strategy. When the court takes up the matter, the judge’s final decision becomes the price paid to those involved in the lawsuit – and this price (statutory fair value) could be higher or lower than the agreed upon merger price.