So why are you doing an MBA at this stage of your career?!

Self initiated Leveraged Recapitalization...

6 months, 19 courses, almost 200 cases and $20,000 later a professor introducing a course on Mergers and Acquisitions explained to us the concept of Leveraged Recapitalization and the reasons why even healthy companies inflict upon themselves the degree of pain this process entails. I believe that term explains why we're here...86 professionals who were doing well in their careers, professionals who decided to inflict incredible pain upon themselves and borrowed heavily ($45,000) to finance that ordeal. Why, oh why do people do the darnedest things?! Leveraged Recapitalization. Read on, slowly if you must, and pause to draw a parallel between 'company' and 'individual'.

(© The following text is an excerpt from Prof. Ian Giddy's (NYU) note on the same subject)

• The primary objective/intent of the management of such a company is to purposefully and successfully use the leveraged recapitalization as a watershed event, employing debt's disciplinary effect to create a crisis that disrupts the status quo and promotes internal change to improve performance, thus increasing shareholder value. This process may include include establishing a new objective, changing compensation systems, and reorganizing manufacturing and capital budgeting processes.

Context: Career on cruise control, trappings of comfort, stagnating learning curve, no apparent threat on the horizon, life's good, why upset it!

• The technique can be used, and has been used, as a "shark repellant" to ward off a hostile takeover, actual or potential. This is done by adding debt, eliminating idle cash and debt capacity. Prospective bidders would face the daunting task of returning the firm to leverage ratios closer to historical industry levels. A high percentage of firms that adopt them are subsequently acquired.

Context: Younger, faster threats seem to emerge, threatening to nullify experiential learning with new skills and insights. Suddenly existing fences don't seem as high as when they were when they were erected.

The result is a far more financially leveraged company - usually in excess of the "optimal" debt capacity (read over-learned). At first the market value of the shares will drop. However in a successful recap the value of the dividend plus the value of the share itself exceeds the pre-recap share price. This is what we 86 hopefuls are trying hard to realize in this crucible called PGPX@IIMA.

Now you know, as well as I do now, why I'm doing an MBA at this stage of my career!

Wish us luck.