Yellow Pages in 21st century, Private Equity approach – high leverage with exit strategy

Looking in to the history of the Yellow Pages industry in general we will find private equity finance approach. In finance, private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. Investments in private equity most often involve either an investment of capital into an operating company or the acquisition of an operating company. Capital for private equity is raised primarily from institutional investors.



In Yellow Pages the investment strategies is a private equity approach which includes leveraged buyouts. Leveraged buyouts refers to a strategy of making equity investments as part of a transaction in which Yellow Pages assets was acquired from the old shareholders typically with the use of financial leverage. The companies involved in these transactions are typically mature and generate operating cash flows.

Financial leverage which takes the form of a loan or other borrowings (debt), the proceeds of which are invested with the intent to earn a greater rate of return than the cost of interest. If the firm's rate of return on assets (ROA) is higher than the rate of interest on the loan and cost of average dept (COD), then its return on equity (ROE) will be higher than if it did not borrow because of the leverage contribution in the DuPont model ROE = ROA + (ROA - COD) D/E. On the other hand, if the firm's ROA is lower than the cost of average dept (COD), then its ROE will be lower than if it did not borrow. Leverage allows greater potential returns to the investor that otherwise would have been unavailable but the potential for loss is also greater because if the investment becomes worthless, the loan principal and all accrued interest on the loan still need to be repaid.

At the time of acquisition of most Yellow Pages in the beginning of 21st century by the private equitys the earnings multiple has been used. The P/E ratio (price-to-earnings ratio) of a stock (also called its "P/E", "PER", "earnings multiple," or simply "multiple") is of curse a measure of the price paid by the private equity for a share relative to the annual net income or profit earned by the Yellow Pages share.

As the financial ratio that was used for valuation of Yellow Pages at the time has been before industry downturn and finical turmoil a high P/E ratio has been used. The high P/E ratio means that investors of Yellow Pages have paid more for each unit of net income, so the stock has been more expensive compared to today’s lower P/E ratio.