contemporer issues 5contemp. issues

8/13/2019 Contemporer Issues 5contemp. issues

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THE MOTIVES AND METHODSOF CORPORATERESTRUCTURINGG. Bennett Stewart III and David M. Glassman,Stern Stewart & Co


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Whether the restructurings of the pastdecade have benefited our economy,shareholders, management, and

employeesDo corporate raiders pillagecompanies for their personal

enrichment?Or do they instead promoteimprovements in corporate

performance and increase in market


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Review of some 300 financialrestructuring transaction completed inthe past decadeMost important discovery was that, in thevast majority of cases corporaterestructurings have led to sustainedincreases in both market values and

operating performance .There were real economic explanationsfor the impressive increases in value andperformance accompanying

restructurings.


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The most important restructuringmotives

Strengthening incentives Achieving a better business fitSharpening management focus

Creating pure plays that have unique investmentappealCurtailing an unproductive reinvestment of cashflowEliminating subsidies for underperformingbusiness

Achieveing a higher-valued use for assetsIncreasing debt capacitySaving taxes


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The Most Controversial Methodof Restructuring: Increasing

LeverageThere are three reasons why theaggressive use of debt has been apositive force for the economy as a

whole, a catalyst for many Americancompanies to increase theirproductivity and values:Debt is cheaper than equity becauseinterest payments are tax-deductible

A debt-financed recapitalizationThe need to repay debt creates a

compulsion to improve efficiency


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Tax Benefits

By highly leveraging their targets, theyare able to capitalize the value of pre-tax


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Repurchase Share

The most flexible method is todischarge surplus cash voluntarily byrepurchasing common shares in the

open market over time.


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Leveraged SharesRepurchase

The second way to cure reinvestmentrisk, then, is to buy back stockaggressively and finance the purchase

with debt.


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Partnerships

The third means to give investorscontrol over the investment of cashflow is to house assets in a

partnership.We previously noted that a partnershipcan benefit investors by avoiding

double taxation of earning.


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Leveraged Acquisition

Debt financed mergers also canassure investors that future cash flowwill not be wasted.


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Dividends

Increasing dividends is usually a lessdesirable method for distributing cash.


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Partial Public Offerings

Offering the public stock of asubsidiary unity stands in contrast tothe methods that force the

disgorgement of cash

contemporer issues 5contemp. issues

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