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Corporate Restructuring

Unit 3

What is Corporate Restructuring? Actions taken to expand or contract a firms basic operations or fundamentally change its asset or financial structure. Activities are broad, range from reorganizing business units from product lines to divisions to takeovers or joint ventures etc. May involve taking the company private, selling attractive assets, undertaking a major acquisition, or even liquidating the company11 May 2011 Maithreye S H

Meaning Corporate restructuring includes the activities involving expansion or contraction of a firms operations or changes in its asset or financial (ownership) structure

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Definitions Corporate control -- the power to make investment and financing decisions. Corporate governance -- the role of the Board of Directors, shareholder voting, proxy fights, etc. and the actions taken by shareholders to influence corporate decisions. Corporate structure -- the financial organization of the business.

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Corporate Strategies Three directions for corporate strategy Growth M&A , JV, and SA (external growth) International (internal growth)

Stability (internal growth) Renewal (internal growth) Retrenchment Turnaround Increase the capabilities via core competencies11 May 2011 Maithreye S H

Acquisitions and Restructuring : reasonsEnvironmental - Competition - Takeover threats - tax motivations Governance - Weak governance Ineffective management Complacent board Inadequate incentives Lack of ownership concentration (institutional investor activism).

Acquisitions and Restructuring: ReasonsStrategy - Poor strategy or implementation - Overdiversification - Leverage Performance Poor or declining performance Difference between desired and actual performance Assets are undervalued Perceived threat of takeover

charecteristics Changes in corporate management Retention of corporate management Sale of underutilised assets Outsourcing of operations to efficient third parties Moving operations to lower-cost locations Reorganising of functions such as sales, marketing, and distribution Renegotiation of labour costs t reduce overhead Refinancing of corporate debt to reduce interest payments Forfeiture of all or part of the ownership share by pre structuring stock holders

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DivestitureDivestiture -- The divestment of a portion of the enterprise or the firm as a whole. Liquidation -- The sale of assets of a firm, either voluntarily or in bankruptcy. Sell-off -- The sale of a division of a company, known as a Sellpartial sell-off, or the company as a whole, known as a voluntary liquidation.

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Divestiture Spin-off -- A form of divestiture resulting in a subsidiary or Spindivision becoming an independent company. Ordinarily, shares in the new company are distributed to the parent companys shareholders on a pro rata basis. Equity Carve-out -- The public sale of stock in a subsidiary Carvein which the parent usually retains majority control.

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DivestituresCompany A without Subsidiary B

Subsidiary B

Company C

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Divestitures (2)Company A w/o subsidiary B

Cash, securities or assets as consideration

Old Sub B Company C

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Spin offsCompany A without Subsidiary B

Subsidiary B

Shareholders own shares of combined company. Own the equity in subsidiary implicitly.

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Spin offs (2)Company A after spinoff

New company B Shareholders receive Shares of company B

Old shareholders still own shares of company A, which now only represent ownership of A without B.

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SpinSpin-offSpinSpin-off represents a pro-rata distribution of proshares of a subsidiary to shareholders.Occurs within the hierarchy. Terms and valuation of the assets are set internally Parent stockholders create new board and top management team Parent can maintain ties with spun-off spununit.

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SellSell-offSellSell-offs: Assets are sold to another firm for cash and/or securities.Occurs outside the hierarchy. Value determined by market forces. Acquiring firm absorbs and governs the soldsold-off assets as part of its hierarchy.

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Motives of Divestitures Unlike business failure, the motive for divestiture is often positive: to generate cash for expansion of other product lines, to get rid of a poorly performing operation, to streamline the corporation, or to restructure the corporations business consistent with its strategic goals. Regardless of the method or motive used, the goal of divesting is to create a more lean and focused operation that will enhance the efficiency and profitability of the firm to enhance shareholder value. Research has shown that for many firms the breakup value -- the sum of the values of a firms operating units if each is sold separately -- is significantly greater than their combined value.11 May 2011 Maithreye S H

Spin-offs, etc. Spin off -- debut independent company created by detaching part of a parent company's assets and operations. Carve-outs-- similar to spin offs, except that shares in the new company are not given to existing shareholders but sold in a public offering. Asset Sales-- the sale of the assets of a division to other firms .11 May 2011 Maithreye S H

Equity carve out Sometimes known as a partial spinoff, a carve out occurs when a parent company sells a minority (usually 20% or less) stake in a subsidiary for an IPO or rights offering.

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Equity carve outs Also called partial IPO Parent company sells a percentage of the equity of a subsidiary to the public stock market Receives cash for the percentage sold Can sell any percentage, often just less than 20%, just less than 50%, are chosen.11 May 2011 Maithreye S H

Equity carve out (partial IPO)Company A without subsidieary B

Subsidiary B

Shareholders implicitly own 100% of equity of subsidiary B through their Company A shares.

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Equity carve out (partial IPO)Company A without subsidieary B

Portion of Sub B equity Not sold

X % of sub B equity sold To market for cash In IPO X % of Company B shares

Shareholders now own 100% of Company A (without B) And (1-X)% of Company B implicitly Through their company A shares

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Ownership RestructuringLeverage Buyout (LBO) -- A primarily debt financed purchase of all the stock or assets of a company, subsidiary, or division by an investor group. The debt is secured by the assets of the enterprise involved. Thus, this method is generally used with capital-intensive businesses. A management buyout is an LBO in which the pre-buyout management ends up with a substantial equity position.

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Common Characteristics For Desirable LBO CandidatesCommon characteristics (not all necessary): necessary): The company has gone through a program of heavy capital expenditures (i.e., modern plant). There are subsidiary assets that can be sold without adversely impacting the core business, and the proceeds can be used to service the debt burden. Stable and predictable cash flows. A proven and established market position. Less cyclical product sales. Experienced and quality management.

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Special features of a Leveraged Buyouts The difference between leveraged buyouts and ordinary acquisitions: 1. A large fraction of the purchase price is debt financed. 2. The LBO goes private, and its share is no longer trade on the open market.11 May 2011 Maithreye S H

LBOs and DivestituresTransaction.

A leveraged buyout (LBO) is an acquisition technique involving the use of a large amount of debt to purchase a firm. It is also called Going Private

LBOs are a good example of a financial merger undertaken to create a highdebt private corporation with improved cash flow and value. In a typical LBO, 90% or more of the purchase price is financed with debt where much of the debt is secured by the acquired firms assets. Successful LBO firms are usually reversed (taken public) after their huge debt is significantly reduced and efficiencies improved. This is called Reversed LBO. And because of the high risk, lenders often take a portion of the firms equity. A management buyout (MBO): acquirer is the current management team11 May 2011 Maithreye S H

Attributes of a candidate for LBOs An attractive candidate for acquisition through leveraged buyout should possess three basic attributes: It must have a good position in its industry with a solid profit history and reasonable expectations of growth. It should have a relatively low level of debt and a high level of bankable assets that can be used as loan collateral. It must have stable and predictable cash flows that are adequate to meet interest and principal payments on the debt and provide adequate working capital.11 May 2011 Maithreye S H

Leveraged Buyouts The three main characteristics of LBOs: 1. 2. 3. High debt Incentives Private ownership

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Stages of a Typical LBO Operation(1). Raise the cash required for the buyout and design a new management incentive system. (2). The organizing sponsor group buys all the outstanding shares of the company and takes it private. To reduce the debt by paying off a part of the bank loan, the new owners sell of

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