corporate restructuring

Corporate Restructuring

Unit 3

What is Corporate Restructuring?• Actions taken to expand or contract a firm’sbasic operations or fundamentally change itsasset or financial structure.• Activities are broad, range from reorganizingbusiness units from product lines to divisions totakeovers or joint ventures etc.• May involve taking the company private, sellingattractive assets, undertaking a majoracquisition, or even liquidating the company

April 8, 2023 Maithreye S H

Meaning • Corporate restructuring includes the

activities involving expansion or contraction of a firm’s operations or changes in its asset or financial (ownership) structure


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.


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

competenciesApril 8, 2023 Maithreye S H

Acquisitions and Restructuring : reasons

Environmental Environmental - CompetitionCompetition- Takeover threatsTakeover threats- tax motivationstax motivations

GovernanceGovernance- Weak governance- Weak governance

• Ineffective managementIneffective management• Complacent boardComplacent board• Inadequate incentivesInadequate incentives• Lack of ownership concentration (institutional investor Lack of ownership concentration (institutional investor activism).activism).

Acquisitions and Restructuring: Reasons

StrategyStrategy- Poor strategy or implementationPoor strategy or implementation- OverdiversificationOverdiversification- LeverageLeverage

PerformancePerformance- Poor or declining performance- Poor or declining performance- Difference between desired and actual performance- Difference between desired and actual performance- Assets are undervalued- Assets are undervalued- Perceived threat of takeover- 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


Divestiture

• LiquidationLiquidation -- The sale of assets of a firm, either voluntarily or in bankruptcy.

• Sell-offSell-off -- The sale of a division of a company, known as a partial sell-off, or the company as a whole, known as a voluntary liquidation.

Divestiture Divestiture -- The divestment of a portion of the enterprise or the firm as a whole.


Divestiture• Spin-offSpin-off -- A form of divestiture resulting in a

subsidiary or division becoming an independent company. Ordinarily, shares in the new company are distributed to the parent company’s shareholders on a pro rata basis.

• Equity Carve-outEquity Carve-out -- The public sale of stock in a subsidiary in which the parent usually retains majority control.


Divestitures

Subsidiary B

Company A without Subsidiary B

Company C


Divestitures (2)

Company A w/o subsidiary B

Old Sub B

Company C

Cash, securities or assets as consideration


Spin offs

Company A without Subsidiary B

Subsidiary B

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


Spin offs (2)

Company A after spinoff

New company BShareholders

receive Shares of

company B

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


Spin-offSpin-off Spin-off represents a pro-rata Spin-off represents a pro-rata

distribution of shares of a distribution of shares of a subsidiary to shareholders.subsidiary to shareholders. Occurs within the hierarchy.Occurs within the hierarchy. Terms and valuation of the assets Terms and valuation of the assets are set internally are set internally Parent stockholders create new Parent stockholders create new board and top management teamboard and top management team Parent can maintain ties with spun-Parent can maintain ties with spun-off unit.off unit.


Sell-offSell-offSell-offs: Assets are sold to another Sell-offs: Assets are sold to another

firm for cash and/or securities.firm for cash and/or securities. Occurs outside the hierarchy. Occurs outside the hierarchy. Value determined by market forces.Value determined by market forces. Acquiring firm absorbs and governs Acquiring firm absorbs and governs the sold-off assets as part of its the sold-off assets as part of its hierarchyhierarchy..


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 firm’s the breakup value -- the sum of the values of a firm’s operating units if each is sold separately -- is significantly greater than their combined value.


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 .


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.


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.


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.


Equity carve out (partial IPO)

Company A without subsidieary B

Portion ofSub B equity

Not soldX % of sub B equity sold

To market for cashIn IPO

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

Through their company A shares

X % ofCompanyB shares


Ownership Restructuring

• The debt is secured by the assets of the enterprise involved. Thus, this method is generally used with capital-intensive businesses.

• A management buyout management buyout is an LBO in which the pre-buyout management ends up with a substantial equity position.

Leverage Buyout (LBO) Leverage Buyout (LBO) -- A primarily debt financed purchase of all the stock or assets of a company, subsidiary, or

division by an investor group.


Common Characteristics For Desirable LBO Candidates

• 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.

Common characteristics (not all necessary)Common characteristics (not all necessary)::


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.


LBOs and Divestitures• 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 Transaction.

• LBOs are a good example of a financial merger undertaken to create a high-debt 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 firm’s 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 firm’s equity.

• A management buyout (MBO): acquirer is the current management team


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.


Leveraged Buyouts• The three main characteristics of

LBOs:

1. High debt2. Incentives3. Private ownership


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 off some parts of the acquiring firm.

(3). The management strives to increase profits and cash flows by cutting operating costs and changing marketing strategies.


Stages of a Typical LBO Operation (cont’d)

(4). It will consolidate or reorganize production facilities, improve inventory control and accounts receivables management, improve product quality and customer service, try to extract better terms from suppliers, and any other ways to increase firm value and most importantly, meet payments on the swollen debt.

(5). The investor group may take the company public again if the “leaner and meaner” company emerges stronger and the goals of the group are achieved.– Reverse LBOs


What is a Management Buyout (MBO)?

• MBO is a going-private process led by the incumbent managers of the formerly public firm.

• MBO is a special form of LBO. When incumbent management is included in the buying group and key executives perform an important role in LBO transactions, then these going private transactions are called MBOs.

• A Critical Issue for MBO:– The buying group needs to be fair to minority/outside

shareholders to avoid accusations of security fraud against controlling shareholders.


Purpose of MBO• Opportunity to enhance performance

(commonly for privatisations]• Retaining the management team

gives additional stability• Wealth Creation – studies prove that

in the short term after a buy-out there is substantial improvements in profitability, cashflow and productivity measures


Why do Management teams do Buy-Outs?

Competitive reasons:• To acquire additional skills and competencies• To secure a source of supply, or distribution• To acquire new technologiesPlus:• The entrepreneurial realisation of an

opportunity• To speed market entry• To get assets cheaplyTo acquire an opportunity in the form of

an enterprise which is not realising its full potential


candidates for MBO’s• businesses with a history of

profitability • have a strong and stable market

share of its niche industry. • Of paramount importance is a

quality management team capable of executing a credible business plan that supports growth through a scaleable investment thesis.


MLP• What It Is:

A master limited partnership (MLP) is a publicly traded limited partnership. Shares of ownership are referred to as units. MLPs generally operate in the natural resource, financial services, and real estate industries

• the most distinguishing characteristic of MLPs is that they combine the tax advantages of a partnership with the liquidity of a publicly traded stock.


Different types of MLPs• Roll up MLP (combination of two or more

partnerships)• Liquidation MLP (complete liquidation of a

corporation)• Acquisition MLP (to acquire assets out of

proccedings)• Roll out MLP (public offering by corporations)• Start up MLP (privately held partnerships

offering interests to public)


ESOPsAn employee stock ownership plan

(ESOP) is a way in which employees of a company can own a share of the company they work for.

• different ways to receive stocks and shares

• as a bonus• buy them directly from the company• receive them through an ESOP.


– Directly by Co.• Co. issues Options on Shares to

Employees

Company EmployeesOptions

ESOP Structuring


ESOP Structuring- Trust is Administrator Through a Trust as Administrator

Co. grants Options To a Trust Trust grants Options to Employees Employees exercise Options and are issued

Shs by Co.

CompanyEmployee

Trust EmployeesOptions Options


ESOP Structuring- Trust is Shareholder Through a Trust

Co. issues Eq. Shs. To a Trust Trust issues Options against these Shares to

Employees

CompanyEmployee

Trust EmployeesOptions Shares


For Whom? : Eligibility• Eligible persons as per SEBI G/L:

– Permanent employee of Co.– Director of Co. – whole-time / part-time /

NED – Permanent employee / director of

Subsidiary / Holding Co.– Non–Ex Dir & Independent Dir - covered


Reasons for employee ownership (multiple reasons possible)

• ownership succession• divestiture of plants & divisions• averting shutdown or major job loss• blocking a takeover or purchase by another

company • financing expansion of company• reducing borrowing costs• replacement of another benefit plan• additional benefit plan• philosophical commitment to employee ownership


THANK YOU

corporate restructuring

Documents

maithreye s h acquisitions

maithreye s h spinoffs

maithreye s h spin offscompany

corporate governance

corporate structure

company private

corporate decisions

shares of combined company