Corporate Restructuring

Download Corporate Restructuring

Post on 26-Nov-2014




0 download

Embed Size (px)


<p>Corporate Restructuring</p> <p>Unit 3</p> <p>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</p> <p>Meaning Corporate restructuring includes the activities involving expansion or contraction of a firms operations or changes in its asset or financial (ownership) structure</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>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.</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>Corporate Strategies Three directions for corporate strategy Growth M&amp;A , JV, and SA (external growth) International (internal growth)</p> <p> Stability (internal growth) Renewal (internal growth) Retrenchment Turnaround Increase the capabilities via core competencies11 May 2011 Maithreye S H</p> <p>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).</p> <p>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</p> <p>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</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>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.</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>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.</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>DivestituresCompany A without Subsidiary B</p> <p>Subsidiary B</p> <p>Company C</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>Divestitures (2)Company A w/o subsidiary B</p> <p>Cash, securities or assets as consideration</p> <p>Old Sub B Company C</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>Spin offsCompany A without Subsidiary B</p> <p>Subsidiary B</p> <p>Shareholders own shares of combined company. Own the equity in subsidiary implicitly.</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>Spin offs (2)Company A after spinoff</p> <p>New company B Shareholders receive Shares of company B</p> <p>Old shareholders still own shares of company A, which now only represent ownership of A without B.</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>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.</p> <p>11 May 2011 Maithreye S H</p> <p>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.</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>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</p> <p>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</p> <p>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.</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>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</p> <p>Equity carve out (partial IPO)Company A without subsidieary B</p> <p>Subsidiary B</p> <p>Shareholders implicitly own 100% of equity of subsidiary B through their Company A shares.</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>Equity carve out (partial IPO)Company A without subsidieary B</p> <p>Portion of Sub B equity Not sold</p> <p>X % of sub B equity sold To market for cash In IPO X % of Company B shares</p> <p>Shareholders now own 100% of Company A (without B) And (1-X)% of Company B implicitly Through their company A shares</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>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.</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>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.</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>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</p> <p>LBOs and DivestituresTransaction.</p> <p> 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</p> <p> 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</p> <p>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</p> <p>Leveraged Buyouts The three main characteristics of LBOs: 1. 2. 3. High debt Incentives Private ownership</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>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.</p> <p>(3). The management strives to increase profits and cash flows by cutting operating costs and changing marketing strategies.11 May 2011 Maithreye S H</p> <p>Stages of a Typical LBO Operation (contd)(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 LBOs11 May 2011 Maithreye S H</p> <p>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.11 May 2011 Maithreye S H</p> <p>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 measures11 May 2011 Maithreye S H</p> <p>Why do Management teams do BuyOuts?Competitive reasons: To acquire additional skills and competencies To secure a source of supply, or distribution To acquire new technologies Plus: The entrepreneurial realisation of an opportunity To speed market entry To get assets cheaply To acquire an opportunity in the form of an enterprise which is not realising its full potential11 May 2011 Maithreye S H</p> <p>candidates for MBOs 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.11 May 2011 Maithreye S H</p> <p>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.11 May 2011 Maithreye S H</p> <p>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)11 May 2011 Maithreye S H</p> <p>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.</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>ESOP Structuring Directly by Co. Co. issues Options on Shares to Employees</p> <p>Company</p> <p>Options Employees</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>ESOP Structuring - Trust is Administrator</p> <p>Through a Trust as Administrator </p> <p>Co. grants Options To a Trust Trust grants Options to Employees Employees exercise Options and are issued Shs by Co. Options Employee Trust Options Employees</p> <p>Company</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>ESOP Structuring - Trust is Shareholder</p> <p>Through a Trust </p> <p>Co. issues Eq. Shs. To a Trust Trust issues Options against these Shares to Employees Shares Options Employees</p> <p>Company</p> <p>Employee Trust</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>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. NonEx Dir &amp; Independent Dir - covered</p> <p>11 May 2011</p> <p>Maithreye S H</p> <p>Reasons for employee ownership (multiple reasons possible) ownership succession divestiture of plants &amp; 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 ownership11 May 2011 Maithreye S H</p> <p>THANK YOU</p>