Corporate Restructuring

Corporate Restructuring

Corporate Restructuring •Actions taken to expand or contract a firm’s 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 company

Restructuring • 1980’s: corporate restructuring identified with leveraged buyouts, LBO’s, LCO’s – More generally, however, divestitures, carve out IPO’s, spin offs, etc. • Early 1990’s: corporate restructuring identified with troubled debt restructuring: workouts and reorganization

Value Creation Process • Review corporate financial structure from the shareholders’ viewpoint. • Increase efficiency and reduce the after-tax cost of capital through judicious use of borrowing • Improve operating cash flows through focusing on wealth-creating investment opportunities, profit improvement and overhead reduction programs and divestiture • Pursue finally-driven creation using various financing instruments and arrangements

Antecedents of Restructuring Environment

Governance Restructuring Strategy

Performance

Financial Restructuring

Antecedents of Restructuring •

Environmental - Competition

•

Takeover threats tax motivations

Governance - Weak governance • Ineffective management

• Complacent board • Inadequate incentives • Lack of ownership concentration (institutional investor activism).

Antecedents of Restructuring •Strategy - Poor strategy or implementation

•

Over diversification Leverage

Performance

- Poor or declining performance

- Difference between desired and actual performance - Assets are undervalued - Perceived threat of takeover

Modes of restructuring

• Operational restructuring – Outright or partial sale of companies or product lines or to downsize by closing unprofitable or non-strategic facilities. – Also known as divestiture – Remove non-core assets – Becoming more focused on core activities

Modes of restructuring Financial restructuring: Actions by the firm to change its total debt and equity structure, i.e, share repurchase, adding debt or lower overall cost of capital.

- LBOs (divisional MBOs)

-

Employee stock options plans (ESOPs) Equity financed share repurchases Targeted share repurchases (greenmail) Leveraged recapitalizations • Leveraged cash-outs

• Leveraged share repurchases • Securities swaps (debt for equity)

Modes of restructuring Asset restructuring - Downsizing • Employee layoffs

• • • •

Mixed results 89% cite expense reduction (46% succeeded) 67% for competitive advantage (19% succeeded) Which employees leave or stay? - Downscoping

• Divestitures (sell-offs, spin-offs, split-ups) • Plant closings • Liquidations

Modes of restructuring •

Divestitures (sell-offs versus spin-offs) Spinoff

• Spin-off represents a pro-rata distribution of shares of a

subsidiary to shareholders. • Occurs within the hierarchy. • Terms and valuation of the assets are set internally • Parent stockholders create new board and TMT. Sell-off • Parent can maintain ties with spun-off • Sell-offs: unit. 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 soldoff assets as • part of its hierarchy.

Modes of restructuring •

Involuntary restructuring (tender offer)

• Options are similar to voluntary restructuring but more immediate.

• Actions designed to thwart the takeover. - Financial • Shark repellents • Poison pills • Leveraged recapitalizations • Greenmail • Litigation - Asset • Scorched earth defense - defensive asset restructuring • Crown jewel sales - sell sought after unit • Pac-man defense - target launches attempt to acquire bidder

Restructuring outcomes

 Strategy • Focus on related or unrelated units (less total diversification) • Innovation  Employee effects • • • •

Trust of management Poor communication Motivation Turnover

 Performance (market) • Generally positive (except when fighting a takeover) • Determined by use of funds