Corporate Restructuring

Unit 3

What is 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
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‡ Corporate restructuring includes the activities involving expansion or contraction of a firm·s operations or changes in its asset or financial (ownership) structure

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‡ 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 ² Growth ‡ M&A . JV. and SA (external growth) ‡ International (internal growth) ² Stability (internal growth) ² Renewal (internal growth) ‡ Retrenchment ‡ Turnaround ‡ Increase the capabilities via core competencies 11 May 2011 Maithreye S H .

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

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

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 11 May 2011 Maithreye S H .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.

The sale of assets of a firm. 11 May 2011 Maithreye S H . known as a Sellpartial sell-off. or the company as a whole.The sale of a division of a company. Sell-off -.The divestment of a portion of the enterprise or the firm as a whole. either voluntarily or in bankruptcy. ‡ ‡ Liquidation -. known as a voluntary liquidation.Divestiture Divestiture -.

Divestiture ‡ Spin-off -. Equity Carve-out -.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 company·s shareholders on a pro rata basis.The public sale of stock in a subsidiary Carvein which the parent usually retains majority control. ‡ 11 May 2011 Maithreye S H .

Divestitures Company A without Subsidiary B Subsidiary B Company C 11 May 2011 Maithreye S H .

securities or assets as consideration Old Sub B Company C 11 May 2011 Maithreye S H .Divestitures (2) Company A w/o subsidiary B Cash.

11 May 2011 Maithreye S H . Own the equity in subsidiary implicitly.Spin offs Company A without Subsidiary B Subsidiary B Shareholders own shares of combined company.

Spin offs (2) Company A after spinoff New company B Shareholders receive Shares of company B Old shareholders still own shares of company A. 11 May 2011 Maithreye S H . which now only represent ownership of A without B.

Occurs within the hierarchy.  11 May 2011 Maithreye S H .SpinSpin-off SpinSpin-off represents a pro-rata distribution of proshares of a subsidiary to shareholders.  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.

 Acquiring firm absorbs and governs the soldsold-off assets as part of its hierarchy.  11 May 2011 Maithreye S H .SellSell-off SellSell-offs: Assets are sold to another firm for cash and/or securities.  Value determined by market forces. Occurs outside the hierarchy.

‡ Research has shown that for many firm·s the breakup value -. ‡ or to restructure the corporations business consistent with its strategic goals. the motive for divestiture is often positive: ‡ to generate cash for expansion of other product significantly greater than their combined value. ‡ Regardless of the method or motive used. ‡ to streamline the corporation.Motives of Divestitures ‡ Unlike business failure. ‡ to get rid of a poorly performing operation. 11 May 2011 Maithreye S H . 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.the sum of the values of a firm·s operating units if each is sold separately -.

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

Equity carve out ‡ Sometimes known as a partial spinoff. 11 May 2011 Maithreye S H . 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. are chosen. just less than 50%. 11 May 2011 Maithreye S H . often just less than 20%.

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. 11 May 2011 Maithreye S H .

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 11 May 2011 Maithreye S H .

‡ The debt is secured by the assets of the enterprise involved. 11 May 2011 Maithreye S H .Ownership Restructuring Leverage Buyout (LBO) -. subsidiary.A primarily debt financed purchase of all the stock or assets of a company. or division by an investor group. 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. Thus.

modern plant).Common Characteristics For Desirable LBO Candidates Common characteristics (not all necessary): necessary): ‡ The company has gone through a program of heavy capital expenditures (i.. ‡ Less cyclical product sales. ‡ Stable and predictable cash flows. ‡ A proven and established market position. ‡ Experienced and quality management. ‡ There are subsidiary assets that can be sold without adversely impacting the core business.e. 11 May 2011 Maithreye S H . and the proceeds can be used to service the debt burden.

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

‡ And because of the high risk. This is called Reversed LBO. ‡ A management buyout (MBO): acquirer is the current management team 11 May 2011 Maithreye S H . ‡ In a typical LBO. lenders often take a portion of the firm·s equity.LBOs and Divestitures Transaction. ‡ 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. 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.

11 May 2011 Maithreye S H . ² 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.Attributes of a candidate for LBOs ‡ An attractive candidate for acquisition through leveraged buyout should possess three basic attributes: ² It must have a good position in its industry with a solid profit history and reasonable expectations of growth. ² It should have a relatively low level of debt and a high level of ´bankableµ assets that can be used as loan collateral.

High debt Incentives Private ownership 11 May 2011 Maithreye S H . 2.Leveraged Buyouts ‡ The three main characteristics of LBOs: 1. 3.

The organizing sponsor group buys all the outstanding shares of the company and takes it private. The management strives to increase profits and cash flows by cutting operating costs and changing marketing strategies.Stages of a Typical LBO Operation (1). (2). Raise the cash required for the buyout and design a new management incentive system. 11 May 2011 Maithreye S H . the new owners sell off some parts of the acquiring firm. ² To reduce the debt by paying off a part of the bank loan. (3).

² Reverse LBOs 11 May 2011 Maithreye S H .Stages of a Typical LBO Operation (cont·d) (4). The investor group may take the company public again if the ´leaner and meanerµ company emerges stronger and the goals of the group are achieved. It will consolidate or reorganize production facilities. improve inventory control and accounts receivables management. and any other ways to increase firm value and most importantly. meet payments on the swollen debt. (5). improve product quality and customer service. try to extract better terms from suppliers.

‡ A Critical Issue for MBO: ² The buying group needs to be fair to minority/outside shareholders to avoid accusations of security fraud against controlling shareholders.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. then these going private transactions are called MBOs. 11 May 2011 Maithreye S H . When incumbent management is included in the buying group and key executives perform an important role in LBO transactions.

cashflow and productivity measures 11 May 2011 Maithreye S H .Purpose of MBO ‡ Opportunity to enhance performance (commonly for privatisations] ‡ Retaining the management team gives additional stability ‡ Wealth Creation ² studies prove that in the short term after a buy-out there is substantial improvements in profitability.

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 potential 11 May 2011 Maithreye S H .Why do Management teams do BuyOuts? Competitive reasons: ‡ To acquire additional skills and competencies ‡ To secure a source of supply.

11 May 2011 Maithreye S H . ‡ Of paramount importance is a quality management team capable of executing a credible business plan that supports growth through a scaleable investment thesis.candidates for MBO·s ‡ businesses with a history of profitability ‡ have a strong and stable market share of its niche industry.

MLP ‡ What It Is: A master limited partnership (MLP) is a publicly traded limited partnership. MLPs generally operate in the natural resource. Shares of ownership are referred to as units. financial services. 11 May 2011 Maithreye S H . 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) 11 May 2011 Maithreye S H .

ESOPs An 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. 11 May 2011 Maithreye S H .

‡ Co. issues Options on Shares to Employees Company Options Employees 11 May 2011 Maithreye S H .ESOP Structuring ² Directly by Co.

grants Options To a Trust Trust grants Options to Employees Employees exercise Options and are issued Shs by Co.Trust is Administrator  Through a Trust as Administrator    Co.ESOP Structuring . Options Employee Trust Options Employees Company 11 May 2011 Maithreye S H .

Shs. issues Eq.ESOP Structuring . To a Trust Trust issues Options against these Shares to Employees Shares Options Employees Company Employee Trust 11 May 2011 Maithreye S H .Trust is Shareholder  Through a Trust   Co.

² whole-time / part-time / NED ² Permanent employee / director of Subsidiary / Holding Co.For Whom? : Eligibility ‡ Eligible persons as per SEBI G/L: ² Permanent employee of Co. ² Director of Co. ² Non²Ex Dir & Independent Dir .covered 11 May 2011 Maithreye S H .

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 11 May 2011 Maithreye S H .