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Chapter 7

This document discusses various corporate restructuring strategies including mergers and acquisitions, tender offers, divestitures, spin-offs, and leverage buyouts. It outlines the strategic planning process for mergers including analyzing company strengths and weaknesses, customers, competitors, and the business environment. Financing strategies for leverage buyouts are also examined, including the use of secured and unsecured debt, preferred stock, common stock, venture capital, and employee stock ownership plans. The risks and potential benefits of these strategies for owners, management, and other stakeholders are also assessed.

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156 views35 pages

Chapter 7

This document discusses various corporate restructuring strategies including mergers and acquisitions, tender offers, divestitures, spin-offs, and leverage buyouts. It outlines the strategic planning process for mergers including analyzing company strengths and weaknesses, customers, competitors, and the business environment. Financing strategies for leverage buyouts are also examined, including the use of secured and unsecured debt, preferred stock, common stock, venture capital, and employee stock ownership plans. The risks and potential benefits of these strategies for owners, management, and other stakeholders are also assessed.

Uploaded by

kiranaisha
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 35

Chapter 7 Corporate Restructuring Strategy

A.Mergers and Acquisitions

(A) Value-added in a merger


Operational benefits

Sales and marketing Costs and production Research and technology Resources Managerial

(A) Value-added in a merger


Non-operational benefit

Funding Taxes Risk Familial


Minority representation

Foreign economy

(B) Strategic planning process


Company Analysis Strengths Weaknesses Company Analysis Segments Motivation Unmet needs Industry Competitor Analysis Business Environment Analysis

Opportunity Threats

Plan Objectives Means for achieving objectives (Strategies) Means for monitoring process Acquisition Criteria

(B) Strategic planning process


Company Analysis

Aggregate Analysis Analysis by Product Type Production and Cost Analysis Financial Capacity Performance Review

(B) Strategic planning process

Identification of Strengths and Weakness


Marketing Ratings Manufacturing Ratings Financial Ratings Creativity Ratings Management and Personal Ratings

(B) Strategic planning process


Customer Analysis Industry and Competitor Analysis Environment Analysis

( C )Buy Strategies
The pursuit of value-added

Horizontal acquisitions Vertical acquisitions Conglomerate acquisitions Joint ventures

( C )Buy Strategies
The pursuit of bargains

Diversifiers Cash needy Time pressured Problem child

B.Tender Offer

(A)Characteristics
A tender offer usually means a cash or securities bid for a company,made directly to the companys shareholders without consultation or cooperation from its management,often as a prelude to a wholesale takeover of the company

10

(B) Strategy
Offensive Strategies

Undervalued assets Gain control Portfolio,etc. Evaluating the tender offer in short and long term(Green mail)

Defensive Strategies

11

(B) Strategy

Accessing the possibility of better alternatives


Finding a white knight Prefer stock issue with special voting right Sell assets

Developing tactics to induce better offer Block or slow the timetable Pac-Man Maneuver
Counter tender offer

12

(C) Corporate policy


Winners

The management of the aggressor company The shareholders of the target company(50% premium) Investment bankers Merger lawyers

Losers

The management and the employees of the target company The shareholders of the aggressor company
13

(C) Corporate policy


Possible abuses

Two-tiered merger(Poison Pills) Fast buck v.s. growth (LCO) Time pressure after tender offer is announced but before shares can be bought up(White Knights) Job displaced(Golden Parachute) Antitrust
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C.Divestiture and Spinning-off

(A)Divestiture
Strategy
Sell if the premium is positive and is judged to be the best obtainable

Finding sugar daddies


Foreigners Superior judge of worth Earnings per share boosters Geared


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(A)Divestiture

Cash rich The shrinking company Wildcat and star worshippers


Wildcat, stars, cash cows, dogs

(LM, HG)(HM, HG)(H, L) (L, L)


Monument builders Investment banker clients

16

(B)Spin-off
Strategy
Spin-off if the costs of being a part of the parent exceed the benefits and a desirable sale cannot be arranged

Problems

Headquarter staff Apportioning debt

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(B)Spin-off
What company should consider a spin-off strategy?

Unrelated divisions

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D. Leverage Buy Out (LBO)


A leverage buyout (LBO) is any acquisition of a company which leaves the acquired operating entity with a greater than traditional debt-to-worth ratio.

By type of financing
Secured financing

purchase price = collateralized asset + investing equity+ notes taken back by seller Unsecured financing purchase price = venture capital + Mezzanine financing + senior debt
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D. Leverage Buy Out (LBO)

By type of transaction
Asset acquisitions

The formation of a new corporation, which acquires the assets of the target, company.

Tax issue

Stock acquisitions

Stock redemption, tender offers, pure stock acquisitions and reverse mergers

Public companies

20

A LBO involves leverage from a financing source to acquire the target company.

Proceed Pay the seller Internal cash flow retire the debt Asset redeployment

21

Features of target companies


Operating loss Capital intensive Market undervalued Trouble companies

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(A) Financing Strategy


Types

Asset-based financing
Asset-based lenders, e.g. banks, financing corp. Secured floating-rate financing

Senior bank debt


Banks Unsecured

Fixed-rate senior and subordinated debt


Insurance companies, pension funds, mezzanine

buyout funds Unsecured fixed rate debt with warrants


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(A) Financing Strategy

Preferred stock or subordinated debt


Venture capitalists, mezzanine buyout

funds,insurance companies. Fixed-rate preferred stock with warrants

Common stock
Leverage buyout specialists, venture capitalists,

ESOP Common stock

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(A) Financing Strategy


The secured leverage buyout
Loan Collateral Cash flow G B G B G G B B B B B G Lenders Plan B G B G -

Small commercial finacing company Commercail financing company Every secured lender Good luck! Some sophisticated lenders Money center bank or regional bank
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(A) Financing Strategy


The unsecured leverage buyout
Securities Lenders Short or intermediate terms Commercial bank senior debt(2- 6 yr.) Long-term senior and Life insurance subordinated debt (5-15 yr.) companies,LBO funds Life insurance companies, Preferred stock(5-20 yr.) venture capitalists Life insurance companies, common stock venture capitalists,investment bankers
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(A) Financing Strategy


Venture capitalists in LBO

When to consider venture financing


Value added

Creditability with seller


Assistance in financing arrangements and

negotiations Cross-utilization of talent

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(A) Financing Strategy

Venture capitalists investment objectives


Expected returns (35%~50%) Liquidation expectations (5 yrs~7 yrs) Put option (protective device) Restrictions on Owner-Managers liquidity

Rights of first refusal Take-along agreement Right of first offer

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(A) Financing Strategy


ESOP in LBO

Function
Raise additional capital Recapture taxes Assure estate liquidity Retire outstanding shares Provide a market for closely held stock Discourage unionization Buy out dissident stockholders

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(A) Financing Strategy


Acquire other companies
Combat tender offers Broaden the appeal of unions Shelter excess accumulated earnings Refinancing existing debt Maximize IRS investment tax credit Divest subsidiaries

Purchase key main insurance

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(A) Financing Strategy


ESOP invests in the securities of the employer

corporation and is permitted to borrow money. (Leverage ESOP)


ESOP

Corporation

guarantee

Bank

(A) Financing Strategy


ESOP is integrated in the financial plan of LBO

Cash flow Debt amortization Purchase stock loan

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(B) Corporate policy


How risky are LBOs?

Highly leveraged, increase failure (Thatcher Glass LBO) Over-leveraged, bad loan, junk bond (Dr Pepper LBO, 3 times net worth) Overpriced LBO failures (5~15%) (Eli Witt, Oppenheimer & Co.)
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(B) Corporate policy


Why owners should consider a LBO?

For the closely held company, a LBO can provide the selling shareholders with benefit that are not fully appreciated. Liquidity for stock, market stability Diversification Family estate tax savings Reverse LBO
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(B) Corporate policy


Why management should consider a LBO?

Opportunity to create personal wealth Conflict of interest (stand on buyout side)

35

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