L12 Corporate Restructuring

8/2/2019 L12 Corporate Restructuring

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Corporate Restructuring andDivestitures

Lecture 12



What is Corporate Restructuring?

• Actions taken to expand or contract a firm’s

basic operations or fundamentally change itsasset or financial structure.

• Activities are broad, range from reorganizing

business units from product lines to divisions totakeovers or joint ventures etc.

• May involve taking the company private, selling

attractive assets, undertaking a majoracquisition, or even liquidating the company



Categories

• Operational restructuring

– Outright or partial sale of companies or product linesor to downsize by closing unprofitable or non-strategicfacilities.

– Also known as divestiture

– Remove non-core assets – Becoming more focused on core activities

• Financial (or debt) restructuring

– Actions by the firm to change its total debt and equitystructure, i.e, share repurchase, adding debt or loweroverall cost of capital.



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 focusingon wealth-creating investment opportunities,profit improvement and overhead reductionprograms and divestiture

• Pursue finally-driven creation using variousfinancing instruments and arrangements



Restructuring Defenses

• Management buyouts

• Leveraged buyouts

• Both are known as “Going Private”.



Management Buyouts

• Involves the management team’s purchase of

the bulk of the firm’s shares.• Create a win-win situation for shareholders whoreceive a premium for their stock andmanagement who retain control.

• To avoid lawsuits, the price paid must representa higher premium to the current market price.

• Alternatively, the target may make itself lessattractive by divesting assets the bidder wants.

• Cash proceeds of the sale could fund otherdefenses such as share buybacks.



Leveraged Buyouts

• Borrowed funds are used to pay for all or most of

the purchase price.• Can be of an entire company or divisions of a

company

• The tangible assets of the company are used ascollateral for the loans

• Investors in LBOs are referred to as financialbuyers because they are primarily focused onrelatively short- to intermediate-term financialreturns



Common Features of LBO and MBO

• Preexisting shareholders receive a large one-time

disgorgement of cash value from their investment in thecompany

• The cash payment is financed by a dramatic leveragingof the company

• The restructuring is accompanied by a dramaticrearrangement of incentive compensation formanagement

• Management retains operational control of the firm

• The restructuring is usually followed by significantoperational tightening to increase operating cash flow.



Important Differences between LBO and MBO

• MBO leads to private companies while LBO leaves thecompany publicly traded with shareholders receiving “stub”equity in addition to cash payout.

• Under the MBO, the company saves on public reporting costs,but its equity shares remain illiquid securities. LBO preservesequity liquidity but exploits no (or few) savings on reporting.

• Under the MBO, owners are insiders. In LBO, equity investors

remain outsiders• Under MBO, control of the firm changes. In LBO, control maynot necessarily change since the stub equity remains in thehands of public shareholders.

• The MBO creates strong conflict of interests, requiring the

board to actively represent shareholders in the buyoutnegotiations. In LBO, ordinary business judgment rulesapplies.

L12 Corporate Restructuring

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