Lecture 10, Restructuring and Divestitures(收购与兼并-外管局,黄国波)

Lecture 10, Restructuring and Divestitures






Corporate restructuring strategies Leverage and leveraged recapitalizations Dual class recapitalizations Exchange offers Reorganizations for financial distressed firms Financial engineering innovations Liquidations and take-over bustups Reading: Chs 11, 12, 13
Functions of leveraged recaps
– Leveraged recap more likely to succeed if
Part
of a strategic plan to improve performance of firm in relation to changing environments Success depends heavily on programs to improve performance
– In substantial number of cases of DCR, controlled group represents founding families or their descendants
Chapter 13 - 11 M&A-Guobo Huang
16

Motives for dual-class recapitalizations
Chapter 13 - 9 M&A-Guobo Huang
14
C. Dual-Class Recapitalizations

Dual-class recapitalization (DCR) mechanism
– Second class of common stock has limited voting rights and a preferential claim to cash flows – New class may be created by distributing limited voting shares pro rata to current shareholders
Chapter 13 - 5 M&A-Guobo Huang
10
– Leverage recap characteristics
Book
leverage measured by total debt to total capitalization increases from 20% to about 70% Management ownership share increases from 9% to 24% on average
Chapter 11 - 6 M&A-Guobo Huang
6




Harvesting past successes to make resources available for developing other opportunities Discarding unwanted businesses from prior acquisitions to value-increasing buyer Divestiture to finance major acquisitions or LBOs Warding off takeovers as a defense by selling off a "crown jewel"
Chapter 13 - 7 M&A-Guobo Huang
12

Subsequent performance
– High rate of financial distress – Main factors influencing postperformance
Macroeconomic
and industry conditions Whether defensive or proactive Whether operating improvements were achieved
Chapter 13 - 10 M&A-Guobo Huang
15
– Some patterns
Officers
and directors have 55-65% of common stock voting rights Officers and directors have claim on about 25% of total cash flows
M&A-Guobo Huang
1
A. Corporate Restructuring Strategies

Some basic forces
– Align interests between managers and shareholders: agency problem – Move assets to higher uses – Reverse conglomerate merger movement
Chapter 11 - 3 M&A-Guobo Huang
3
– Equity carve-outs: some of subsidiary's shares are offered for sale to general public – Split-offs: some shareholders receive subsidiary's shares for their parent company shares
Chapter 13 - 8 M&A-Guobo Huang
13
– Defensive leveraged recaps
Succeed
by returning cash to shareholders Shareowners continue to hold equity stubs May discourage outside bidders: scorchedearth policy High percentage of firms which adopt leveraged recaps are subsequently acquired
Chapter 11 - 2 M&A-Guobo Huang
2

Definitions
– Divestitures: sale of segment of a company to a third party – Spin-offs: company distributes on a pro rata basis all shares it owns in a subsidiary to its own shareholders – Split-ups: two or more new companies come into being in place of original company
Increase
debt level to make firm less attractive Use debt to reorganize management control of firm
Effects of the use of leveraged recaps
– Leveraged recap mechanism
Chapter 11 - 8 M&A-Guobo Huang 8
B. Leverage and Leveraged Recapitalizations

Value enhancement of capital structure decisions
– Acquisition of other firms
Chapter 11 - 7 M&A-Guobo Huang 7



Divestiture to obtain government approval of a combination of segments with competing products Corporate sale of divisions or business units to operating managements Divestiture to finance taking a position in another firm Divest businesses after learning more about them Reversing prior mistakes
Chapter 11 - 5 M&A-Guobo Huang
5


Change in strategic focus which may reflect realignment with firm's changing environments Adding value by selling into a better fit Firm is unable or unwilling to make additional investments to remain in a business
– Market response to announcement of leveraged recap: defensive
Defensive
leveraged recap: action taken in response to actual takeovers or indications of likely takeover bid Both positive and negative returns: success less likely