Corporate%20Restructuring%20Strategy

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Chapter 7

• Corporate Restructuring Strategy

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A.Mergers and Acquisitions
(A) Value-added in a merger

• Operational benefits
• Sales and marketing
• Costs and production
• Research and technology
• Resources
• Managerial

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(A) Value-added in a merger

• Non-operational benefit
• Funding
• Taxes
• Risk
• Familial
• Minority representation
• Foreign economy

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(B) Strategic planning process
Industry Competitor Analysis
Business Environment Analysis
Company Analysis
Company Analysis
Strengths Weaknesses
Segments Motivation Unmet needs
Opportunity Threats
Plan Objectives Means for achieving objectives
(Strategies) Means for monitoring process
Acquisition Criteria
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(B) Strategic planning process

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

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(B) Strategic planning process

• Identification of Strengths and Weakness
• Marketing Ratings
• Manufacturing Ratings
• Financial Ratings
• Creativity Ratings
• Management and Personal Ratings

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(B) Strategic planning process

• Customer Analysis
• Industry and Competitor Analysis
• Environment Analysis

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( C )Buy Strategies

• The pursuit of value-added
• Horizontal acquisitions
• Vertical acquisitions
• Conglomerate acquisitions
• Joint ventures

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( C )Buy Strategies

• The pursuit of bargains
• Diversifiers
• Cash needy
• Time pressured
• Problem child

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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

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(B) Strategy

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

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(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

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(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

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(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

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(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

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• A LBO involves leverage from a financing source
  to acquire the target company.
• Proceed ? Pay the seller
• Internal cash flow
• Asset redeployment

retire the debt
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• 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

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(A) Financing Strategy

• The unsecured leverage buyout

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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 (3550)
• Liquidation expectations (5 yrs7 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
New stock tax- Deductible payment
loan
amatization payment
Stock purchase
Corporation
Bank
guarantee
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(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 (515)
  (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)