Corporate Restructuring

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Chapter 23

• Corporate Restructuring

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Corporate Restructuring
External Expansion
Merger/ Acquisition
Corporate Restructuring
Failure
Bankruptcy
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External vs. Internal Growth

• Companies will seek external growth if
• It is less expensive than internal growth
• Economies of scale can be achieved
• Rapid growth versus internal expansion
• Diversification is important

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Types of Mergers

• Vertical
• Combination of companies that are considered
  buyers and sellers with each other
  (Disney/Comcast)
• Horizontal
• Combination of companies that compete with each
  other (Harrahs/Caesars)
• Conglomerate
• Combination of unrelated companies (Philip
  Morris/General Foods)

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Form of Mergers

• Stock Purchase
• Acquiring company buys the stock of the target
  company.
• Assumes liabilities
• Asset Purchase
• Acquiring company buys assets of target company.
• NO assumption of liabilities
• Joint Venture
• Two unaffiliated companies

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Leveraged Buyout (LBO)

• Buyer borrows most of the purchase price
• Purchased assets pledged as collateral
• Buyers frequently are the managers
• Anticipate cash flows sufficient to service debt
• Reasonable return on investment
• Could involve sale of assets to reduce debt

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Hostile Takeover

• Most acquisitions are friendly and have the
  support of the Board of Directors
• If the targets BOD does not agree to a
  transaction, the acquirer can commence a Hostile
  Takeover
• Take transaction directly to shareholders
• Offering price is greater than the market price
• Induce shareholders to sell
• Many acquisitions start out as hostile takeovers,
  but become friendly when the BOD and the acquirer
  agree on the stock price that is paid.

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Anti-Takeover Measures Before a Hostile Bid

• Staggered board Stagger terms of BOD over a
  number of years instead of same year
• Golden Parachutes Benefits given to executives
  terminated without cause after a merger
• Supermajority Voting Voting rules that require
  more than a simple majority to approve merger
• Poison Pills Securities that become valuable
  when unfriendly bidder controls certain
  percentage of stock

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Anti-Takeover Measures After a Hostile Bid

• White Knight Find more friendly acquirer
• Pacman Defense Commence bid for acquirer
• Litigation Legal action to delay process
• Restructure Sell desirable assets to somebody
  else
• Greenmail Buy back bidders shares at a premium
• Overall Goal
• Avoid takeover by delaying the process,
  increasing the cost, making the firm less
  attractive, or finding an alternative buyer

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EPS of Combined Company
EPSc E Earnings of both companies (E1
and E2) plus synergy income (E1,2) NS Number
of shares of stock ER Exchange
Ratio Post-merger common stock price and price
to earnings (P/E) ratio determined in the
marketplace.
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Evaluating Merger Candidates
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Evaluating Merger Candidates

• Stable Products acquisition initially results in
  increased EPS
• Accretive to earnings
• High Tech Products acquisition initially results
  in decreased EPS
• Dilutive to earnings

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Evaluating Merger Candidates

• While Stable Products acquisition looks more
  appealing initially, the High Tech acquisition
  is better over the long term
• Difference is EPS growth rate
• 5 Stable Products
• 14 High Tech Products

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Why Do Businesses Fail?

• Business risk Symptoms
• Industry downturns
• Over expansion
• Inadequate sales
• Increased competition
• Technological change

• Financial risk Symptoms
• Leverage
• Too much Short Term debt
• Poor management of
• A/R
• A/P
• Poor Management

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Why Do Businesses Fail?
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Business Failure Definitions

• Technically Insolvent (Illiquid) unable to pay
  bills as they come due, even if assets exceed
  liabilities
• Legally Insolvent value of assets is less than
  value of liabilities
• Bankrupt unable to pay its debts and files a
  bankruptcy petition in accordance with the
  federal bankruptcy laws.

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Aztar Acquisition

• Merger agreement with Pinnacle at 38 per share
• Premium of 24 over 30.70 close on 3/10/06
• Colony Capital bids 41 per
• Ameristar bids 42 per share
• Columbia Sussex bids 47 per share and ultimately
  succeeds in bidding war with a 54 per share
  bid
• Columbia Sussex is a hotel company that operates
  small casinos
• Acquisition closes in 1/07 and merged entity is
  renamed Tropicana Entertainment
• Company consists of Aztar properties and smaller
  casinos formerly controlled by Columbia Sussex

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Failure of Tropicana Entertainment

• Acquisition was a Leveraged Buyout (LBO) that was
  primarily funded with debt borrowings
• High debt service requirements (interest/principal
  )
• Operating results began to decline, due largely
  to
• Poor management decisions in staffing and
  marketing areas
• Inexperience operating large properties
  (Tropicana AC/LV)
• Focus on cost cutting, without regard to revenue
  impact
• Industry revenues began to decline (partial
  smoking ban in AC, increased competition in
  AC/LV, declining economy, volatile gas prices

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Failure of Tropicana Entertainment

• Land/Casino values deteriorated
• Aztar acquired in bidding war at market peak
• Loss of Tropicana AC casino license
• Control shifts to Trustee/Conservator
• Tropicana Entertainments access to Tropicana
  ACs cash flows is severely limited
• Covenant in bank loan agreement is violated
• Interest rate on bank loan increases in exchange
  for lenders not declaring the loan in default.
• Tropicana Entertainment becomes unable to fund
  debt service requirements and files for
  bankruptcy protection in May 2008.

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Alternatives for Failing Business
Resolve its Difficulties on a Voluntary/ Informal
Basis
Failing Firm
Formally Declare Bankruptcy
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Informal/Voluntary Resolution

• Stretch Accounts Payable
• Suppliers make concessions
• Debt Restructuring
• Extension
• Composition
• Sell Assets
• Real estate/operating divisions
• Sale and leaseback of fixed assets

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Bankruptcy Alternatives
Chapter 11 (Reorganization)
U. S. Bankruptcy Law
Chapter 7 (Liquidation)
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Reorganization vs. Liquidation

• Reorganize if going-concern value exceeds its
  liquidation value
• Value is higher as an operating business
• Often used for companies having difficulty
  funding principal/interest payments on debt
• Liquidate if liquidation value is more than its
  going-concern value

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Priorities

• Administration expenses
• Business expenses (Post filing)
• Wages owed three months prior
• Contributions to employee benefit plans
• Customer lay-away deposits
• Taxes owed

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Priorities (Contd)

• Secured debt obligations
• General/unsecured claims
• Unsecured Debt
• Accounts Payable
• Preferred Stockholders
• Common Stockholders
• Priorities create divergent interest among the
  various stakeholders, and thus, makes agreeing on
  a bankruptcy plan inherently difficult.

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Prepackaged Bankruptcy

• A plan that is agreed to by more than 50 of
  creditors who hold at least two-thirds of the
  debt before filing for bankruptcy.
• Plan effectuated through Chapter 11 proceeding
• Dramatically shortens the length of time a
  company spends in the bankruptcy process
• Professional expenses are significantly reduced

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Chapter 11

• Seek protection from creditors
• Attempt to work out a plan of reorganization
• Court may appoint trustee to run the business
• Reorganization plan must be approved
• Court
• Creditors
• Companys security holders
• 2/3 of debtholders
• Majority of stockholders
• Bankruptcy Court can Cram Down a plan

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Chapter 11
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Chapter 7

• Court selects a referee.
• Handles the administrative procedures
• Arranges a meeting of the creditors
• Creditors select a trustee.
• To liquidate the business
• Distribute the proceeds according to priorities

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Chapter 7 Example
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Trump Casinos Questions

• What are the problems that Trump Casino
  encountered?
• Were the problems related more to operational
  issues or debt structure?
• What would you recommend as a restructuring
  solution?
• Be mindful of incentives to be given to
  bondholders in support of your plan
• Global Marine example