Professional Documents
Culture Documents
RESTRUCTURING
Restructuring hexagon
Information gap
Current Market Value
Optimized firm value
Divestiture
activity, spin
offs
and disposals
Financial engineering:
leverage, dual class
stock, carve outs,
tracking stock,
employee ownership,
debt restructuring
Restructuring Models
Essentials of Restructuring
Cost Reduction
Divestment
Improving bottom-line
Core Competencies
Resolving conflict
Bifurcation of business
Barriers to Restructuring
Resistance to change
Poor communication
Scepticism
Availability of resources
Organizational workload
Dimensions of restructurings-1
Asset restructuring
Acquisitions
Divestitures
Spin offs
Corporate downsizing
Outsourcing
Dimensions of restructuring-II
Restructuring ownership structure, leverage
Exchange offers
Share repurchases
LBOs
MBOs
ESOPs
IPO
Buyback
Dimensions of restructuring-III
Ownership vs. control
Limited partnerships
Joint ventures
Securitization
Project finance
Incentive restructuring
Dimensions of restructuring- IV
Corporate control
Takeovers
Dual-class recapitalizations
Share repurchase
Proxy contests
Chapter 11 reorganizations
Liquidations
Improved management
Information effect
Wealth transfers
Tax reasons
Leverage gains
Hubris hypothesis
Economies
Financial Restructuring
Buyback of shares
Debt Reduction
Purpose
Organizational Restructuring
Restructuring options
Expansion
Contraction
Spin offs
Split offs
Divestitures
Equity carve-outs
Assets sale
Split-up
Corporate Control
Takeover defenses
Share repurchases
Exchange offers
Proxy contests
Leveraged buyout
Going Private
ESOPs and MLPs
EXPANSION
1. Merger Combination of two or more companies into a single
company by way of Amalgamation or Absorption.
Amalgamation is the merger of one or more companies with another or
the merger of two or more companies to form a new company, in
such a way that all assets and liabilities of the amalgamating
companies become assets and liabilities of the amalgamated
company and shareholders not less than nine-tenths in value of the
shares in the amalgamating company or companies become
shareholders of the amalgamated company.
Merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian
Software Company Ltd and Indian Reprographics Ltd into an entirely new
company called HCL Ltd
ACQUISITION
Mergers
A
Brooke Bond
India Ltd
B
Lipton
India Ltd
A
B
Acquisition
A subsequent merger
7.
Joint Venture
Strategic Alliance
Competitive Goals
To pre-empt competitors
To pre-empt competitors
Market Alliance
Sales alliance
Concentration Alliance
Supply Alliance
Disadvantages:
Tender Offer
TENDER OFFERS
Tender Offer An offer to buy current shareholders stock at a
specified price, often with the objective of gaining control of the
company. The offer is often made by another company and
usually for more than the present market price.
Asset Acquisition
M3M India acquired DLF 28- Acre Plot in Gurgaon as non core
assets for Rs 440 Cr.
Achieve focus
Reverse synergy
Tax consideration
SPIN OFF
Example :Pepsi Spinoff of Pizza Hut and KFC, spin-off of EDS from
GM. Lehman was an outcome of spin-off of American Express, L&T
spun off its Cement division into a company Ultra tech, which was later
acquired by Grasim.
Spin-off
Shareholders of
Company A
A
Subsidiary
Company
of A
SPLIT-UP
Split-UP
Shareholders of
Company A
A
B
Subsidiary
SPLIT-OFF
Split- off
In a split off, a new company is created to takeover the operations
of an existing division or unit. A portion of existing shareholders
receives stock in a subsidiary (new company) in exchange for
parent company stock Hence the shareholding of the new entity
does not reflect the shareholding of the parent firm. A split-off
does not result in any cash inflow to the parent company
Shareholders of
Company A
Shareholders of
Company A
A
C
Shareholder
s of
Company A
New Compan
A
E
Operations of
Shareholder
s of
Company B
B
Subsidiary
Company
of A
Investors
20%
Shares
of
Compan
yB
distributed as dividend to
Divestiture
Divestitures
Shares
A
A
Oper
ation
s
Shares
Some Operations
of A
Cash
Patent
s
B
B
Assets
Assets
Oper
ation
s of
A
Unprofitable division
A Bad fit
Reverse Synergy
2.
3.
4.
5.
Registration of Shares
6.
De Mergers
SLUMP SALE
The sale is made for a lump sum price, without values being
assigned to the assets and liabilities transferred.
Corporate Control
Share Buyback
CORPORATE CONTROL
1. TAKEOVER DEFENSES intends to change the corporate control
position of the promoter. This includes pre-bid & post-bid defenses.
2. SHARE REPURCHASES leads to reduction in the equity capital of the
company thereby increasing the promoters stake.
3. EXCHANGE OFFERS involves exchanging common stock for debt or
vice versa for changing the capital structure &keeping the investment
policy unchanged.
4. PROXY CONTESTS is an attempt by a single shareholder or a group of
dissident shareholder to take control or seek membership of the
Board , to influence the management decision-making process of the
firm. Even if the dissident group obtains a minority position on the
Board, it can have positive impact on the share prices by virtue of
pressures they can exert on various corporate and functional policies.
5. TENDER OFFER involves making a public offer for acquiring the
shares of target company to acquire the management control in
that company.
6. DUAL CLASS STOCK RECAPITALISATION: Those with non-voting rights/
limited voting rights but preferential claim on the companys cash
flows, and those with voting rights ( Ford Company). Usually common
in closely-held companies.
1.
2.
3.
4.
.
.
.
ESOPs
TYPES OF MERGERS
1. Horizontal mergers
- Mergers between two firms operating & competing in
the same kind of business activity;
- Main purpose is
. economies of scale by elimination of duplication of
facilities and operations
. broadening the product line
. reduction in investment in working capital
. elimination of competition in a product
. reduction in advertising costs
. increase in market share etc.;
- Decrease in no. of firms in an industry;
- Potential to create monopoly.
- Timing is the key
Exxon-Mobil,
2. Vertical mergers
- Involves merger between firms that are in different stages of
production or value chain;
- Combination of companies that usually have buyer seller
relationships;
- Backward & Forward integration;
. Motive is to reduce inventories of raw materials and finished
goods-better competitive power through controlling input prices
. implements its production plans as per the schedules
. better working capital management
. elimination of transaction costs etc.
Eg-RIL-RPL MERGER,
Acquisition by Pepsico acquisition of bottlers of Pizzahut and KFC
AOLs purchase of media and content provider Time Warner
Merck and Medco containment Services (forward)
Ford buying Hertz (forward)
Auto Car Rental Acquisitions: Chrysler, GM, Ford
3. Conglomerate mergers
- Merger between the firms engaged in unrelated types of
business activity; example- GE
- Motive is to utilize financial resources, enhance the stability
of acquirer company by creating balance in the companys total
portfolio of diverse products production processes. Philip
Morris, a tobacco company, acquired General Foods in 1985
for $5.6 billion
Types of Conglomerate mergers:
- Product extension mergers or Concentric mergers
- Geographic market extension merger
- Pure conglomerate merger
- Financial conglomerate-TDPL merged with Sun Pharma for
funds
- Managerial conglomerate
TYPES OF MERGERS
COGENERIC MERGERS
Type of merger when two merging firms are in the same industry but
have no mutual buyer-customer or supplier relationship, such as a bank
and a leasing company. For Example-Prudentials acquisition of Bache
and Company.
Example: American Express acquisition of Shearson Hamil
REVERSE MERGER
Lower cost
No control premium
Example: GM acquired EDS and made it a subsidiary and issued Class E shares
Earn-outs
Pre-Purchase Decision
Activities
Post-Purchase Decision
Activities
Phase 3: Search
Phase 4: Screen
Phase 6: Negotiation
Phase 8: Closing
Phase 9: Integration
Strategic realignment
Technological change
Deregulation
Synergy
Economies of scale/scope
Cross-selling
Diversification (Related/Unrelated)
Financial considerations
Acquirer believes target is undervalued
Booming stock market
Falling interest rates
Market power
Ego/Hubris
Tax considerations
Poor strategy
Industry concentration
Increasing leverage
IT revolution
Deregulation
Syndicated debt
CDOs
Acquisition vehicle
2.
Post-closing organization
3.
Form of payment
4.
Form of acquisition
5.
6.
Accounting Considerations
7.
Tax considerations
Strategic Acquisitions
Involving Common Stock
Strategic Acquisition Occurs when one company acquires
another as part of its overall business strategy.
Strategic Acquisitions
Involving Common Stock
Example Company A will acquire Company B with shares of common stock.
Company A
Present earnings
Shares outstanding
Earnings per share
Price per share
Price / earnings ratio
$20,000,000
5,000,000
$4.00
Company B
$5,000,000
2,000,000
$2.50
$64.00
$30.00
16
12
Strategic Acquisitions
Involving Common Stock
Example Company B has agreed on an offer of $35 in common stock of
Company A.
Surviving Company A
Total earnings
$25,000,000
Shares outstanding*
Earnings per share
6,093,750
$4.10
Strategic Acquisitions
Involving Common Stock
The shareholders of Company A will experience
an increase in earnings per share because of the
acquisition [$4.10 post-merger EPS versus $4.00
pre-merger EPS].
The shareholders of Company B will experience a
decrease in earnings per share because of the
acquisition [.546875 x $4.10 = $2.24 post-merger
EPS versus $2.50 pre-merger EPS].
Strategic Acquisitions
Involving Common Stock
Surviving firm EPS will increase any time the
P/E ratio paid for a firm is less than the
pre-merger P/E ratio of the firm doing the
acquiring. [Note: P/E ratio paid for
Company B is $35/$2.50 = 14 versus premerger P/E ratio of 16 for Company A.]
Strategic Acquisitions
Involving Common Stock
Example Company B has agreed on an offer of $45 in common stock of
Company A.
Surviving Company A
Total earnings
$25,000,000
Shares outstanding*
Earnings per share
6,406,250
$3.90
Strategic Acquisitions
Involving Common Stock
The shareholders of Company A will experience
a decrease in earnings per share because of
the acquisition [$3.90 post-merger EPS versus
$4.00 pre-merger EPS].
The shareholders of Company B will experience
an increase in earnings per share because of
the acquisition [0.703125 x $4.10 = $2.88 postmerger EPS versus $2.50 pre-merger EPS].
Strategic Acquisitions
Involving Common Stock
Surviving firm EPS will decrease any time the
P/E ratio paid for a firm is greater than the
pre-merger P/E ratio of the firm doing the
acquiring. [Note: P/E ratio paid for
Company B is $45/$2.50 = 18 versus premerger P/E ratio of 16 for Company A.]
What About
Earnings Per Share (EPS)?
With the
merger
Equal
Without the
merger
Time in the Future (years)
Acquiring
Company
Present earnings
$20,000,000
Shares outstanding 6,000,000
Earnings per share
$3.33
Price per share
$60.00
Price / earnings ratio
18
Bought
Company
$6,000,000
2,000,000
$3.00
$30.00
10
Target firms in a
takeover receive an
average premium of
30%.
Evidence on buying
firms is mixed. It is
not clear that
acquiring firm
shareholders gain.
Some mergers do
have synergistic
benefits.
CUMULATIVE AVERAGE
ABNORMAL RETURN (%)
Empirical Evidence on
Mergers
Selling
companies
+
Buying
companies
Announcement date
Developments in Mergers
and Acquisitions
Roll-Up Transactions The combining of
multiple small companies in the same
industry to create one larger company.
Idea is to rapidly build a larger and more valuable firm with
the acquisition of small- and medium-sized firms
(economies of scale).
Provide sellers cash, stock, or cash and stock.
Owners of small firms likely stay on as managers.
If privately owned, a way to more rapidly grow towards
going through an initial public offering (see Slide 24).
Developments in Mergers
and Acquisitions
An Initial Public Offering (IPO) is a companys first offering of
common stock to the general public.
Control by owners
2.
Management autonomy
Continuity of ownership
Duration or life of entity
Ease of transferring ownership
3.
4.
5.
6.
7.
8.