Corporate

Restructuring
 Corporate Restructuring
•Actions taken to expand or contract a firm’s
basic operations or fundamentally change its
asset or financial structure.

• Activities are broad, range from reorganizing

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

• May involve taking the company private,

selling attractive assets, undertaking a major
acquisition, or even liquidating the company
 Restructuring
• 1980’s: corporate restructuring identified with
leveraged buyouts, LBO’s, LCO’s
– More generally, however, divestitures, carve
out IPO’s, spin offs, etc.

• Early 1990’s: corporate restructuring

identified with troubled debt restructuring:
workouts and reorganization
 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 focusing
on wealth-creating investment opportunities,
profit improvement and overhead reduction
programs and divestiture
• Pursue finally-driven creation using various
financing instruments and arrangements
 Antecedents of Restructuring

Environment

Governance

Restructuring

Strategy

Financial
Performance Restructuring
 Antecedents of Restructuring
• Environmental
- Competition
- Takeover threats
- tax motivations
• Governance
- Weak governance
• Ineffective management
• Complacent board
• Inadequate incentives
• Lack of ownership concentration (institutional investor
activism).
 Antecedents of Restructuring
•Strategy
- Poor strategy or implementation
- Over diversification
- Leverage

• Performance
- Poor or declining performance
- Difference between desired and actual
performance
- Assets are undervalued
- Perceived threat of takeover
 Modes of restructuring

• Operational restructuring
– Outright or partial sale of companies or product
lines or to downsize by closing unprofitable or
non-strategic facilities.
– Also known as divestiture
– Remove non-core assets
– Becoming more focused on core activities
 Modes of restructuring
Financial restructuring: Actions by the firm to change
its total debt and equity structure, i.e, share repurchase,
adding debt or lower overall cost of capital.

- LBOs (divisional MBOs)

- Employee stock options plans (ESOPs)
- Equity financed share repurchases
- Targeted share repurchases (greenmail)
- Leveraged recapitalizations
• Leveraged cash-outs
• Leveraged share repurchases
• Securities swaps (debt for equity)
 Modes of restructuring

Asset restructuring

- Downsizing

• Employee layoffs
• Mixed results
• 89% cite expense reduction (46% succeeded)
• 67% for competitive advantage (19% succeeded)
• Which employees leave or stay?

- Downscoping

• Divestitures (sell-offs, spin-offs, split-ups)

• Plant closings
• Liquidations
 Modes of restructuring

• Divestitures (sell-offs versus spin-offs)

Spin-
off
• Spin-off represents a pro-rata distribution of shares of a
subsidiary to shareholders.
• Occurs within the hierarchy.
• Terms and valuation of the assets are
set internally
• Parent stockholders create new board
and TMT.
Sell-off
• Parent can maintain ties with spun-off
• Sell-offs:
unit. Assets are sold to another firm for cash and/or
securities.
• Occurs outside the hierarchy.
• Value determined by market forces.
• Acquiring firm absorbs and governs the sold-
off assets as
• part of its hierarchy.
 Modes of restructuring

• Involuntary restructuring (tender offer)

• Options are similar to voluntary restructuring but more immediate.
• Actions designed to thwart the takeover.
- Financial
• Shark repellents
• Poison pills
• Leveraged recapitalizations
• Greenmail
• Litigation
- Asset
• Scorched earth defense - defensive asset restructuring
• Crown jewel sales - sell sought after unit
• Pac-man defense - target launches attempt to acquire bidder
 Restructuring outcomes

 Strategy

• Focus on related or unrelated units (less total diversification)

• Innovation

 Employee effects

• Trust of management
• Poor communication
• Motivation
• Turnover
 Performance (market)

• Generally positive (except when fighting a takeover)

• Determined by use of funds