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MERGERS, ACQUISITIONS AND RESTRUCTURING

Week 3 Babtan, Paun, Policarpo

CORPORATE DIVESTITURE
Divestiture

Involuntary

Voluntary

Underperf orming

Underpositi oned

Strategy misfit

Financial distress (cash)

Bought in pack

DIVESTITURES: DRIVING VALUE THROUGH SEPARATION


What do companies want out of a divestiture?

Getting value for their assets is the top goal


negotiating a good price matters;

Minimizing disruption to the business is another big concern


the level of chaos such transactions may create in the existing business;

Closing the deal quickly and using managements time efficiently

DIVESTITURES: DRIVING VALUE THROUGH SEPARATION


Importance of outcomes that characterize a successful divestiture

Factor accounting for the greatest value erosion in divestitures

DIVESTITURES: DRIVING VALUE THROUGH SEPARATION


Factors that may lower the probability of success

Involvement of corporate development team in divestitures Frequency of evaluating portfolio for potential divestitures Adequacy of resources devoted to executing divestitures

DIVESTITURES: DRIVING VALUE THROUGH SEPARATION


Some important steps in preparing to separate out part of the business:

Make sure that all the stakeholders are aligned; Create a plan for how the divestiture will happen, function by function; Do due diligence on yourself;

Savvy leaders view divestiture as an essential core competency of an organization and embrace its role in portofolio optimization

LEVERAGED BUYOUTS (LBO)


Financial dictionaries define a leveraged buyout (LBO) as

a debt-financed transaction, typically via bank loans and bonds,

aimed at taking a public corporation private.

Because of the large amount of debt relative

to equity in the new corporation, these bonds


are typically rated below investment-grade, and are properly referred to as high-yield or junk bonds.

LEVERAGED BUYOUTS (LBO)


IBO
Investor buyout

MBO
Management buyout

MBI
Management buyin

BIMBO
Buyin management buyout

PTP
Going private buyouts

Club Deals
Several PE firm form a consortium

LBOs differentiation aspects:

Whether the incumbent management of the target of the buyout is part of the team initiating buyout and invests in the equity of NEWCO Whether the target firm is a company listed on a stock exchange and includes the public, both institutional and individual, investors as shareholders Whether the management team consists of incumbent target management or it includes new managers from outside or a mixture of both.

LEVERAGED BUYOUTS (LBO)


Possible exit strategies for LBOs include initial public offering, which allows investors to liquidate ownership interest, re-capitalization which allows equity holders to realize a return by taking a sizable dividend, and outright or partial sale to another strategic or financial buyer.

(i)

(ii)

(iii)

LEVERAGED BUYOUTS (LBO)


Fine-tuned strategies

Buy-and-build High-technology buyouts JV LBOs Club Deals PIPE

This means: Low R&D level -> High R&D level Low risk business -> High risk business

ACQUISITION THE DECISION MAKING PROCESS THE TARGET SELECTION

ACQUISITION THE DECISION MAKING PROCESS


Rationalist perspective Organizational process perspective
Economic, Strategic Financial evaluation. Costs and benefits of the acquisition.

Organizational context relevant Acquisition process starts with an idea Progresses through acquisition justification.

ACQUISITION THE DECISION MAKING PROCESS


Hubris

Representativeness Availability Anchoring Prospect theory


Over Confidence

Over Optimism
Directors can institutionalize a devils advocate whose function is make a serious case as to why the deal should not be done.

ACQUISITION THE TARGET SELECTION


Value creation sources:

Cost savings
Revenue enhancement New growth opportunities Consolidation in fragmented industries: Add-on or bolt-on acquisition Platform acquisition or leveraged build-up Buy-build-operate (BBO) Buy-build-sell (BBS)

Public vs Private Small vs Large

IPO roll-up

THANK YOU

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