Corporate Restructuring

Atul Chandra Pandit Assistant Professor, BIBM

Corporate Restructuring

Corporate restructuring is the process of redesigning one or more aspects of a company. Restructuring refers to a process of reorganizing the legal, ownership, debt, financial, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs.
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Corporate Restructuring

Acquisition Merger

Acquisition

A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy.

Example in Bangladesh

Bank Asia Ltd. Acquired MCBP and Nova Scotia.

Merger

A merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated.

Merger

A merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operate Both companies' stocks are surrendered and new company stock is issued in its place. For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created.
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Example in Bangladesh

BSRS and BSB merged to form BDBL

Negotiated vs. Tender Offers

Three Types of Merger

Horizontal Merger: unites direct competitors ex., 2 shoe companies combine Vertical Merger: unites buyers and sellers a shoe manufacturer buys a leather producer Conglomerate Merger: merging of firms in totally unrelated industries a shoe company joins with a beverage company

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Reasons of Acquisition or Merger

Economies of scale and scope Vertical Integration Expertise Monopoly Gains Efficiency Gains Tax Savings from Operating Losses

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Reasons of Acquisition

Diversification
Risk Reduction Debt Capacity and Borrowing Cost Liquidity

Earnings Growth Managerial Motives to Merger

Conflict of Interest Overconfidence

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Defenses
Poison Pills Staggered Board White Nights Golden Parachutes Recapitalization Other Strategies

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Poison Pills
A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills: 1. A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a discount. 2. A "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger.

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Staggered Board

A (also known as a classified board) is a board that is made up of different classes of directors. Usually, there are three classes, with each class serving for a different term length than the other. Elections for the directors of staggered boards usually happen on an annual basis. At each election, shareholders are asked to vote to fill whatever positions of the board are vacant, or up for re-election. Terms of service for elected directors vary, but one-, three- and fiveyear terms are common.
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Defenses
White Knight: a friendly company that agrees to bid a higher price for a targeted company Crown Jewels: targeted company sells prime division or asset of company to make it less attractive to buyer Golden Parachute: contract that pays existing management if they lose their jobs in a takeover

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Recapitalization

A company changes its capital structure to make it less attractive to the acquirer

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Leveraged Buyout ( LBO )

Buyer borrows most of the purchase price Purchased assets used as collateral

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Types 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

Tender Offer / Hostile Takeover

Purchase the C/S of the merger candidate Offering price > market price
Induce shareholders to sell
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What Happens After a Merger ?

Divestitures
Part of the company sold for cash Spin-off Equity carve-out

Restructurings
Operational Financial

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Why Has Restructuring Been Increasing ?

Failure of internal control mechanisms

Unproductive investment Organizational inefficiencies

Large active investors Available financing High Yield Bonds Long economic expansion

Increased revenues Increased asset values

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Anti-Takeover Measures

Staggering board Golden parachutes Supermajority rule Poison pills White knight

Standstill agreement Pacman defense Litigation Asset/Liability restructuring Greenmail

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Boardmail
Institutional investors use it to fight anti-takeover devices Requires the board of directors to adopt weaker anti-takeover measures In exchange for voting support from institutional owners Vote in sympathetic board members

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Why Do Companies Seek External Growth ?

Less Expensive Economies of scale Vertical merger Availability Rapid growth Diversification Tax-loss carryforward

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Taxes on Mergers

Cash or nonvoting securities

Gains are taxable at the time of the merger

Voting equity securities

Tax-free

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Accounting for Mergers

Purchase method
Total value paid recorded on books Tangible assets at fair market value Excess as goodwill Not a tax-deductible expense
Must be amortized Deducted from NI after taxes

Pooling-of-interest
Assets recorded at book value No goodwill Higher NI No deduction for goodwill
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Valuation of a Merger Candidate

Comparative P/E Ratio Method

Examines prices and P/E ratios of similar companies

Adjusted book value method

Determine market value of the companys assets

Discounted C/F method

Capital budgeting techniques Future free C/Fs Risk-adjusted rate
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Cash

Terms of a Merger

Stock

Other Financial Instruments

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EPS of the Surviving Company

EPSc =

E1 + E2 + E1,2
NS1 + NS2 ( ER )

Post-merger price of C/S

Determined in the marketplace

Post-merger P/E

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Failures

Technically insolvent
Unable to meet current obligations

Legally insolvent
Assets < liabilities

Bankrupt
Unable to pay debts Files bankruptcy Fed bankruptcy laws

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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 S-T debt Poor management of
A/R A/P

Incompetent management
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Resolve its Difficulties

Failing Firm

Declare Bankruptcy
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Reorganization Vs Liquidation

Reorganize if going-concern value exceeds its liquidation value

Going-concern Liquidation

Liquidate if liquidation value is more than its going-concern value

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Alternatives for C/F Problems

Stretch A/P Buy a few weeks time Debt restructuring Voluntary

Extension Composition Suppliers make concessions

Sell off assets

Real estate / operating divisions

Sale and leaseback Creditors committee Assignment Liquidation outside bankruptcy

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Priorities

Debts satisfied from sale of secured assets Administration expenses Business expenses After petition before trustee Wages owed Three months prior Contributions to employee benefit plans $ Customer lay-away deposits $ Taxes owed General /unsecured claims Creditors P/S and finally C/S holders
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