MF 0011 Mergers & Acquisitions

Unit 5-Corporate Restructuring

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Program : MBA
Semester : III
Subject Code : MF 0011
Subject Name : Mergers & Acquisitions
Unit number : 5
Unit Title : Corporate Restructuring
Lecture Number :
Lecture Title : Corporate Restructuring
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MF 0011 Mergers & Acquisitions
Unit 5-Corporate Restructuring
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Objectives:

After studying this unit, you should be able to:
Explain the meaning of corporate restructuring
Identify the characteristics of corporate restructuring
Discuss the different types of corporate restructuring
Describe the various methods of corporate restructuring

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Corporate Restructuring
MF 0011 Mergers & Acquisitions
Unit 5-Corporate Restructuring
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Introduction
Corporate Restructuring: Meaning
Corporate Restructuring: Characteristics
Corporate Restructuring: Types
Corporate Restructuring: Methods
Joint Venture
Sell-Off
Spin-Off
Divesture
Equity Carve-out
Leveraged Buy-out
Management Buy-out
Master Limited Partnerships
Employee Stock Ownership Plans
Summary
Glossary
Check Your Learning
Answers
Case Study
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Lecture Outline
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Unit 5-Corporate Restructuring
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Corporate Restructuring is a complex phenomenon.
All companies find it necessary to choose between diversification and
refocusing on core businesses after a merger/ acquisition.

Diversifying indicates an expansion of company's business.

Refocus means concentrating more on the core business. From this point
of view, corporate restructuring means reduction or contraction.

Reasons for Restructuring
Positioning the company to be more competitive
Surviving adverse economic climate
Getting the corporation ready to move in an entirely new direction.
Corporate restructuring is a broad-based business initiative that results in
major change of size, ownership, control and/or management.
Introduction
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Unit 5-Corporate Restructuring
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Corporate Restructuring can be defined as the process
of redesigning one or more features of a business firm.
Forms of Corporate Restructuring
Expansion
Contraction
Change of ownership
Change of corporate control.
Corporate Restructuring: Meaning
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Selling or closing of unprofitable divisions from its core business, there by
achieving staff reduction and a stronger balance sheet.
Revamping of corporate management.
Sale of under utilized assets such as patents/brands.
Outsourcing of operations like payroll and technical support to a more
efficient third party.
Moving of operations like manufacturing to lower-cost locations.
Reorganization of major functions like sales, marketing and distribution.
Renegotiation of labor contracts at reduced costs.
Refinancing of corporate debt to reduce interest payments.
A major public relations campaign to change the position of the company
in the market.
Corporate Restructuring:
Characteristics
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Financial Restructuring: Reorganizing a
company's financial assets and liabilities so that the
most favorable financial environment is created
Organizational Restructuring: Reorganizing the
management or internal corporate governance
structures in order to keep their organizations
perfectly suited to the changing business conditions
Corporate Restructuring: Types
Click here for details on the
need for financial and
organizational restructuring
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Joint venture
Sell-off
Spin-off
Divestiture
Equity carve-out
Leveraged Buyout (LBO)
Management Buyout (MBO)
Master Limited Partnership
Employee Stock Option Plan (ESOP)
Corporate Restructuring: Methods
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Enterprises formed by coming together of two or more participants
for special purposes for a limited duration
Combination of subsets of assets contributed by two or more
business entities
Each partner continues functioning as a separate firm, and the
joint venture represents a new business project
Contract among participants who not only agree to work together
and expect to gain from the venture, but also agree to make a
contribution
Joint
Venture
Example of GM-Toyota Joint Venture: GM hoped to learn from the new
experience of management techniques of the Japanese in building high-quality,
low-cost compact and subcompact cars. Toyota was seeking to learn the
management traditions that had made GM the numero uno in the production of
auto in the world.
Methods: Joint Venture
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Sell-off means selling a part or the whole of a firm through a sale,
liquidation or spin-off
A partial sell-off/slump sale involves the sale of a subsidiary, a
business unit or a plant
Sell-Off
Strategic Objectives
Unlocking hidden value
Divesting non-core business
Institutional sponsorship
Public currency
Motivating management
Strengthening synergies
Anti-trust
Corporate defence
Methods: Sell-Off
Click here for a detailed view
on the Strategic Objectives of
sell-off
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New legal entity is created, but shares are issued to the existing
stockholders on a pro rata basis (stockholder base in the new
company is the same as that of the old company).
Here the firm has its own management team and its activities are
carried out as a separate company.
Spin-
Off
Company
takes
decision to
spin-off a
division
Parent
company
does the
paper work
with SEBI
Unit
Registered
and filed
with SEBI
Shares of
new
company
distributed to
shareholders
of previous
company
Company
goes public
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2 3 4 5
PROCESS OF SPIN-OFF
Methods: Spin-Off
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Reason why spin-off entitys shares are distributed among the parent company
shareholders:
Parent company shareholders who are not interested in holding shares of the
spun off unit are free to sell the shares once the new company goes public.
Large institutional stock holders in the parent company are not allowed to keep
shares in spin-offs due to smaller market capitalisation and increased risk and
they look to sell their shares soon.
Split-up
A split-up is defined as the separation of a company into two or more parts.
Restructuring where the firm strategically breaks up the entire corporate body.
Firm is broken up into a number of spin-offs, after which the parent company
does not exist any longer, and only the newly formed companies exist.
The stockholders in the companies may not be the same, as the stockholders
trade their shares in the parent company with shares in one or more of the
units that are spun off.
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Methods: Spin-Off (Contd.)
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A transaction through which a firm sells a portion of its
assets, a product line, a subsidiary or a division to another
company for cash or securities is called divesture
Divestiture is a form of contraction. Mergers, asset purchases and
takeovers lead to expansion and are based on the principle of
synergy which says 2 + 2 = 5. Divesture on the other hand is
based on the principle of reverse synergy which says 5 3 = 3!
Divestiture
Reasons for Divesture:
Poor fit
Abandoning Core business
Cash Flow Effect
Reverse Energy
Reaping benefits of past successes
Financing prior acquisitions
Discouraging takeovers
Meeting regulatory norms
Methods: Divestiture
Click here for a detailed
description of reasons for
divesture
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The sale of equity interest in a subsidiary. Here, a new legal
entity will be created having a stockholder base that may be
quite different from that of the parent company.
The divested company will have a different management team and
will be considered as a separate firm. This mode of restructuring
creates a new publicly traded company with partial or complete
autonomy from the parent firm.
Equity
Carve-Out
Features of equity carve-out
It is the sale of a minority or majority voting control in a subsidiary by the
parent company to outside investors. These are also referred to as split-off
IPOs
A new legal entity is formed.
The equity holders in the new entity may be different from the equity holders
in the original company. Immediately, a new control group is formed.
Methods: Equity Carve-out
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Spin-Off
Shares are distributed to the
shareholders of the selling company
on a pro-rata basis in the form of
dividend, a form of non-cash
payment to shareholders
Stock of subsidiary is sold to the
public for cash
Equity Carve-out
Stock of subsidiary is sold to the
public for cash
Only a minor interest in the
subsidiary company is sold and the
parent company is still in control
Many firms consider equity carve-outs to be a means of reducing their
exposure to a riskier line of business.
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Methods: Equity Carve-out
Click here for examples of
Equity Carve-out
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A buyout is a contract under which a person, group of people,
or organisation buys a company or a controlling share in the
stock of a company.
Here, borrowed funds are used to finance the buyout; as
much as 90% of the purchase price may be borrowed.
This is risky as the assets of the company are usually given as
collateral. If the company fails to perform, it can lead to
bankruptcy because the people involved in the buyout will not be
able to service the debt
Leveraged
Buy-Out
Methods: Leveraged Buyout (LBO)
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The management of the company buys the company, and they
may be joined by employees in the venture
Management can have unfair advantages in negotiations, and
could potentially manipulate the value of the company in order
to bring down the purchase price
When a company's managers buy or acquire a major part of the
company, the employees and management, a management buyout
serves as a motivation to make the company robust.
Management
Buy-Out
Purpose of MBO
To strengthen the managers concern for making the company successful
Saving the jobs of the employees. The employees may lose their jobs and an
MBO will help in avoiding such a situation.
Maximizing financial benefits from the success they bring to the company by
taking the profits for themselves.
Discouraging aggressive buyers.
Methods of Restructuring:
Management Buyout (MBO)
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Limited partnerships dealing with publicly-traded shares.
The limited partnership interests are divided into units which
are traded as shares of common stock. Units are shares of
ownership.
Combines the liquidity of a publicly traded company with the tax
benefits of a limited partnership. No tax on profits is paid by the
partnership. When the unit holders receive distribution, they are
taxed
Master
Limited
Partnership
Master
Limited
Partnership
Limited
Partner
The person or group that gives capital to
the MLP and gets income distributions
regularly from the cash flow of the MLP's
General
Partner
The party that manages the MLP's
operations and receives compensation
that is linked to the performance of the
venture
Methods: Master Limited Partnership
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A defined contribution benefit plan that buys and holds stock
a qualified, defined contribution, an employee benefit plan
designed to invest primarily in the stock of the sponsoring
employer
Qualified implies, the sponsoring company, the selling shareholder
and participants receive various tax benefits. With an ESOP,
employees may rarely have to buy or hold stocks directly.
ESOP
Features of ESOP
It is an employee benefit plan.
The scheme enables the employees to own stocks of the company.
It is a kind of profit-sharing plan.
Employers have benefits of profitability, liquidity (the stocks could be collateral
for loans) and asset acquisition.
ESOPs provide tax advantages to the employer.
Methods : Employee Stock Option Plan
(ESOP)
MF 0011 Mergers & Acquisitions
Unit 5-Corporate Restructuring
Summary
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Corporate restructuring is necessary when a company needs to
improve its efficiency and profitability and it requires expert corporate
management.
A corporate restructuring strategy involves the dismantling and
rebuilding of areas within an organisation that need special attention
from the management and CEO.
Different methods of corporate restructuring are venture capital, spin-
off, split-up, equity carve-out etc.
The process of corporate restructuring often occurs after buyouts,
corporate acquisitions, takeovers or bankruptcy. It can involve a
significant movement of an organisations liabilities or assets.
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Unit 5-Corporate Restructuring
Glossary
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Split-up: A split-up is defined as the separation of a company into
two or more parts.
ESOP: Employee Stock Ownership Plans
MLP: Master Limited Partnerships is a type of limited partnership in
which the shares are publicly traded.
MBO: Management Buyouts
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MF 0011 Mergers & Acquisitions
Unit 5-Corporate Restructuring
Check Your Learning
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1. Corporate restructuring is the process of ____________ one or more
aspects of a company.
2. A corporate restructuring may call for spinning off some departments into
____________.
3. Change in management is not the part of corporate restructuring.
(True/False)
4. Organisational restructuring focuses on management and internal
____________ structures.
5. ____________ may be undertaken as a means of eliminating waste from the
operations of the company.
6. Spin-off does not create a separate business entity. (True/False)
7. A split-up is defined as the separation of a company into two or more parts.
(True/False)
8. In MBO, the management of the company buys the company. (True/False)
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Unit 5-Corporate Restructuring
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Check Your Learning
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9. Employee Stock Ownership Plan (ESOP) is an employee benefit plan.
(True/False)
10. A new entity is created in a joint venture. (True/False)
11. Divestiture involves a _______________ into the parent corporation.
12. The spin-off entitys shares are distributed to the parent company
_________________.
13. Divestitures reflect continuous efforts by companies to adjust to
_________________.
MF 0011 Mergers & Acquisitions
Unit 5-Corporate Restructuring
Answers
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1. Redesigning
2. Subsidiaries
3. False
4. Corporate governance
5. Financial restructuring
6. False
7. True
8. True
9. True
10. True
11. Cash inflow
12. Shareholders
13. Changing environment
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Unit 5-Corporate Restructuring
Case Study
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Answer the following questions, based on the
given case:

Question
Make an analysis of the case.

Hint answer:
The decision by First Data Corp to spin off of
Western Union, its profitable division, might help
the company to protect shareholders from the
losses of First Data, and allow management to
focus on rebuilding First Datas business and
market.
Click on the icon besides, to
analyse the case on Corporate
Restructuring