Chapter 7 Corporate Restructuring Strategy
A.Mergers and Acquisitions
(A) Value-added in a merger
Operational benefits
Sales and marketing Costs and production Research and technology Resources Managerial
(A) Value-added in a merger
Non-operational benefit
Funding Taxes Risk Familial
Minority representation
Foreign economy
(B) Strategic planning process
Company Analysis Strengths Weaknesses Company Analysis Segments Motivation Unmet needs Industry Competitor Analysis Business Environment Analysis
Opportunity Threats
Plan Objectives Means for achieving objectives (Strategies) Means for monitoring process Acquisition Criteria
(B) Strategic planning process
Company Analysis
Aggregate Analysis Analysis by Product Type Production and Cost Analysis Financial Capacity Performance Review
(B) Strategic planning process
Identification of Strengths and Weakness
Marketing Ratings Manufacturing Ratings Financial Ratings Creativity Ratings Management and Personal Ratings
(B) Strategic planning process
Customer Analysis Industry and Competitor Analysis Environment Analysis
( C )Buy Strategies
The pursuit of value-added
Horizontal acquisitions Vertical acquisitions Conglomerate acquisitions Joint ventures
( C )Buy Strategies
The pursuit of bargains
Diversifiers Cash needy Time pressured Problem child
B.Tender Offer
(A)Characteristics
A tender offer usually means a cash or securities bid for a company,made directly to the companys shareholders without consultation or cooperation from its management,often as a prelude to a wholesale takeover of the company
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(B) Strategy
Offensive Strategies
Undervalued assets Gain control Portfolio,etc. Evaluating the tender offer in short and long term(Green mail)
Defensive Strategies
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(B) Strategy
Accessing the possibility of better alternatives
Finding a white knight Prefer stock issue with special voting right Sell assets
Developing tactics to induce better offer Block or slow the timetable Pac-Man Maneuver
Counter tender offer
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(C) Corporate policy
Winners
The management of the aggressor company The shareholders of the target company(50% premium) Investment bankers Merger lawyers
Losers
The management and the employees of the target company The shareholders of the aggressor company
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(C) Corporate policy
Possible abuses
Two-tiered merger(Poison Pills) Fast buck v.s. growth (LCO) Time pressure after tender offer is announced but before shares can be bought up(White Knights) Job displaced(Golden Parachute) Antitrust
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C.Divestiture and Spinning-off
(A)Divestiture
Strategy
Sell if the premium is positive and is judged to be the best obtainable
Finding sugar daddies
Foreigners Superior judge of worth Earnings per share boosters Geared
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(A)Divestiture
Cash rich The shrinking company Wildcat and star worshippers
Wildcat, stars, cash cows, dogs
(LM, HG)(HM, HG)(H, L) (L, L)
Monument builders Investment banker clients
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(B)Spin-off
Strategy
Spin-off if the costs of being a part of the parent exceed the benefits and a desirable sale cannot be arranged
Problems
Headquarter staff Apportioning debt
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(B)Spin-off
What company should consider a spin-off strategy?
Unrelated divisions
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D. Leverage Buy Out (LBO)
A leverage buyout (LBO) is any acquisition of a company which leaves the acquired operating entity with a greater than traditional debt-to-worth ratio.
By type of financing
Secured financing
purchase price = collateralized asset + investing equity+ notes taken back by seller Unsecured financing purchase price = venture capital + Mezzanine financing + senior debt
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D. Leverage Buy Out (LBO)
By type of transaction
Asset acquisitions
The formation of a new corporation, which acquires the assets of the target, company.
Tax issue
Stock acquisitions
Stock redemption, tender offers, pure stock acquisitions and reverse mergers
Public companies
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A LBO involves leverage from a financing source to acquire the target company.
Proceed Pay the seller Internal cash flow retire the debt Asset redeployment
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Features of target companies
Operating loss Capital intensive Market undervalued Trouble companies
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(A) Financing Strategy
Types
Asset-based financing
Asset-based lenders, e.g. banks, financing corp. Secured floating-rate financing
Senior bank debt
Banks Unsecured
Fixed-rate senior and subordinated debt
Insurance companies, pension funds, mezzanine
buyout funds Unsecured fixed rate debt with warrants
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(A) Financing Strategy
Preferred stock or subordinated debt
Venture capitalists, mezzanine buyout
funds,insurance companies. Fixed-rate preferred stock with warrants
Common stock
Leverage buyout specialists, venture capitalists,
ESOP Common stock
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(A) Financing Strategy
The secured leverage buyout
Loan Collateral Cash flow G B G B G G B B B B B G Lenders Plan B G B G -
Small commercial finacing company Commercail financing company Every secured lender Good luck! Some sophisticated lenders Money center bank or regional bank
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(A) Financing Strategy
The unsecured leverage buyout
Securities Lenders Short or intermediate terms Commercial bank senior debt(2- 6 yr.) Long-term senior and Life insurance subordinated debt (5-15 yr.) companies,LBO funds Life insurance companies, Preferred stock(5-20 yr.) venture capitalists Life insurance companies, common stock venture capitalists,investment bankers
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(A) Financing Strategy
Venture capitalists in LBO
When to consider venture financing
Value added
Creditability with seller
Assistance in financing arrangements and
negotiations Cross-utilization of talent
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(A) Financing Strategy
Venture capitalists investment objectives
Expected returns (35%~50%) Liquidation expectations (5 yrs~7 yrs) Put option (protective device) Restrictions on Owner-Managers liquidity
Rights of first refusal Take-along agreement Right of first offer
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(A) Financing Strategy
ESOP in LBO
Function
Raise additional capital Recapture taxes Assure estate liquidity Retire outstanding shares Provide a market for closely held stock Discourage unionization Buy out dissident stockholders
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(A) Financing Strategy
Acquire other companies
Combat tender offers Broaden the appeal of unions Shelter excess accumulated earnings Refinancing existing debt Maximize IRS investment tax credit Divest subsidiaries
Purchase key main insurance
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(A) Financing Strategy
ESOP invests in the securities of the employer
corporation and is permitted to borrow money. (Leverage ESOP)
ESOP
Corporation
guarantee
Bank
(A) Financing Strategy
ESOP is integrated in the financial plan of LBO
Cash flow Debt amortization Purchase stock loan
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(B) Corporate policy
How risky are LBOs?
Highly leveraged, increase failure (Thatcher Glass LBO) Over-leveraged, bad loan, junk bond (Dr Pepper LBO, 3 times net worth) Overpriced LBO failures (5~15%) (Eli Witt, Oppenheimer & Co.)
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(B) Corporate policy
Why owners should consider a LBO?
For the closely held company, a LBO can provide the selling shareholders with benefit that are not fully appreciated. Liquidity for stock, market stability Diversification Family estate tax savings Reverse LBO
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(B) Corporate policy
Why management should consider a LBO?
Opportunity to create personal wealth Conflict of interest (stand on buyout side)
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