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Chapter 7

Corporate Restructuring Strategy

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A.Mergers and Acquisitions

Operational benefits Sales and marketing Costs and production Research and technology Resources Managerial

(A) Value-added in a merger

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(A) Value-added in a merger

Non-operational benefit Funding Taxes Risk Familial

Minority representation Foreign economy

(B) Strategic planning processCompanyAnalysis

CompanyAnalysis

StrengthsWeaknesses

SegmentsMotivation

Unmet needs

IndustryCompetitor

Analysis

BusinessEnvironment

Analysis

OpportunityThreats

PlanObjectives

Means for achieving objectives (Strategies)Means for monitoring process

AcquisitionCriteria

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(B) Strategic planning process

Company Analysis Aggregate Analysis Analysis by Product Type Production and Cost Analysis Financial Capacity Performance Review

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(B) Strategic planning process

Identification of Strengths and Weakness Marketing Ratings Manufacturing Ratings Financial Ratings Creativity Ratings Management and Personal Ratings

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(B) Strategic planning process

Customer Analysis

Industry and Competitor Analysis

Environment Analysis

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( C )Buy Strategies

The pursuit of value-added Horizontal acquisitions Vertical acquisitions Conglomerate acquisitions Joint ventures

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( C )Buy Strategies

The pursuit of bargains Diversifiers Cash needy Time pressured Problem child

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B.Tender Offer

A tender offer usually means a cash or securities bid for a company,made directly to the company’s shareholders without consultation or cooperation from its management,often as a prelude to a wholesale takeover of the company

(A)Characteristics

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(B) Strategy

Offensive Strategies Undervalued assets Gain control Portfolio,etc.

Defensive Strategies Evaluating the tender offer in short and long

term(Green mail)

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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

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

(A)Divestiture

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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 Asset redeployment

retire the debt

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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

LendersCollateral Cash flow Plan

G B B Small commercial finacing companyG B G Commercail financing companyG G - Every secured lenderB B B Good luck!B B G Some sophisticated lendersB G - Money center bank or regional bank

Loan

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(A) Financing Strategy

The unsecured leverage buyoutSecurities Lenders

Short or intermediate termssenior debt(2- 6 yr.)

Commercial bank

Long-term senior andsubordinated debt (5-15 yr.)

Life insurancecompanies,LBO funds

Preferred stock(5-20 yr.)Life insurance companies,venture capitalists

common stockLife insurance companies,venture capitalists,investmentbankers

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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

(A) Financing Strategy ESOP invests in the securities of the employer

corporation and is permitted to borrow money. (Leverage ESOP)

ESOP

Corporation Bank

New stock tax-

Deductible

payment

Stock purchase amatizationpayment

loan

guarantee

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(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 (Thatche

r 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 stabilityDiversificationFamily estate tax savingsReverse 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)