1 Chapter 7 Corporate Restructuring Strategy. 2 A.Mergers and Acquisitions Operational benefits...
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Transcript of 1 Chapter 7 Corporate Restructuring Strategy. 2 A.Mergers and Acquisitions Operational benefits...
1
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)