18 - Corporate Restructuring

Question 1

Synergies can be

Answer 1

cost synergies (lower expenses), revenue synergies (increased sales), or a combination of the two.

Question 2

Types of Corporate Transactions

Answer 2

Investment
Divestment
Restructuring

Question 3

Investment Motivations

Answer 3

Realize synergies, increase growth, improve company capabilities, acquire needed resources/talent, or acquire an undervalued target

Question 4

Divestment Motivations

Answer 4

Liquidity, valuation (i.e., fetching an attractive price), refocus on core business, or to comply with regulatory requirements

Question 5

Restructuring Motivations

Answer 5

Address financial challenges (including bankruptcy and liquidation), or improve return on capital

Question 6

There are two top-down drivers of all three kinds of actions

Answer 6

high security prices overall and industry shocks.

Question 7

Types of Investment Transactions

Answer 7

Equity Inv
JV
Acquisition

Question 8

Types of Divestment Transactions

Answer 8

Sale
Spin Off

Question 9

Types of Restructurings

Answer 9

Cost Restructuring
- Outsourcing
- Offshoring
Balance Sheet Restructuring
- Sale and Leasback
- Dividend Recapitalisation
Reorganisation

Question 10

Cost restructuring

Answer 10

pursue improvements in the operational efficiency of the company

Question 11

Sale and leaseback

Answer 11

involves selling an asset to a lessor, and then entering into a lease contract over the remaining economic life of the asset

Question 12

Dividend recapitalization

Answer 12

involves increasing leverage on the balance sheet by increasing debt-financed dividends or by repurchasing shares.

Question 13

Reorganization

Answer 13

may be mandated by a court during an insolvency proceeding.

Question 14

A leveraged buyout (LBO)

Answer 14

In an LBO, a private equity firm first purchases a company using a large amount of debt to finance the transaction (the investment).

Question 15

The steps involved in analyzing an announced corporate action include:

Answer 15

1 - Initial evaluation.
2 - Preliminary valuation.
3 - Modeling and valuation.
4 - Update investment thesis.

Question 16

There are three primary approaches to this valuation of acquisitions and divestures

Answer 16

comparable company analysis
comparable transaction analysis
and discounted cash flow analysis.

Question 17

Comparable Company Analysis

Answer 17

relative valuation metrics of comparable firms to estimate value, and then adds a takeover premium to determine a fair price for the acquirer to pay for the target.

Question 18

Comparable Company Analysis advanatages

Answer 18

easy to access.
fundamentally sound assumptions
derived directly from the market

Question 19

Comparable Company Analysis disadvanatages

Answer 19

assumes that the market’s valuation of the comparable companies is fair.
provide an estimate of a fair stock price, rather than a fair takeover price.
Sometimes the target may be unique

Question 20

Comparable transaction analysis (CTA)

Answer 20

uses actual takeover transaction prices rather than market prices of stock

Question 21

Comparable transaction analysis (CTA) advanatages

Answer 21

no need to estimate a separate takeover premium.
estimates of value are derived directly from recent prices

Question 22

Comparable transaction analysis (CTA) disadvantages

Answer 22

assumes that the M&A market valued past transactions appropriately.
There may not be enough comparable transactions to develop a reliable estimate of the target value.
Historical transactions may have occurred under different conditions

Question 23

Premium Paid Analysis

Answer 23

premium = (DP – UP) / UP

where:

DP = deal price and UP = unaffected (i.e., pre-announcement) price.