18 - Corporate Restructuring Flashcards
Synergies can be
cost synergies (lower expenses), revenue synergies (increased sales), or a combination of the two.
Types of Corporate Transactions
Investment
Divestment
Restructuring
Investment Motivations
Realize synergies, increase growth, improve company capabilities, acquire needed resources/talent, or acquire an undervalued target
Divestment Motivations
Liquidity, valuation (i.e., fetching an attractive price), refocus on core business, or to comply with regulatory requirements
Restructuring Motivations
Address financial challenges (including bankruptcy and liquidation), or improve return on capital
There are two top-down drivers of all three kinds of actions
high security prices overall and industry shocks.
Types of Investment Transactions
Equity Inv
JV
Acquisition
Types of Divestment Transactions
Sale
Spin Off
Types of Restructurings
Cost Restructuring
- Outsourcing
- Offshoring
Balance Sheet Restructuring
- Sale and Leasback
- Dividend Recapitalisation
Reorganisation
Cost restructuring
pursue improvements in the operational efficiency of the company
Sale and leaseback
involves selling an asset to a lessor, and then entering into a lease contract over the remaining economic life of the asset
Dividend recapitalization
involves increasing leverage on the balance sheet by increasing debt-financed dividends or by repurchasing shares.
Reorganization
may be mandated by a court during an insolvency proceeding.
A leveraged buyout (LBO)
In an LBO, a private equity firm first purchases a company using a large amount of debt to finance the transaction (the investment).
The steps involved in analyzing an announced corporate action include:
1 - Initial evaluation.
2 - Preliminary valuation.
3 - Modeling and valuation.
4 - Update investment thesis.
There are three primary approaches to this valuation of acquisitions and divestures
comparable company analysis
comparable transaction analysis
and discounted cash flow analysis.
Comparable Company Analysis
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.
Comparable Company Analysis advanatages
easy to access.
fundamentally sound assumptions
derived directly from the market
Comparable Company Analysis disadvanatages
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
Comparable transaction analysis (CTA)
uses actual takeover transaction prices rather than market prices of stock
Comparable transaction analysis (CTA) advanatages
no need to estimate a separate takeover premium.
estimates of value are derived directly from recent prices
Comparable transaction analysis (CTA) disadvantages
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
Premium Paid Analysis
premium = (DP – UP) / UP
where:
DP = deal price and UP = unaffected (i.e., pre-announcement) price.
