5. Antecendents of Corporate Restructuring Flashcards
Background of Antecedents of Corporate Restructuring
- Corporate Restructuring
- Diversification
- Refocusing
LOs of Background of Corporate Restructuring
- To explain corporate diversification
- To explain corporate divestment
- To understand a framework explaining the drivers of corporate restructuring
Hoskisson and Turk 1990 Definition of Corp Restructuring
- Defined as a major change in the composition of a firms assets combined with major changes in its corporate strategy.
Thompson and Wright’s 1995 Definition of Corporate Restructuring
Involves simultaneous changes in the ownership, financial structure and incentive systems of firms.
What can Corporate Restructuring do?
- Corporate restructuring changes the size and scope of an organisation (product lines, geographic location, corporate assets)
- How corporate restructuring is financed impacts financial structure, which can impact senior managers’ incentives (LBO)
Background of CorpRes: Diversification Overview of Firms
- Firms have a core business with core resources/assets.
- Increases a firm’s scope
- Strategy can be achieved by M&A (or takeover) - related acquisitions and unrelated acquisitions.
- Implies firms have optimal scope.
Background of CorpRes: Related Diversification
- Exploit scope economies in expanded product range (VW, Audi)
- Exploit synergies between by increasing range of assets (Disney, Pixar)
- Increases firm performance.
Background of CorpRes: Unrelated Diversification
- No scope economies of synergies exploited.
Background of CorpRes: Refocusing on Over-diversification
- Over-diversification leads to under performance.
- Control loss, higher costs to managing more complex business, no synergies, no economies of scope.
Background of CorpRes: Refocusing on Core Business
- Refocus on core business by downscoping.
- Reduces product lines and/or geographic operations.
- Reduces corporate assets/resources under managers’ control.
- Refocusing and downscoping achieved by divestment (Ford Sole of Jaguar and Land Rover to Tara)
Background of CorpRes: Refocusing (Downscaling)
- Involves reducing the volume produced.
Framework of Corporate Restructuring (Antecedents)
- Environment
- Governance
- Strategy
- Performance
- Financial Restructuring
- All connected
Framework of CorpRes: Process
- Restructuring
Framework of CorpRes: Outcomes
- Strategy
- Employee Effects
- Performance
- Johnson 1996
Background of CorpRes: Summary
- Factors internal and external to the firm drive CR, changing the size and scope of the firm.
- Complicated identifying the impact of individual factors because of inter-relatedness of factors.
Antecedents of CorpRes: Governance Overview
- Diversification and Corporate Governance: Agency Perspective
- Diversification and Corporate GovernanceL Resource Contingency Perspective
- Divestment
- Refocusing
LOs of Background of Antecedents of CorpRes
- Explain how governance impacts the diversification decision.
- Explain how governance impacts the divestment decision
- Explain how governance impacts the divestment decision.
- Explain how governance impacts refocusing decisions.
Antecedents of CorpRes: Diversification and CG - Agency Persp
- Mgrs might benefit from increased firm size and scope, manifesting in over-diversification and M&A activity that destroys firm value.
- Expect good CG to restrict managers ability to pursue a diversification strategy that destroys firm value (Effective BoD rejecting M&A proposals not in shareholders interest)
Antecedents of CorpRes: Diversification and CG - Agency Perspective (Evidence)
- Vigilant boards (more outside directors, outside directors, equity ownership) associated w higher-post M&A performance
- Kroll et al. 2007, SMJ)
- Consistent with agency theory
Antecedents of CorpRes: Diversification and Governance (Resource Contingency Perspective)
- Outside director’s prior acquisition experience provides knowledge to monitor and advise on profitable M&A.
- Experienced directors more engaged with monitoring and advising as experienced and knowledgable directors more enabled to contribute to decision-making.
Antecedents of CorpRes: Diversification and Governance (Resource Contingency Perspective) (Evidence)
- Evidence that director experience has a positive effect on post-M&A performance (Kroll et al 2007) (McDonald et al. 2008)
- Consistent with RCP
Antecedents of CorpRes: Refocusing
- Stronger CG is associated with refocusing.
- Board involvement in divestment more likely when performance declines (Johnson et. al 1996)
- Outsider-dominated boards positively associated with divestment (Kolev, 2016)
- Higher mgmt equity financially motivates managers to divest (Johnson et al. 1996)
LOs of Environment as a Antecedents of CS
- Explain how the environment impacts the diversification decision.
- Explain how environment impacts the divestment decision.
Antecedents of CorpRes: Environment Diversification
- Competition/Anti-Trust Policy and Laws (Deregulation in industries allowed diversification (Fin Services))
- Environmental uncertainty: lower uncertainty - managers diversify and engage in M&A as they have confidence in generating earnings.
- Fin innovations: junk bond markets help finance M&As
Antecedents of CorpRes: Environment Refocusing
- Comp/Anti Trust Policy and Laws: CMAs can break up large firms. Argue that Google and FB should break up to increase competition in advertising.
- Industry Conditions Create Aspiration Induced Crisis: Downscope and refocus to improve performance.
- Environmental Uncertainty: downscope to reduce costs of managing a diverse portfolio of assets and reduce complexity of the firm
- Fin Innovation: Junk bond market helps finance acquisitions of divisions/subsidiaries.
Antecedents of CorpRes: Strategy Diversification (Resource Based View)
- RBV of firm assets that each firm is a unique bundle of resources and capabilities: resources tangible and intangible assets owned by a firm. Capabilities (what a firm can do) derived from resources
- Valuable, scarce and not easily tradable resources create comp adv.
Antecedents of CorpRes: Strategy Diversification RBV (Synergies)
- Achieved when complementary resources are combined to create or increase a capability that the resources are unable to achieve independently.
- Create value for shareholders.
- Related diversification strategy seeks to exploit synergies between resources (Markides and Williamson 1996): Exploit under-utilised resources and capabilities - Virgin Brand
Antecedents of CorpRes: Strategy Diversification RBV (Acquisition)
- Mechanism to gain access to scarce resources that are not easily traded as they are embedded in the firm: organisation know how
Antecedents of CorpRes: Strategy Diversification (Economies of Scope)
- Related diversification strategy seeks to exploit EoScope - produce a range of products that share facilities (car manufacturers).
- Avg cost of production decline by producing two or more products together.
- Scope economies concern exploiting joint production of two or more products.
Antecedents of CorpRes: Strategy Refocusing (divesting)
- Divest resources that do not produce synergies - refocus on resources that generate the greatest value,
- Divest resources that are not relevant to a firm’s core capabilities - refocus on what the firm is good at doing.
- Prompted due to poor performance.
Antecedents of CorpRes: Strategy Refocusing
- Haynes, Thompson & Wright 2003
- Divestment positively associated with diversification, size, acquisitions, and market share
- Negatively associated with high market concentration in core business (high concentration may cushion effect or reduce optimal diversification and discourage management from divesting)
LOs of Antecedents of CorpRes: Performance
Understand how performance impacts the diversification and refocusing deciision
Antecedents of CorpRes: Performance Diversification
- Glamour firms with higher past stock returns, cash flow growth, and earnings leads: managers to overestimate their ability to manage acquisitions // Board to give managers the BenofD and approve acquisitions (Ray and Vermaelen (1998)
- Cash-rich firms are more likely to make diversifying acquisitions and this is followed by a decline in operating performance.
Antecedents of CorpRes: Performance Refocusing
- Poor performance signals need to change
- Firm performance predicts the refocusing decision: under-performance of assets triggers divestment // some successful firms divest successful subsidiaries, allowing both to develop their own strategic focus (eBay and PayPal)
- Performance is a factor, it is related to other factors, unsuccessful diversification strategy leads to underperformance.
Antecedents of CorpRes: Financial Restructuring LOs
- Explain how financial restructuring impacts diversification decisions.
- Explain how financial restructuring impacts the divestment decision
Antecedents of CorpRes: Financial Restructuring Diversification
- Debt can be used to finance an M&A and there was an emergence of junk bond market in 80s
- Macro-level capital liquidity is a driver or merger waves (Harfod 2005)
- Growth in high-yield lending and M&A activity might simply reflect both lenders and management are optimistic about future economic prospects. (Gugler et al. 2012)
Financial Restructuring: Refocusing
- LBO acquisition is facilitated with debt finance.
Antecedents of CorpRes: Financial Restructuring Refocusing (Different LBOs)
- LBOs of a PLC - targets are over-diversified with separable assets and under-performing / High leverage encourages managers to divest under-performing assets and use cash to pay debt.
- LBO of a division/subsidiary: Facilitated by buyer’s access to debt finance / allows selling firm to refocus.
Summary of Antecedents
- Factors are interrelated, so diversification and refocusing are not explained with simple narratives.
