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Corporate Restructuring and Governance > 5. Antecendents of Corporate Restructuring > Flashcards

5. Antecendents of Corporate Restructuring Flashcards

1
Q

Background of Antecedents of Corporate Restructuring

A
  • Corporate Restructuring
  • Diversification
  • Refocusing
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2
Q

LOs of Background of Corporate Restructuring

A
  • To explain corporate diversification
  • To explain corporate divestment
  • To understand a framework explaining the drivers of corporate restructuring
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3
Q

Hoskisson and Turk 1990 Definition of Corp Restructuring

A
  • Defined as a major change in the composition of a firms assets combined with major changes in its corporate strategy.
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4
Q

Thompson and Wright’s 1995 Definition of Corporate Restructuring

A

Involves simultaneous changes in the ownership, financial structure and incentive systems of firms.

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5
Q

What can Corporate Restructuring do?

A
  • 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)
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6
Q

Background of CorpRes: Diversification Overview of Firms

A
  • 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.
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7
Q

Background of CorpRes: Related Diversification

A
  • Exploit scope economies in expanded product range (VW, Audi)
  • Exploit synergies between by increasing range of assets (Disney, Pixar)
  • Increases firm performance.
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8
Q

Background of CorpRes: Unrelated Diversification

A
  • No scope economies of synergies exploited.
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9
Q

Background of CorpRes: Refocusing on Over-diversification

A
  • Over-diversification leads to under performance.
  • Control loss, higher costs to managing more complex business, no synergies, no economies of scope.
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10
Q

Background of CorpRes: Refocusing on Core Business

A
  • 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)
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11
Q

Background of CorpRes: Refocusing (Downscaling)

A
  • Involves reducing the volume produced.
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12
Q

Framework of Corporate Restructuring (Antecedents)

A
  • Environment
  • Governance
  • Strategy
  • Performance
  • Financial Restructuring
  • All connected
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13
Q

Framework of CorpRes: Process

A
  • Restructuring
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14
Q

Framework of CorpRes: Outcomes

A
  • Strategy
  • Employee Effects
  • Performance
  • Johnson 1996
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15
Q

Background of CorpRes: Summary

A
  • 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.
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16
Q

Antecedents of CorpRes: Governance Overview

A
  • Diversification and Corporate Governance: Agency Perspective
  • Diversification and Corporate GovernanceL Resource Contingency Perspective
  • Divestment
  • Refocusing
17
Q

LOs of Background of Antecedents of CorpRes

A
  • 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.
18
Q

Antecedents of CorpRes: Diversification and CG - Agency Persp

A
  • 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)
19
Q

Antecedents of CorpRes: Diversification and CG - Agency Perspective (Evidence)

A
  • 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
20
Q

Antecedents of CorpRes: Diversification and Governance (Resource Contingency Perspective)

A
  • 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.
21
Q

Antecedents of CorpRes: Diversification and Governance (Resource Contingency Perspective) (Evidence)

A
  • Evidence that director experience has a positive effect on post-M&A performance (Kroll et al 2007) (McDonald et al. 2008)
  • Consistent with RCP
22
Q

Antecedents of CorpRes: Refocusing

A
  • 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)
23
Q

LOs of Environment as a Antecedents of CS

A
  • Explain how the environment impacts the diversification decision.
  • Explain how environment impacts the divestment decision.
24
Q

Antecedents of CorpRes: Environment Diversification

A
  • 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
25
Q

Antecedents of CorpRes: Environment Refocusing

A
  • 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.
26
Q

Antecedents of CorpRes: Strategy Diversification (Resource Based View)

A
  • 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.
27
Q

Antecedents of CorpRes: Strategy Diversification RBV (Synergies)

A
  • 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
28
Q

Antecedents of CorpRes: Strategy Diversification RBV (Acquisition)

A
  • Mechanism to gain access to scarce resources that are not easily traded as they are embedded in the firm: organisation know how
29
Q

Antecedents of CorpRes: Strategy Diversification (Economies of Scope)

A
  • 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.
30
Q

Antecedents of CorpRes: Strategy Refocusing (divesting)

A
  • 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.
31
Q

Antecedents of CorpRes: Strategy Refocusing

A
  • 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)
32
Q

LOs of Antecedents of CorpRes: Performance

A

Understand how performance impacts the diversification and refocusing deciision

33
Q

Antecedents of CorpRes: Performance Diversification

A
  • 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.
34
Q

Antecedents of CorpRes: Performance Refocusing

A
  • 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.
35
Q

Antecedents of CorpRes: Financial Restructuring LOs

A
  • Explain how financial restructuring impacts diversification decisions.
  • Explain how financial restructuring impacts the divestment decision
36
Q

Antecedents of CorpRes: Financial Restructuring Diversification

A
  • 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)
37
Q

Financial Restructuring: Refocusing

A
  • LBO acquisition is facilitated with debt finance.
38
Q

Antecedents of CorpRes: Financial Restructuring Refocusing (Different LBOs)

A
  • 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.
39
Q

Summary of Antecedents

A
  • Factors are interrelated, so diversification and refocusing are not explained with simple narratives.

Corporate Restructuring and Governance (8 decks)

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