Alternatives Flashcards
Restructuring alternatives (6)
- asset sales
- equity carve out/subsidiary IPO
- spin off
- split up
- tracking stocks
- exchange offer/ split off
Asset sales (1)
- sales of division or assets to another firm, usually cash
Equity carve out/subsidiary IPO (1)
- public offering with partial interest by subsidiary to create a new firm with at least some autonomy
Spinoff (1)
- pro rata distribution of subsidiary to create new independent firms
Split up (1)
- separate firms to 2+ parts, via spinoff
Tracking stock (1)
- creation of new class of stocks with value based on CF of division
Exchange offer/split off (1)
- distribution giving SH choice of parent or subsidiary stocks, separate public firms
Restructuring and divestiture motives (3)
- corporate strategy
- force changes
- market conditions
Value in divestiture from information (2)
- management is easier to monitor
- separate entity of incentive rights to improve efficiency
Value in divestiture transaction cost (2)
- assets manage more profitably
- contract are hard to enforce
Leverage recapitalization (3)
- large issues of debt
- payment of large cash dividend to non management SH
- alternative of cash dividend or combined with it, repurchase of common share
Dual class stock recapitalization (2)
- create a second class of common shares that has limited voting rights and preferential claims to firms CF
- distribution of pro rating to existing SH
Security exchange offer (3)
- right or options
- exchange holding for different class of firm’s securities
- new securities have higher market value of induced exchange
Reorganization process (1)
- financial distress: liquidation of value firm less FV creditor claims
Types of reorganization process (3)
- out of court procedures
- merger into another firm
- legal proceedings
Bankruptcy code (2)
- liquidation: management losses control of appointed trustee
- reorganization: restructure plan
Canada bankruptcy code (2)
- bankruptcy and insolvency act
- company creditor agreement
US bankruptcy code (2)
- chapter 7: liquidation
- chapter 11: reorganization
Liquidation characteristics (2)
- voluntary: SH receive more if firm sold its parts
- involuntary: creditor force to liquidate (better dead than alive)
Empirical studies (3)
- large positive return on voluntary liquidation
- acquired firm have small, insignificant positive return
- executive ownership and compensation incentive increase probability of liquidation
Leverage buyout (2)
- purchase a company with small group of investors for high percentage of debt financing
- management ownership equity share increases
Typical LBO operation stages (4)
- planning and funding
- firms to private
- attempt to increase CF
- reverse LBO, increase liquidation
Source of gains in LBO (5)
- tax benefit
- wealth transfer effect
- management incentive and agency cost effect
- asymmetrical information and underpricing
- other efficiency condition
Advantage of LBO (2)
- add value to increase magnitude tax shield
- change in incentive: increase value
Disadvantage of LBO (1)
- cost of financial distress
Valuation of LBO (1)
- recalculation of WACC to reflect leverage (use APV without interest tax shield)
Cooperative mechanism (5)
- joint venture
- strategic alliance and agreement
- franchising
- licensing
- cross sharing
Cooperative mechanism uses (5)
- pool resources
- expand capabilities
- increase geographic scope
- enter new product market
- transition mechanism: slow entry/exit
Rationale of cooperative mechanism (5)
- strategic planning
- tax advantage
- international operations
- risk reduction
- knowledge acquisition and transfer
Restructuring effort typically center on three key financial characteristics of company (3)
- assets on B/S
- liability on B/S
- CF on operations
forces driving cross border mergers (10)
- growth
- technology
- advantage of differentiated product
- roll up
- diversification
- following client
- exchange rate
- government policy
- economic and political stability
- consolidation
Strategic choices of cross border (3)
- location: domestic or international
- mode: build: greenfield, trade: export, import
- mode: buy: invest, joint venture, acquire
Strategic choice of cross border (3)
- location: domestic or international
- mode: build: greenfield, trades: import, export
- mode: buy: invest, join venture, acquire
Country differences (6)
- restriction
- culture
- currency exchange
- rules
- ability to exit
- legal
Valuation international finance relationship (4)
- IRPT
- FPT
- PPPT
- IFR
Cost of capital- international (1)
- interest rate parity is forward and spot rate = foreign and domestic nominal rate
DCF- international (3)
- forward parity: spot future or forward exchange should be unbiased predictor of future spot rate
- purchasing power parity: law of one price
- international fisher relation: nominal interest rate reflects the anticipated rate of inflation
Assuming global capital market, two approaches (2)
- In CAD: convert EUR cash flow into CAD using forward rate, CAD wacc
- in EUR: discount EUR FCF at EUR wacc, convert CAD at spot price
