Cororate Restructuring Flashcards
What are the 4 life cycles companies pass through?
- start-up
- growth
- maturity
- decline
In the start up life cycle what does revenue growth, free cash flow, business risk, and debt in capital structure look like?
Revenue growth: beginning
Free cash flow: negative
Business risk: high
Debt in capital structure: close to 0%
In the growth phase life cycle what does revenue growth, free cash flow, business risk, and debt in capital structure look like?
Revenue growth: rising
Free cash flow: improving
Business risk: medium
Debt in capital structure: 0%-20%
In the mature phase life cycle what does revenue growth, free cash flow, business risk, and debt in capital structure look like?
Revenue growth: slowing
Free cash flow: peak
Business risk: low
Debt in capital structure: 20%+
In the decline phase life cycle what does revenue growth, free cash flow, business risk, and debt in capital structure look like?
Revenue growth: declining
Free cash flow: declining
Business risk: medium-high
Debt in capital structure: 20%+
What are 3 scenarios/broad categories typically chosen by management to implement changes and improve their company’s growth prospects?
- Investments: increase the size and/or scope of a company’s operations.
- Divestments: The objective of divestment actions is to improve a company’s overall financial performance by getting rid of operations that are less profitable, riskier, and/or have lower growth potential.
- Restructurings: Changes in this category do not affect the size and/or scope of a company’s operations. However, they do impact its cost and/or financial structure.
What is synergies?
- the combined effort of two or more entities (like companies, departments, or individuals) working together to achieve a greater outcome than they could individually.
What are 3 motivations of divestment(decrease) actions?
- Improve valuation metrics
- improve operational focus
- meet liquidity needs
What are 2 motivations of restructuring(improve) actions?
- Improve ROC (return on capital) metrics
- Avoid or respond to financial challenges
What are 3 reasons Investments, divestments, and restructurings are all more likely to occur during economic expansions?
- CEOs are more confident that these changes will be successful
- Financing costs are lower during periods of strong economic growth
- Desire to take advantage of inflated stock prices for equity-financed acquisitions
What’s the difference between cost synergy and revenue synergy?
- cost synergies: potential cost savings achieved by combining two companies, by eliminating redundancies
- revenue synergies: potential increase in revenue generated by the combined entity, by accessing new markets or etc.
What are 3 types of investment actions, describe them.
- Equity investments: 25-49% ownership in company, maybe eventual acquisition
- Joint ventures: Joint ventures are created when two or more companies establish a new, separate entity to pursue common objectives
- Acquisitions: like equity investments, but the acquirer purchases the majority (or all) of the target company’s shares in exchange for cash and/or stock.
What is conglomerate discount?
- conglomerate discount refers to the tendency of markets to value a diversified group of businesses and assets at less than the sum of its parts.
What are 2 types of divestments actions?
- sales: seller transfers a segment or business line to an acquirer
- spin-offs: turn one of a company’s segments into a separate, independently-operating entity (aka separate company from its parent company)
What are 3 types of restructuring actions?
- Cost restructuring: company’s plan to reduce costs and improve profitability
- Balance sheet: changing a company’s asset composition and/or capital structure.
- Reorganization: court-supervised restructuring of an insolvent company
What are 2 types of cost restructuring?
- outsourcing: use of third parties to perform internal business functions, such as IT, legal, and finance.
- offshoring: relocating certain operations to another country while still maintaining them within the company
What are the 2 main balance sheet restructuring methods?
- sale leaseback: transaction where an asset owner sells it and then leases it back from the buyer
- dividend recapitalization: when a company raises debt fund the dividend.
What is leveraged buyout?
- when a company is acquired using a large amount of borrowed money with the objective of operating them more efficiently under private ownership
What are the three steps involved in evaluating corporate investments, divestments, and restructurings?
- Initial Evaluation: what is happening and why?
- Primary Valuation: Comparable company analysis/transaction analysis, premium paid analysis.
- Modeling & Valuation: financial statements and discounted cash flows.
What is materiality?
- what information is significant to investors
What are the three questions important to materiality in the initial valuation step?
- size (size of action, scale of restructuring, etc.)
- fit (reason for business strategy, eg. mature stage company may acquire a small, private company in an unrelated sector in pursuit of growth opportunities)
- share price (change in share price after an announcement, little empirical evidence suggesting short term price movements and a company’s ability to generate excess returns)
What are 3 preliminary valuation methods?
- Comparable company analysis
- Comparable transaction analysis
- Premium paid analysis
What’s the difference between comparable company analysis and comparable transaction analysis?
- comparable company analysis: value of a comparable company usually in same industry and similar capital structure, revenue growth, & etc
- comparable transactions analysis: value of a comparable M&A transaction that actually occurred.
What is control premium/ take over premium and formula?
-premium to entice current shareholders to give up their shares (usually fall in range of 20-40%)
Take over premium = deal price - stock price/ stock price
What is the modeling and valuation step?
- After estimating the target company’s fair value, the next step in the evaluation process is to produce a set of pro forma financial statements for the combined entity.
When creating pro forma financial statements what should you do with revenue, operating expenses, amortization, interest expense, income taxes, and shares outstanding?
- Revenues: Add revenue synergies, subtract any dis-synergies
- Operating expenses: Subtract cost synergies, add any dis-synergies
- Amortization: Add amortization of acquired intangible assets
- Interest expense: Add interest on debt issued to fund the acquisition, but do not include the target’s interest expense
- Income taxes: Use a weighted average of the two companies’ tax rates
- Shares outstanding: Start with the acquirer’s current total and add any new shares issued as part of the acquisition
What are 5 key factors and metrics that lenders consider when determining their required rates of return for lending money in acquisitions? PVLCI
- profitability (EBIT/sales or EBITDA/sales)
- volatility (standard deviation of revenue of EBITDA)
- leverage (debt/ebitda)
- collateral (asset liquidity)
- interest rates (benchmark spreads, credit spreads)
