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FI3004 > Corporate restructuring > Flashcards

Corporate restructuring Flashcards

1
Q

Divestment

A
  • the process of downsizing
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2
Q

De-merger

A
  • Opposite of merger
  • splitting of a company into two or more separate entities
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3
Q

Types of de-merger

A
  • Spin-offs
  • Sell-offs
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4
Q

Why is divestment hard for managers

A
  • May suggest leadership errors were made in the past
  • May result in redundancies
  • Can be viewed as negative growth
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5
Q

Disadvantages of de-merging

A
  • Lost economies of scale
  • Impact on status
  • May harm ability to raise
    finance
  • More vulnerable to takeover
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6
Q

Spin-offs

A
  • A spin-off involves a de-merger with no change in ownership.
  • A new company is created, and original shareholders receive proportional shares.
  • Shareholders retain the same ownership proportion in both companies.
  • There is no inflow of cash to the group company
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7
Q

Spin-offs practical aspects

A
  • Need to separate the assets and liabilities of the operations being spun off
  • ## May need to reallocate personnel
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8
Q

Reasons for Spin-offs

A
  • Focus on Core Business
  • Unlocking Shareholder Value
  • Strategic Flexibility
  • Improved Operational Efficiency
  • Reducing Debt or Financial Burden
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9
Q

Focus on Core Business

A
  • Separating non-core or underperforming units allows the parent company to focus on its primary operations.
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10
Q

Unlocking Shareholder Value

A
  • Spin-offs often reveal the hidden value of the separated unit, attracting investors and improving valuations for both entities.
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11
Q

Strategic Flexibility

A
  • The spun-off unit gains independence to pursue tailored strategies, partnerships, or growth opportunities.
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12
Q

Improved Operational Efficiency

A
  • Each company can focus on its unique priorities, reducing inefficiencies from conflicting objectives.
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13
Q

Reducing Debt or Financial Burden

A
  • A spin-off can transfer liabilities or underperforming assets to the new entity, improving the parent company’s balance sheet.
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14
Q

Spin-offs empirical evidence

A
  • Stock markets generally react positively to spin-offs.
  • Pre-spin-off performance is often subpar.
  • Both parent and spin-off companies improve performance post-spin-off.
  • Positive market reactions may partly stem from takeover activity.
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15
Q

Kingfisher Spin-off de-mergers

A
  • Woolworths Demerger 2001
  • Kesa Electricals Demerger 2003
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16
Q

Woolworths Demerger 2001

A
  • Kingfisher spun off its general merchandise businesses, Woolworths and Superdrug, into a separate entity, Woolworths Group plc.
  • This allowed Kingfisher to focus on its home improvement and electrical retail operations
17
Q

Kesa Electricals Demerger 2003

A
  • Kingfisher separated its electrical retail businesses (such as Comet and Darty) into a new company, Kesa Electricals plc.
  • Enabling Kingfisher to concentrate on its core DIY operations through its B&Q and Castorama brands.
18
Q

Sell-offs

A
  • A form of divestment whereby part of a company is sold off to a third party
  • Cash is received and re-invested into the remaining business operations
19
Q

Reasons for Sell-offs

A
  • Allows the company to focus on core
    activities
  • Remove a loss-making division
  • Protect the rest of the business from a takeover
  • Reduce the business risk of the group
20
Q

Examples of Sell-Offs

A
  • In 2002, the Kingfisher Group sold off Superdrug for £310m
  • Danone sold the HP product range to Heinz for £470m in June 2005
  • Rentokil sold off its security arm (Manned Guarding)
21
Q

Practical Considerations of Sell-Offs

A
  • Valuation.
  • Buyer Identification
  • Regulatory Compliance
  • Strategic Fit
  • Impact on Employees
  • Market Perception
  • Transaction Costs
  • Integration/Separation
22
Q

Valuation

A

Accurate asset valuation to determine a fair selling price.

23
Q

Buyer Identification

A

Finding suitable buyers aligned with strategic goals.

24
Q

Regulatory Compliance

A

Adhering to legal and tax regulations during the process.

25
Q

Strategic Fit

A

Ensuring the sell-off aligns with the company’s long-term objectives.

26
Q

Impact on Employees

A

Managing layoffs, relocations, or reassignments

27
Q

Market Perception

A

Communicating the rationale to investors and stakeholders.

28
Q

Transaction Costs

A

Accounting for legal, advisory, and restructuring expenses.

29
Q

Integration/Separation

A
  • Facilitating smooth transfer of operations to the buyer.
30
Q

Going Private

A

-A public company goes private when a small group of individuals buy all the shares
- Existing shareholders and management are likely to be the new shareholders
- If the company is listed, the shares are usually taken off the exchange

31
Q

Reasons for going private part 1

A
  • No longer need to spend time and money complying with the listing requirements
  • No longer subject to share price volatility
  • The company may be able to focus more on long term objectives
32
Q

Reasons for going private part 2

A
  • Less likely to be taken over
  • Reduces agency problems
    -Growth in private equity funds
33
Q

Disadvantages of going private

A
  • Loss of Liquidity
  • Limited Access to Capital
  • Difficulty in Attracting Talent
34
Q

Going private: Loss of Liquidity:

A
  • Shares become less liquid, limiting the ability of shareholders to sell their holdings quickly.
35
Q

Going private: Limited Access to Capital

A
  • The company loses access to public markets for raising funds, relying solely on private equity or debt.
36
Q

Going private: Difficulty in Attracting Talent

A
  • Without the incentive of publicly traded shares or stock options, attracting and retaining top talent may be harder

FI3004 (6 decks)

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