Corporate restructuring Flashcards
Divestment
- the process of downsizing
De-merger
- Opposite of merger
- splitting of a company into two or more separate entities
Types of de-merger
- Spin-offs
- Sell-offs
Why is divestment hard for managers
- May suggest leadership errors were made in the past
- May result in redundancies
- Can be viewed as negative growth
Disadvantages of de-merging
- Lost economies of scale
- Impact on status
- May harm ability to raise
finance - More vulnerable to takeover
Spin-offs
- 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
Spin-offs practical aspects
- Need to separate the assets and liabilities of the operations being spun off
- ## May need to reallocate personnel
Reasons for Spin-offs
- Focus on Core Business
- Unlocking Shareholder Value
- Strategic Flexibility
- Improved Operational Efficiency
- Reducing Debt or Financial Burden
Focus on Core Business
- Separating non-core or underperforming units allows the parent company to focus on its primary operations.
Unlocking Shareholder Value
- Spin-offs often reveal the hidden value of the separated unit, attracting investors and improving valuations for both entities.
Strategic Flexibility
- The spun-off unit gains independence to pursue tailored strategies, partnerships, or growth opportunities.
Improved Operational Efficiency
- Each company can focus on its unique priorities, reducing inefficiencies from conflicting objectives.
Reducing Debt or Financial Burden
- A spin-off can transfer liabilities or underperforming assets to the new entity, improving the parent company’s balance sheet.
Spin-offs empirical evidence
- 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.
Woolworths Demerger 2001
- 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
Sell-offs
- 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
Reasons for Sell-offs
- 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
Examples of Sell-Offs
- In 2002, the Kingfisher Group sold off Superdrug for £310m
- ## Danone sold the HP product range to Heinz for £470m in June 2005
Practical Considerations of Sell-Offs
- Valuation.
- Buyer Identification
- Regulatory Compliance
- Strategic Fit
- Impact on Employees
- Market Perception
- Transaction Costs
- Integration/Separation
Valuation
Accurate asset valuation to determine a fair selling price.
Buyer Identification
Finding suitable buyers aligned with strategic goals.
Regulatory Compliance
Adhering to legal and tax regulations during the process.
Strategic Fit
Ensuring the sell-off aligns with the company’s long-term objectives.
Impact on Employees
Managing layoffs, relocations, or reassignments
Market Perception
Communicating the rationale to investors and stakeholders.
Transaction Costs
Accounting for legal, advisory, and restructuring expenses.
Integration/Separation
- Facilitating smooth transfer of operations to the buyer.
Going Private
-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
Reasons for going private part 1
- 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
Reasons for going private part 2
- Less likely to be taken over
- Reduces agency problems
-Growth in private equity funds
Disadvantages of going private
- Loss of Liquidity
- Limited Access to Capital
- Difficulty in Attracting Talent
Going private: Loss of Liquidity:
- Shares become less liquid, limiting the ability of shareholders to sell their holdings quickly.
Going private: Limited Access to Capital
- The company loses access to public markets for raising funds, relying solely on private equity or debt.
Going private: Difficulty in Attracting Talent
- Without the incentive of publicly traded shares or stock options, attracting and retaining top talent may be harder
