P2B.5 Corporate Restructuring

Question 1

What is Corporate Restructuring?

Answer 1

Changing a certain structure or reorganizing a company through:

1. Capital structure or operations
2. Mergers and acquisitions
3. Divestitures
4. Bankruptcy

It protects company from impeding business failure & helps resolve major deficiency.

Question 2

Reason for a Merger or Acquisition

Answer 2

1. Expansion
2. Synergy: positive results
3. Diversification
4. Economies of Scale

Question 3

Types of Synergies (Acquisitions)

Answer 3

1. Increased revenue
2. Cost reduction
3. Tax advantages
4. Capitalization advantages
5. Quality increases
6. Enhanced knowledge and skills

Question 4

Types of Mergers

Answer 4

1. Horizontal: merger of competitors
2. Vertical: merger of supplier and customers
3. Conglomerate: merger of unrelated businesses

Question 5

Mergers & Acquisition

Answer 5

Merger: A + B = C. Refers to the union of two entities where both companies cease to exist.

Acquisition: A + B = A or B. Refers to the union of two entities where one company ceases to exist.

Question 6

What is Tender Offer?

Answer 6

Acquirer buys shares directly from target shareholders usually at a price higher than current stock price.

Question 7

What is a Proxy Battle?

Answer 7

Acquirer seeks to control the target company by soliciting approval from Board of Directors

Question 8

What is a Takeover?

Answer 8

When a company gains control of a target company by acquiring the latter’s majority stock.

M&A: friendly
Hostile: unfriendly

Question 9

Defenses against Hostile Takeover

Answer 9

1. Golden Parachute
2. Leveraged Recapitalization
3. Poison Pill
4. Staggered Board of Directors
5. Fair Price
6. Voting Rights Plan
7. White Knight

Question 10

Golden Parachute

Answer 10

Contract where a potential buyer will have to pay high costs to compensate key executives upon termination.

Question 11

Leveraged Recapitalization

Answer 11

Approach to avoid takeovers by repurchasing company’s own stock or compensating shareholders with large dividend. It modifies the capital structure of the business by increasing debt and decreasing equity.

Question 12

Poison Pill

Answer 12

Defense in which existing shareholders have option to buy shares at a discount making it less attractive to potential buyer.

Question 13

Staggered Board of Directors

Answer 13

A staggered board of directors consists of directors who are grouped into classes – Class 1, Class 2, Class 3, etc. Each class represents holds a certain percentage of the total number of positions. During elections, only one class is open, hence the name – “staggered” board. A staggered board is commonly practiced in U.S. corporate law and is a valuable takeover defense strategy against hostile takeovers.

Question 14

Voting Rights Plan

Answer 14

The company issues a special voting right to common shareholders, allowing the shareholders to reject the buyer’s offer. This can empower a relatively small number of shareholders, and prevent a takeover.

Question 15

White Knight

Answer 15

A company who is preferable over potential buyer to purchase stock of targeted company.

Question 16

What is a divestiture and what types are there?

Answer 16

Total or partial disposal of business through a sale, closure, exchange, bankruptcy or liquidation.

1. Spin-off
2. Split up
3. Equity carve out
4. Tracking stock
5. Leveraged buyout
6. ESOP

Question 17

Spin-off

Answer 17

1. Parent company disposes of a subsidiary (usually underperforming) to its shareholders to create a new independent company.
2. A spin-off retains its assets, employees, and intellectual property from the parent company, which gives it support in a number of ways, such as investing equity in the newly formed firm and providing legal, technology or financial services.

Question 18

Split-up

Answer 18

Where a company splits its operations into two or more independent entities. After split up, original company ceases to exist.
Hope is that value of new companies exceeds value of original company.

Question 19

Equity Carve-out

Answer 19

Company sells shares of a division of a company by offering shares to the public via IPO with intention of generating cash while still maintaining control over company.
Precursor to eventual spin-off.

Question 20

Tracking Stock

Answer 20

Special stock issued to division or business unit rather than the company as a whole.

Question 21

Leveraged Buyouts

Answer 21

1. Acquisition of entity using mainly or entirely debt.
2. To acquire a business using less equity.
3. Precursor to split up.

Risk: high leveraged (debt to equity) & interest payments (debt service payments)

Question 22

Bargain Purchase

Answer 22

1. A business combination where the acquisition date amounts of identifiable net assets acquired, excluding goodwill, exceed the sum of the value of consideration transferred.
2. The purchaser is required under GAAP to recognize a gain for financial accounting purposes. The effect of this gain is an immediate increase to net income.

Question 23

Pac-Man Defense

Answer 23

If aggressor is purchasing the target company’s stock in attempt of takeover, the company will use their assets to purchase a large number of the aggressors stock.

Question 24

Greenmail

Question 24

Greenmail

Answer 24

Greenmail is a practice whereby a greenmailer buys up a substantial block of a company’s shares and threatens a hostile takeover. The target company can resist the takeover attempt by repurchasing its shares at a premium from the greenmailer. Greenmail became more frequent and controversial during the 1980s. Anti-greenmail provisions, laws, regulations, and taxes made greenmail more difficult after the 1980s.

Question 25

Fair Price Defense

Answer 25

A fair price defense is written into the corporate charter, and requires that minority shareholders must be paid a fair price for their shares, and the price calculation is defined by the corporation. This increases the cost paid by a potential buyer.