P2B.5 Corporate Restructuring Flashcards
What is Corporate Restructuring?
Changing a certain structure or reorganizing a company through:
- Capital structure or operations
- Mergers and acquisitions
- Divestitures
- Bankruptcy
It protects company from impeding business failure & helps resolve major deficiency.
Reason for a Merger or Acquisition
- Expansion
- Synergy: positive results
- Diversification
- Economies of Scale
Types of Synergies (Acquisitions)
- Increased revenue
- Cost reduction
- Tax advantages
- Capitalization advantages
- Quality increases
- Enhanced knowledge and skills
Types of Mergers
- Horizontal: merger of competitors
- Vertical: merger of supplier and customers
- Conglomerate: merger of unrelated businesses
Mergers & Acquisition
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.
What is Tender Offer?
Acquirer buys shares directly from target shareholders usually at a price higher than current stock price.
What is a Proxy Battle?
Acquirer seeks to control the target company by soliciting approval from Board of Directors
What is a Takeover?
When a company gains control of a target company by acquiring the latter’s majority stock.
M&A: friendly
Hostile: unfriendly
Defenses against Hostile Takeover
- Golden Parachute
- Leveraged Recapitalization
- Poison Pill
- Staggered Board of Directors
- Fair Price
- Voting Rights Plan
- White Knight
Golden Parachute
Contract where a potential buyer will have to pay high costs to compensate key executives upon termination.
Leveraged Recapitalization
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.
Poison Pill
Defense in which existing shareholders have option to buy shares at a discount making it less attractive to potential buyer.
Staggered Board of Directors
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.
Voting Rights Plan
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.
White Knight
A company who is preferable over potential buyer to purchase stock of targeted company.
What is a divestiture and what types are there?
Total or partial disposal of business through a sale, closure, exchange, bankruptcy or liquidation.
- Spin-off
- Split up
- Equity carve out
- Tracking stock
- Leveraged buyout
- ESOP
Spin-off
- Parent company disposes of a subsidiary (usually underperforming) to its shareholders to create a new independent company.
- 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.
Split-up
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.
Equity Carve-out
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.
Tracking Stock
Special stock issued to division or business unit rather than the company as a whole.
Leveraged Buyouts
- Acquisition of entity using mainly or entirely debt.
- To acquire a business using less equity.
- Precursor to split up.
Risk: high leveraged (debt to equity) & interest payments (debt service payments)
Bargain Purchase
- A business combination where the acquisition date amounts of identifiable net assets acquired, excluding goodwill, exceed the sum of the value of consideration transferred.
- 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.
Pac-Man Defense
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.
Greenmail
Greenmail
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.
Fair Price Defense
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.
