Please enable JavaScript.
Coggle requires JavaScript to display documents.
Corporate Restructuring - Coggle Diagram
Corporate Restructuring
Definition
Corporate Restructuring is the reorganising of legal, ownership, operational, financial and other structures of the company for the purpose of making it profitable or better organised for its present needs.
-
Mix and match of any of Legal, ownership, operational, financial
Types
-
Financial Restructuring
-
Leveraged transactions (LBOs, MBOs) and debt restructuring.
-
Why Restructure ?
-
-
To provide a sharper focus for management who may lack the skill set to manage different types of business.
-
-
-
-
Diversification discount
Evidence
Multi segment firms relative to single segment firms experienced a value loss between 12.7% and 15.2%
-
Benefits of diversification (More tax shields as higher debt capacity & Earlier use of tax shields as tax losses cane be quickly offset against taxable income were not enough to offset the diversification discount.
Reasons
-
Cross - Subsidisation - When poor performing units are kept afloat by the star performers by offsetting profits against losses.
Business / Operational
Divestitures
-
-
Reasons:
-
Needs for funds in the company to pursue other investments, paying off debt, post LBOs due to significant levels of debt.
-
-
-
Spin-Offs
-
-
-
Reasons
-
Better alignment of interests of management with shareholders especially when the businesses are not natural business complements
-
Sometimes, a demerger can precede a takeover
Equity Carve Outs
A company establishes a new listed entity like spin offs but shares in the new entity are sold off to the market.
-
Like spin-offs, except that parent company sells a percentage of the equity of a subsidiary to the public stock market (partial IPO)
Parent company receives cash for the percentage of shares sold in the new entity and retains the remaining shares
Can sell any percentage, often just less than 20% (minority portion) is chosen (so that it retains control)
Reasons
Alternative to equity financing: the parent company can get funds by issuing its subsidiary’s equity (when parent company has some difficulty in raising capital in a usual way)
Showcase the subsidiaries to prospective future buyers as part of a two-stage process:
- Get the stock market to understand the subsidiary business
- Once the subsidiary is re-valued, the parent may also be re- valued because it still owns the remaining shares.
- May subsequently spin off the remaining shares to existing shareholders – If closing price tends to be higher after a while remaining shares can be spun off for a higher price
Financial Restructuring
LBOs and MBOs
When a small group of investors purchase a company by using a relatively small portion of equity and a relatively large portion of outside debt
-
If these investors are institutional (private equity firms), it is a leveraged buyout (LBO)
If these investors mostly include the existing management, it is a management buyout (MBO)
Greater focus to cut expenses, dispose non-core assets, tax benefits, increase efficiency.
-
Need assets with debt capacity – If company were to go bankrupt, then debt holders have confidence in recouping the cash from sale of assets & stable cash flows – To service the debt via interest rates.
Exit strategy: Do a (second) IPO, trade sale, management buyout, sale to another PE player etc.
-
-
Sometimes, the management is unable to effectively execute the plan to reduce debt and cut waste
Greater focus to cut expenses, dispose non-core assets, tax benefits, increase efficiency.
Debt Restructuring
Debt restructuring is the reorganization of companies’ outstanding liabilities when they are facing difficulties in repaying their debt payments (in financial distress)
-
Debt may be settled at the time of restructuring: Debt-for-equity swap: creditors agree to accept the company’s equity instead of receiving debt payments.
Debt may still exist but with modified terms: Bondholder haircuts: reduce or delay the promised interest payments and principal repayment