Chapter 7

Corporate Restructuring
Strategy

A.Mergers and Acquisitions

(A) Value-added in a merger
Operational benefits

Sales and marketing

Costs and production
Research and technology
Resources
Managerial
2

(A) Value-added in a merger

Non-operational benefit

Funding
Taxes
Risk
Familial
Minority representation
Foreign economy

(B) Strategic planning process

Company
Analysis
Strengths
Weaknesses

Industry
Competitor
Analysis

Company
Analysis
Segments
Motivation
Unmet needs

Business
Environment
Analysis

Opportunity
Threats

Plan
Objectives
Means for achieving objectives (Strategies)
Means for monitoring process
Acquisition
Criteria

(B) Strategic planning process

Company Analysis

Aggregate Analysis
Analysis by Product Type
Production and Cost Analysis
Financial Capacity
Performance Review

(B) Strategic planning process

Identification of Strengths and Weakness

Marketing Ratings
Manufacturing Ratings
Financial Ratings
Creativity Ratings
Management and Personal Ratings

(B) Strategic planning process

Customer Analysis
Industry and Competitor Analysis
Environment Analysis

( C )Buy Strategies
The pursuit of value-added

Horizontal acquisitions
Vertical acquisitions
Conglomerate acquisitions
Joint ventures

( C )Buy Strategies
The pursuit of bargains

Diversifiers
Cash needy
Time pressured
Problem child

B.Tender Offer
(A)Characteristics
A tender offer usually means a cash or
securities bid for a company,made directly
to the companys shareholders without
consultation or cooperation from its
management,often as a prelude to a
wholesale takeover of the company
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(B) Strategy
Offensive Strategies

Undervalued assets
Gain control
Portfolio,etc.

Defensive Strategies

Evaluating the tender offer in short and long

term(Green mail)
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(B) Strategy

Accessing the possibility of better alternatives

Finding a white knight
Prefer stock issue with special voting right
Sell assets

Developing tactics to induce better offer

Block or slow the timetable
Pac-Man Maneuver
Counter tender offer

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(C) Corporate policy

Winners

The management of the aggressor company

The shareholders of the target company(50%
premium)
Investment bankers
Merger lawyers

Losers

The management and the employees of the

target company
The shareholders of the aggressor company

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(C) Corporate policy

Possible abuses

Two-tiered merger(Poison Pills)

Fast buck v.s. growth (LCO)
Time pressure after tender offer is announced
but before shares can be bought up(White
Knights)
Job displaced(Golden Parachute)
Antitrust
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C.Divestiture and Spinning-off

(A)Divestiture
Strategy
Sell if the premium is positive and is judged to be
the best obtainable

Finding sugar daddies

Foreigners
Superior judge of worth
Earnings per share boosters
Geared
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(A)Divestiture

Cash rich
The shrinking company
Wildcat and star worshippers
Wildcat, stars, cash cows, dogs

(LM, HG)(HM, HG)(H, L) (L, L)

Monument builders
Investment banker clients

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(B)Spin-off
Strategy
Spin-off if the costs of being a part of the parent
exceed the benefits and a desirable sale cannot be
arranged

Problems

Headquarter staff
Apportioning debt

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(B)Spin-off
What company should consider a spin-off
strategy?

Unrelated divisions

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D. Leverage Buy Out (LBO)

A leverage buyout (LBO) is any acquisition of a
company which leaves the acquired operating
entity with a greater than traditional debt-to-worth
ratio.

By type of financing
Secured financing

purchase price = collateralized asset + investing equity+

notes taken back by seller
Unsecured financing
purchase price = venture capital + Mezzanine financing +
senior debt

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D. Leverage Buy Out (LBO)

By type of transaction
Asset acquisitions

The formation of a new corporation, which acquires

the assets of the target, company.

Tax issue

Stock acquisitions

Stock redemption, tender offers, pure stock

acquisitions and reverse mergers

Public companies

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A LBO involves leverage from a financing

source to acquire the target company.

Proceed Pay the seller

Internal cash flow
retire the debt
Asset redeployment

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Features of target companies

Operating loss
Capital intensive
Market undervalued
Trouble companies

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(A) Financing Strategy

Types

Asset-based financing
Asset-based lenders, e.g. banks, financing corp.
Secured floating-rate financing

Senior bank debt

Banks
Unsecured

Fixed-rate senior and subordinated debt

Insurance companies, pension funds, mezzanine

buyout funds
Unsecured fixed rate debt with warrants

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(A) Financing Strategy

Preferred stock or subordinated debt

Venture capitalists, mezzanine buyout

funds,insurance companies.
Fixed-rate preferred stock with warrants

Common stock
Leverage buyout specialists, venture capitalists,

ESOP
Common stock

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(A) Financing Strategy

The secured leverage buyout
Loan
Collateral Cash flow
G
B
G
B
G
G
B
B
B
B
B
G

Lenders
Plan
B
G
B
G
-

Small commercial finacing company

Commercail financing company
Every secured lender
Good luck!
Some sophisticated lenders
Money center bank or regional bank

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(A) Financing Strategy

The unsecured leverage buyout
Securities
Short or intermediate terms
senior debt(2- 6 yr.)
Long-term senior and
subordinated debt (5-15 yr.)
Preferred stock(5-20 yr.)
common stock

Lenders
Commercial bank
Life insurance
companies,LBO funds
Life insurance companies,
venture capitalists
Life insurance companies,
venture capitalists,investment
bankers
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(A) Financing Strategy

Venture capitalists in LBO

When to consider venture financing

Value added
Creditability with seller
Assistance in financing arrangements and

negotiations
Cross-utilization of talent

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(A) Financing Strategy

Venture capitalists investment objectives

Expected returns (35%~50%)
Liquidation expectations (5 yrs~7 yrs)
Put option (protective device)
Restrictions on Owner-Managers liquidity

Rights of first refusal

Take-along agreement
Right of first offer

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(A) Financing Strategy

ESOP in LBO

Function
Raise additional capital
Recapture taxes
Assure estate liquidity
Retire outstanding shares
Provide a market for closely held stock
Discourage unionization
Buy out dissident stockholders

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(A) Financing Strategy

Acquire other companies
Combat tender offers
Broaden the appeal of unions
Shelter excess accumulated earnings
Refinancing existing debt
Maximize IRS investment tax credit
Divest subsidiaries
Purchase key main insurance

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(A) Financing Strategy

ESOP invests in the securities of the employer

corporation and is permitted to borrow money.

(Leverage ESOP)
ax
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De men
pay

Corporation

ur
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ESOP
loa

am
ati
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ym on
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se
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ch

guarantee

Bank

(A) Financing Strategy

ESOP is integrated in the financial plan of LBO

Cash flow
Debt amortization
Purchase stock
loan

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(B) Corporate policy

How risky are LBOs?

Highly leveraged, increase failure

(Thatcher Glass LBO)
Over-leveraged, bad loan, junk bond
(Dr Pepper LBO, 3 times net worth)
Overpriced
LBO failures (5~15%)
(Eli Witt, Oppenheimer & Co.)
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(B) Corporate policy

Why owners should consider a LBO?

For the closely held company, a LBO can

provide the selling shareholders with benefit
that are not fully appreciated.
Liquidity for stock, market stability
Diversification
Family estate tax savings
Reverse LBO
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(B) Corporate policy

Why management should consider a LBO?

Opportunity to create personal wealth

Conflict of interest (stand on buyout side)

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