Mergers and Other

Forms of Corporate
Restructuring
Prepared by: DR. Tb. Donny Syafardan, SE., MM

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 Mergers and Other Forms of
Corporate Restructuring

Sources of Value
Strategic Acquisitions
Involving Common Stock
Acquisitions and Capital
Budgeting
Closing the Deal
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 Mergers and Other Forms of
Corporate Restructuring

Takeovers, Tender Offers, and

Defenses
Strategic Alliances
Divestiture
Ownership Restructuring
Leveraged Buyouts
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 Why Engage in
Corporate Restructuring?
Sales enhancement and operating
economies
Improved management
Information effect
Wealth transfers
Tax reasons
Leverage gains
Managements personal agenda

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 Sales Enhancement
and Operating Economies
Sales enhancement can occur because of
market share gain, technological
advancements to the product table, and filling
a gap in the product line.
Operating economies can be achieved
because of the elimination of duplicate
facilities or operations and personnel.
Synergy -- Economies realized in a merger
where the performance of the combined firm
exceeds that of its previously separate parts.
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 Sales Enhancement
and Operating Economies
Economies of Scale -- The benefits of size
in which the average unit cost falls as
volume increases.
Horizontal merger:
merger best chance for economies
Vertical merger:
merger may lead to economies
Conglomerate merger:
merger few operating
economies
Divestiture:
Divestiture reverse synergy may occur
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 Strategic Acquisitions
Involving Common Stock
Strategic Acquisition -- Occurs when one
company acquires another as part of its overall
business strategy.
When the acquisition is done for common stock, a
ratio of exchange, which denotes the relative
weighting of the two companies with regard to
certain key variables, results.
A financial acquisition occurs when a buyout firm is
motivated to purchase the company (usually to sell
assets, cut costs, and manage the remainder more
efficiently), but keeps it as a stand-alone entity.
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 What About
Earnings Per Share (EPS)?
Merger decisions
should not be made With the

Expected EPS ($)

without considering merger
the long-term
consequences. Equal
The possibility of
future earnings growth Without the
may outweigh the merger
immediate dilution of
earnings. Time in the Future (years)

Initially, EPS is less with the merger.

8 Eventually, EPS is greater with the merger.
 Market Value Impact
Number of shares offered by
Market price per share
X the acquiring company for each
of the acquiring company
share of the acquired company
Market price per share of the acquired company

The above formula is the ratio of exchange of

market price.
If the ratio is less than or nearly equal to 1, the
shareholders of the acquired firm are not likely to
have a monetary incentive to accept the merger
offer from the acquiring firm.
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 Empirical Evidence
on Mergers
Target firms in a
takeover receive an Selling

ABNORMAL RETURN (%)

CUMULATIVE AVERAGE
average premium of companies
30%.
Evidence on buying +
Buying
firms is mixed. It is companies
not clear that 0
acquiring firm
shareholders gain. -
Some mergers do Announcement date
have synergistic
TIME AROUND ANNOUNCEMENT
benefits. (days)
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 Developments in Mergers
and Acquisitions
Roll-Up Transactions The combining of
multiple small companies in the same
industry to create one larger company.
Idea is to rapidly build a larger and more valuable firm
with the acquisition of small- and medium-sized firms
(economies of scale).
Provide sellers cash, stock, or cash and stock.
Owners of small firms likely stay on as managers.
If privately owned, a way to more rapidly grow towards
going through an initial public offering.
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 Developments in Mergers
and Acquisitions
An Initial Public Offering (IPO) is a
companys first offering of common stock
to the general public.

IPO Roll-Up An IPO of independent

companies in the same industry that
merge into a single company concurrent
with the stock offering.
IPO funds are used to finance the
acquisitions.
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 Acquisitions and
Capital Budgeting
An acquisition can be treated as a capital budgeting
project. This requires an analysis of the free cash
flows of the prospective acquisition.
Free cash flows are the cash flows that remain after
we subtract from expected revenues any expected
operating costs and the capital expenditures
necessary to sustain, and hopefully improve, the
cash flows.
Free cash flows should consider any synergistic
effects but be before any financial charges so that
examination is made of marginal after-tax operating
cash flows and net investment effects.
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 Other Acquisition and
Capital Budgeting Issues
Noncash payments and assumption
of liabilities
Estimating cash flows
Cash-flow approach versus earnings
per share (EPS) approach
Generally, the EPS approach examines the
acquisition on a short-run basis, while the cash-
flow approach takes a more long-run view.
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 Closing the Deal
Consolidation -- The combination of two or more firms
into an entirely new firm. The old firms cease to exist.
Target is evaluated by the acquirer
Terms are agreed upon
Ratified by the respective boards
Approved by a majority (usually two-thirds) of
shareholders from both firms
Appropriate filing of paperwork
Possible consideration by The Antitrust Division
of the Department of Justice.
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 Taxable or
Tax-Free Transaction
At the time of acquisition, for the selling firm or
its shareholders, the transaction is:
Taxable -- if payment is made by cash or with a
debt instrument.
Tax-Free -- if payment made with voting
preferred or common stock and the transaction
has a business purpose. (Note: to be a tax-
free transaction a few more technical
requirements must be met that depend on
whether the purchase is for assets or the
common stock of the acquired firm.)
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 Alternative
Accounting Treatments

Purchase (method) -- A method of accounting

treatment for a merger based on the market
price paid for the acquired company.

Pooling of Interests (method) -- A method of

accounting treatment for a merger based on
the net book value of the acquired
companys assets. The balance sheets of
the two companies are simply combined.
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 Tender Offers
Tender Offer -- An offer to buy current
shareholders stock at a specified price, often
with the objective of gaining control of the
company. The offer is often made by another
company and usually for more than the present
market price.
Allows the acquiring company to bypass
the management of the company it wishes
to acquire.

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 Strategic Alliance
Strategic Alliance -- An agreement between two
or more independent firms to cooperate in order
to achieve some specific commercial objective.
Strategic alliances usually occur between (1) suppliers
and their customers, (2) competitors in the same
business, (3) non-competitors with complementary
strengths.
A joint venture is a business jointly owned and controlled
by two or more independent firms. Each venture partner
continues to exist as a separate firm, and the joint
venture represents a new business enterprise.

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 Divestiture
Divestiture -- The divestment of a portion
of the enterprise or the firm as a whole.
Liquidation -- The sale of assets of a firm,
either voluntarily or in bankruptcy.
Sell-off -- The sale of a division of a
company, known as a partial sell-off, or
the company as a whole, known as a
voluntary liquidation.

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 Divestiture
Spin-off -- A form of divestiture resulting in
a subsidiary or division becoming an
independent company. Ordinarily, shares
in the new company are distributed to the
parent companys shareholders on a pro
rata basis.
Equity Carve-out -- The public sale of stock
in a subsidiary in which the parent usually
retains majority control.

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 Empirical Evidence
on Divestitures
For liquidation of the entire company, shareholders of
the liquidating company realize a +12 to +20% return.
For partial sell-offs, shareholders selling the company
realize a slight return (+2%). Shareholders buying
also experience a slight gain.
Shareholders gain around 5% for spin-offs.
Shareholders receive a modest +2% return for equity
carve-outs.
Divestiture results are consistent with the
informational effect as shown by the positive market
responses to the divestiture announcements.
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 Ownership Restructuring
Leverage Buyout (LBO) -- A primarily debt
financed purchase of all the stock or
assets of a company, subsidiary, or
division by an investor group.
The debt is secured by the assets of the enterprise
involved. Thus, this method is generally used with
capital-intensive businesses.
A management buyout is an LBO in which the pre-
buyout management ends up with a substantial equity
position.
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 Common Characteristics For
Desirable LBO Candidates
Common characteristics (not all necessary):
The company has gone through a program of heavy
capital expenditures (i.e., modern plant).
There are subsidiary assets that can be sold without
adversely impacting the core business, and the
proceeds can be used to service the debt burden.
Stable and predictable cash flows.
A proven and established market position.
Less cyclical product sales.
Experienced and quality management.
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