Chapter 7

Corporate Restructuring
Strategy

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 A.Mergers and Acquisitions
(A) Value-added in a merger
Operational benefits
 Sales and marketing
 Costs and production
 Research and technology
 Resources
 Managerial

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(A) Value-added in a merger
Non-operational benefit
 Funding
 Taxes
 Risk
 Familial
 Minority representation
 Foreign economy

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 (B) Strategic planning process
Industry Business
Company Company
Competitor Environment
Analysis Analysis
Analysis Analysis
Strengths Segments
Weaknesses Motivation Opportunity
Unmet needs 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

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(B) Strategic planning process
 Identification of Strengths and Weakness
 Marketing Ratings
 Manufacturing Ratings
 Financial Ratings
 Creativity Ratings
 Management and Personal Ratings

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(B) Strategic planning process
Customer Analysis
Industry and Competitor Analysis
Environment Analysis

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( C )Buy Strategies
The pursuit of value-added
 Horizontal acquisitions
 Vertical acquisitions
 Conglomerate acquisitions
 Joint ventures

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( C )Buy Strategies
The pursuit of bargains
 Diversifiers
 Cash needy
 Time pressured
 Problem child

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 B.Tender Offer
(A)Characteristics
A tender offer usually means a cash or
securities bid for a company,made directly
to the company’s 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 Lenders
Collateral Cash flow Plan
G B B Small commercial finacing company
G B G Commercail financing company
G G - Every secured lender
B B B Good luck!
B B G Some sophisticated lenders
B G - Money center bank or regional bank

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(A) Financing Strategy
The unsecured leverage buyout
Securities Lenders
Short or intermediate terms
Commercial bank
senior debt(2- 6 yr.)
Long-term senior and Life insurance
subordinated debt (5-15 yr.) companies,LBO funds
Life insurance companies,
Preferred stock(5-20 yr.)
venture capitalists
Life insurance companies,
common stock 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)

ESOP

Corporation Bank
guarantee
(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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