Corporate Restructuring - Session 3.pdf

Corporate restructuring is a critical process that organizations undergo to realign their structure, operations, or finances to better meet their strategic objectives. In today’s rapidly changing business environment, restructuring has become an essential tool for companies to maintain competitiveness, enhance profitability, and adapt to market demands. Whether driven by financial distress, shifts in market dynamics, or the pursuit of growth, corporate restructuring can take various forms, including mergers and acquisitions, divestitures, debt restructuring, and organizational redesign.

The primary aim of corporate restructuring is to improve the overall performance of the company. It often involves reassessing the company’s assets and liabilities, workforce, business units, and market position. By realigning these elements, companies can achieve greater efficiency, reduce costs, and focus on core competencies. Restructuring can also be a proactive strategy to capitalize on emerging opportunities or to stave off potential threats in a competitive landscape.

However, corporate restructuring is not without its challenges. The process can be disruptive and may involve difficult decisions, such as downsizing or divesting non-core assets. Additionally, restructuring requires careful planning and execution to minimize risks and maximize the intended benefits. Stakeholder management is crucial during this process, as employees, investors, customers, and creditors may be affected by the changes. Clear communication and transparency are vital to maintaining trust and support throughout the restructuring process.

In the globalized economy, where market conditions and consumer behaviors are constantly evolving, corporate restructuring is often seen as a necessary step to ensure long-term sustainability. Companies that successfully navigate restructuring can emerge stronger, more agile, and better positioned to thrive in a competitive environment. However, the success of restructuring efforts hinges on a thorough understanding of the company's current state, a clear vision for the future, and the ability to execute the necessary changes effectively.

1. Corporate
Restructuring

2. Resultsofrestructuringstrategiescanbe
measuredbyoneoftwoperformance
standards,
i.e.MarketPerformanceorAccounting
Performance.
ROI(returnoninvestment)andROE(return
onequity)comparisonofpre-andpost-
restructuringcanmeasurerestructuring
results.
01
02
Measuring Results

3. Measuring Results
1.Marketperformance
Themarketperformancestandardaddressesthestockpriceofthe
organizationfollowingarestructuring.Thechangescanbedirectly
attributedtorestructuringactionareshorttermindicatorsofhow
therestructuringhaseffectedtheorganizationsperformance.
2.AccountingPerformance
Todeterminelongtermperformanceofanorganizationaccounting
standards(financialratios)areusedtocalculaterestructuring
performance.AcomparisonismadeonfinancialratiosROI(Return
ofInvestment)andROE(ReturnonEquity)ofpre-restructuringand
post-restructuringdataoverseveralperiodsandyears.Theresults
usingthismethodtakelongertoobtainbutcangiveaclearerpicture
towhethertherestructuringobjectiveshavebeenmet.

4. Key Activities
oAsell-offisthesaleofabusinessorsubsidiaryoftheparentcompanytoanotherfirmoutsidethegroup,generallyresultingina
paymentofcashtotheparent.Intheory,sell-offsaretheleastcomplexofrestructuringstructures.Acquirerscanusuallybe
dividedintotwogroups:strategicbuyersandfinancialbuyers.
oStrategicbuyersarethosewhoareinterestedinacquiringabusinessforstrategicpurposes,e.g.,increasingmarketshare,
creatingeconomiesofscaleorexploitingsynergies;theyaretypicallycompaniesengagedinthesamebusinessas,and
thereforecompetingwith,thebusinessorcompanyunderconsideration.
oIncontrast,financialbuyersarethosewhoareinterestedinacquiringabusinesstosecureafinancialreturnintheshort-to
medium-term,beforesellingthebusinessorotherwiseexitingtheinvestment.Financialbuyersarelikelytobebuyoutfirms.
oBuyoutfirmsraisefundsinordertobeabletotakeequitystakesincompaniesthoughfundingandassistingwithmanagement
buyouts(MBOs)andleveragedbuyouts(LBOs).
oBuyoutfirmsgenerallyfocusonestablishedcompanieswithpotentialtogrowaftertransformation.Non-coredivisionsand
subsidiariesoflargepubliccompaniesaretheirtypicaltargets.
SELL-OFF

5. Key Activities
oAnequitycarve-outisthesaleofanequityinterestinasubsidiarytopublicinvestorsinanIPOortoprofessionalinvestorsina
privateplacement.Equitycarve-outscomeintwoforms:minoritycarve-outsandmajoritycarve-outs.
oAminoritycarve-outoccurswhenaparentcompanysellsaminorityinterestinawholly-ownedsubsidiarytoinvestorswhile
retainingthemajorityinterest.
oAmajoritycarve-outinvolvesthesaleofamajorityinterestinawholly-ownedsubsidiarytoinvestors.
oItshouldbenotedthatthepreparationforeitheranIPOoraprivateplacementtoprofessionalinvestorstakeslongerthanthatfor
asell-off.
oInaddition,aparentcompanywillhavetoensurethatacarved-outsubsidiaryshouldbeaviableindependentcompany.Thisis
oftenthemostdifficultpartofthepreparationforanequitycarve-out.
EQUITY
CARVE-
OUTS

6. Collaborate
Strategy
Goals or Awards
MainbenefitsofaMinorityCarve-out:
1.Afteraminoritycarve-out,theparentcompanycontinuestoremain
incontrolofthesubsidiary.
2.Itallowstheparentcompanytotakeadvantageofahigh
valuationofpartofitsoperationsandprovidesopportunitiesto
raisecapitalonadvantageousterms.
3.Iftheminoritycarve-outunlocksvalueandahigher-ratedorhighervalue
stockiscreated(inaggregate),thestockoftheparentcompany(or
subsidiary)hasmorevalueasanacquisitioncurrency.
4.Itgivesthesubsidiary,timetobecomeastrongercompanybeforea
saleormajorityorfullcarve-out.
5.Itmaycreatebusinessopportunitiesforthesubsidiaryby
demonstratingthatthesubsidiarywillbeanindependent
business.
6.Aminoritycarve-outIPO,allowsthesubsidiarytooffermarket-linked
orotherequityincentivestomanagement.

7. Collaborate
Strategy
Goals or Awards
DisadvantagesoftheMinorityCarve-outsinclude:
1.Theparentcompanymaintainscontrolofthesubsidiary,whichmay
causeapotentialconflictofinterestswiththeminorityshareholdersof
thesubsidiary.
2.Iftheinitialpublicfloatistoosmall,itmayfailtoattract
institutionalinvestors.
3.Smallpublicfloatsmayincreasethevolatilityofthestock.
4.Indifficultmarkets,aminoritycarve-outmayimpedeasellingstrategyby
settingapriceforthesharesofthesubsidiarywhichisbelowtheir"real"
value.
5.Aminoritycarve-outmayreducetheflexibilitywithwhichtheparentand
subsidiarycancooperatetocapturesynergies.

8. Key Activities
oTheparentcompanyshouldanticipatethataminoritycarve-outisoftenaninterimsolution.Inmostcases,aminority
carve-outislaterfollowedbyanothertransaction,suchasasell-off,follow-onpublicofferingorspin-off.
oInpractice,aminoritycarve-outislikelytoleadtocompleteseparationovertimebecausethecarved-outsubsidiary
tendstodriftawayfromandinteractlesswiththeparentduetoitsindependence.
oInaddition,thecarved-outsubsidiary,ifitbecomesapubliclylistedcompany,willissueitsownfinancialstatements
andestablishapublicmarketvalue,resultingintheincreasedpossibilityofamerger(ortakeover)offer.
oAminoritycarve-outIPOmaybecombinedwithalaterspin-off.Ifunsuccessful,theminoritycarve-outmaybefollowed
byaspin-in,i.e.,theparentcompanyacquiresthesharesheldbyminorityshareholdersandturnsthemajority-owned
subsidiaryintoawholly-ownedsubsidiary.
oWhenasubstantialorcompleteseparationisdesired,amajoritycarve-outmaybeimplemented(againusuallybyway
ofanIPOorprivateplacement).
TIPS..

9. Collaborate
Strategy
Goals or Awards
AMajorityCarve-outisbeneficialinthefollowingways:
1.Amajoritycarve-outmaygeneratesubstantialcashfortheparentand/or
thesubsidiary.
2.Amajoritycarve-outmayallowtheparenttoterminateits
responsibilitytowardthesubsidiary.
3.Amajoritycarve-outmeansthattherewillbefewerpotentialconflictsof
interestsbetweentheparentandthesubsidiaryafterthecarve-outthan
isthecasewithaminoritycarve-out.
4.Notwithstandingthatitwillonlybeaminorityshareholder,theparentmay
maintainasignificantinfluenceonthesubsidiaryafterthecarve-out.
DisadvantagesofaMajorityCarve-outinclude:
1.Neithertheparentnoritsshareholderswillparticipatefullyinthe
upsideofthesubsidiary.
2.Theparentwilllosecontroloverthesubsidiaryafterthecarve-out.

10. Key Activities
oAspin-off(ordemerger)oftenconsistsofthedistributionofasubsidiary'sstocktotheparentcompany'sexisting
shareholdersbywayofadividend.Aspin-offisapopularwayofundertakingcorporaterestructuringintheU.S.and
Europe.
oThemainreasonforthepopularityofspin-offsisthatthedistributioncanoftenbemadetaxfreeforboththeparent
corporationandthereceivingshareholder.Thiscanrepresentsignificantsavingstotheparentcompany.
oSpin-offsareameanstounlockthevalueofasubsidiaryandtransferthatvaluedirectlytotheparentcompany's
shareholders.
oItisespeciallyusefulforasubsidiarythatdoesnotcompletelyfitwiththeparentcompany'scoreactivitiesorwould
otherwisebenefitfrombeingastand-alonepubliccompany.
SPIN-OFFS

11. Key ActivitiesSPIN-OFFS
Spin-offsarealsoameanstoobtainfullvaluefortheparentcompany'sshareholders,whenaspun-offsubsidiary
isviable,butwillnotcommandareasonablepriceinacashdivestiture,becauseofmarketconditions.
Wherethesharesoftheparentcompanyarepubliclylisted,inordertoensurethattheparentcompany's
shareholderscanrealizethevalueofthedistribution,thesharesofthesubsidiarygenerallyneedtobe(or
become)publiclylistedtogivetheshareholdersthesameliquidityinthesharesinthesubsidiaryastheyhavein
thesharesoftheparent,i.e.,theparentwillneedtoseekapubliclistingforthenewshares.
Asisthecasewithequitycarve-outs,thespun-offsubsidiarymustbeaviablestand-aloneentitytocreate
shareholdervalue.Thismeansthatitmusthaveastrongcapitalstructureandaviablebusinessmodel.This
posesamajorchallengeforallspin-offs.

12. Collaborate
Strategy
Goals or Awards
Inaddition,spin-offshavedisadvantages,includingthefollowing:
1.Unlikeanequitycarve-outorasaleforcash,neithertheparent
companynorthesubsidiaryreceivesanycashinthetransaction
itself.
2.Theparentcompanylosestheincomeandcashflowofthesubsidiary
withoutreceivinganycashinreturn.
3.Unlikeacarve-outIPO,thesharesaredistributedtotheparent's
shareholdersasadividend,andtherefore,theparentcompanymay
notworkhardtocreateinvestorinterestinthestock,asmuchasina
carve-outIPO.
4.Ifthespun-offsubsidiaryfailstomeettheirinvestmentcriteria(e.g.,
minimumsizeofmarketcapitalizationorportfolioholdings),institutional
investorsoftheparentcompanymaysellthesharesdistributedtothem
inthespin-off.

13. Collaborate
Strategy
Goals or Awards
Acarve-outIPOmaybecombinedwithalaterspin-off.Theadvantagesof
suchtwo-stagetransactionsincludethefollowing:
1.TheIPOestablishesapublicmarketforthesubsidiary’sstockinadvanceofthe
spin-off;
2.Thescrutinywhichcomeswithbeingapubliclylistedcompanyshouldmake
thesubsidiaryastrongercompany.
3.TheIPOgeneratescashforeithertheparentcompanyorsubsidiaryorboth.
Thedisadvantagesofthesetwo-stagetransactionsaresimilartothoseofminority
carve-outs,including:
1.TheIPOisdependentonequitymarketconditions.
2.PreparingforandimplementingtheIPOistimeconsuming.
3.Companieswithsmallpublicfloatsarelessattractivetoinstitutionalinvestors.
4.Adepressedstockpricemaypreventtheparentfromundertakingthe
subsequentspin-off.

14. SPIN-INS
Increasingly,companiesaremakingmajority-owned
subsidiariesintowholly-ownedsubsidiaries.
SuchtransactionsarereferredtoasSpin-ins.Oftenspin-ins
areimplementedthroughtheshareexchangeprocedure.
Spin-insallowaparentcompanytoimplementgroup-wide
restructuringbystreamliningoverlappingbusinessesand
redeployingassetsandcapabilitieswithinthegroup.
Consequently,spin-inswilloftenleadtodivestitures.

15. SPLIT OFF & SPLIT
UP
Asplit-offisavariantofaspin-off.Inasplit-off,aparentcompany
distributessharesitownsinasubsidiarytoitsshareholdersinexchange
fortheirsharesoftheparent.
Asplit-offisawaytocreatevaluefortheparent'sshareholdersby
reducingtheparent'soutstandingshares.Reducingtheparent'sshares
outstanding,increasestheearningsandcashflowpershare,and
thereby,thevalueoftheremainingshares.
Asplit-upisaformofsplit-offwhereaparentcompanyisbrokenup
intotwoormoreindependentcompanies.
Inthesplit-up,aparentcompanyisoftenliquidatedandtheparent
company'sshareholdersbecomeshareholdersofeachofthenew
independentcompanies.