FNCE30002 Lecture 10: Corporate Restructuring

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Identify the type of corporate restricting that fits with common theories of what are assumed to be causes of mergers and acquisitions.

Corporate reconstructing is more often defined as re-designing organization’s practice and structure; so to remain competitive and sustainable in the market (s). There may be several reasons for corporate restructuring. These includes, but not limited to, re-positioning in the market, discovery of a new market or becoming more profitable and/or economical. The corporate restructuring is generally classified into or two different categories: operational reconstructing and financial reconstructing. This entails changes in the alignment of firm’s asset structure by acquiring new business outright, by partial sale, by a spin-off of companies or via product lines. This can also include downsizing through closure of non-profitable units. Financial reconstructing deals with the changes in the capital structure of the firm. Share repurchase or adding debt in capital structure; just to name. Financial limiting hardly deals with mergers and acquisitions, hence we will discuss the cause of mergers and acquisitioning and how it is related to that the operational restructuring only.

Omit the chart in the question!

There are several types of Restructuring are given below:

A merger is a combination of two or more firms who combine all operations, officers, structure and other functions of business to form a new entity. Desired effect being not just the accumulation of assets and liabilities of the distinct entities, but also to achieve several other benefits such as: economics of scale, acquisition of new technologies and having access to new markets. Additionally, the merger allows for one company giving shareholders in the other stock in exchange for surrounding the stock of the first company. And it allow for the entities to retain its original identity.

Mergers can be classified into the following categories:

Horizontal Mergers

Two merged units were doing the same business i.e. TMobile and Sprint they were competitors with one another in the market. The basic motive in this type of merger is to consolidate in the market so as to gain advantage in negotiating with customers as well as having better position with respect to other competitors.

Vertical Mergers

This type of mergers is conducted between customer and suppliers of a value chain process and main motive in this type of merger is gain maximum efficiency in supply chain and minimization of transaction cost.

Congener Mergers

In this type of mergers, the two firms will be sharing similar kind of industry structure at least in one form of their operation and therefore try to combine operation in that one form and get efficiency benefit in supply chain and other operations.

Conglomerate

A conglomerate merger is a merger between two firms having unrelated business. The motive behind a conglomerate is a.) Better utilization of financial resources b.) Increase in debt capacity, c.) Increase in the share price by increased EPS with decreased cost capital d) Cross selling and e.) Synergy

Cash-out merger

In this type of merger the share of one unit involved in merger don’t want to retain their share in the merged unit and therefore are compensated with cash in place of the share.

Acquisitions or take-over has said to have happened when the acquirer company buys out majority of the shares of the acquired company and the ownership of the assets and liabilities of the acquired company get transferred to the acquirer company. The process of acquisition or take-over may be conducted in both friendly and hostile manner depending upon the specific strategy of the acquirer.

Friendly takeover

In a friendly takeover, the target’s board and management recommend shareholders’ approval. To gain control, the acquiring company usually will offer a premium to the current stock price. The excess of the price over the target’s premerger share price is called a purchase premium and can vary widely by country, which reflects the perceived value of obtaining a controlling interest in the target, the value of expected synergies resulting from combining the two entities and any overpayment of the target firm. Acquirers often prefer friendly takeovers because the post-merger integrations process in usually more expeditious when both parties are cooperating fully and customer, employee attrition is less.

Hostile takeover

A Hostile takeover occurs when the offer is unsolicited, the approach was contested by the target’s management and control changed hands. The acquirer prefers hostile mode rove the friendly mode only when it becomes possible to acquire the shares in a friendly mode. The acquirer may attempt to circumvent management by offering to buy shares directly from the targets from the target’s shareholders and buy shares in a public stock exchange. A hostile takeover can be accomplished through either a tender offer or a proxy fight.

The Pros to a merge and an acquisition is that both types of transactions include the potential increase in the competitiveness, cost-efficiency and stock value of the new enterprise. And with everything pro there has to be Cons. One disadvantage of these transactions; it could be very expensive. A significant amount of capital typically must be raided before entering negotiations. Another mergers drawback is that there is now a new owner, co-owners, in which they must now collaborate.

In conclusion any entity or entities that have chosen to merge or entering an acquisition should consider prior to move. Identify the goals of acquisition clearly, if the move is a good fit and what conditions must be met for the pursing the merge or the acquisition. An in-depth due diligence must occur; the financial records must be thoroughly examined, is the marketplace a profitable absolute, as well as the senior executives should also be conducted. There could be potential for disaster if all areas are not explored. Negotiation process is should have clear written rules and guidelines before following through with the merger or acquisition. Assembling an acquisition team can be very valuable to the success of the new owners. The team will be able to define the responsibilities of each company; considering all parties are in agreement with the new implementations such as computer systems, new HR policies and so forth. Lastly, be flexible and ready for unexpected surprises and have a supplemental plan in case of potential disasters.

On January 1, an analyst who has been reviewing a firm called Gild Mathematics believes the company will make a big announcement before May 1. Gild Mathematics currently is priced at $22.15 and has a beta of .90. The analyst believes that the stock can advance about 15% if the market does not move. The analyst thinks the market might decline by as much as 10%, leaving the stock with a return of 6% [15% + (‐10% *.9)]. To capture the full 15% alpha, the analyst recommends the sale of a stock index futures. The June contract currently is priced at $358. Assume the investor owns 120,000 shares of the stock. Set up a transaction by determining the appropriate number of futures contracts. Then determine the effective return on the stock if, on May 1, the stock is sold at $23.85. The futures contract is at $393 and the multiplier is $550. Describe your results.

a. Is the analyst concerned about a market increase or decrease?

b. On January 1, what is the total stock position worth?

c. On May 1, what is the total stock position worth?

d. How much did the stock portfolio gain or lose in value since January 1 (must state if gain or loss and the amount)?

e. On January 1, how much is one futures contract worth? How many futures contracts are needed (round up)? Do you buy or sell the futures contracts?

f. On May 1, does the firm buy or sell the futures contracts? How much is one futures contract worth?

g. Is there is a gain or loss on the futures contract? If so, how much is the gain or loss on all the contracts combined?

h. What is the net value of the stock on May 1 (stock and futures contracts combined)? What is the effective return on the stock (in %)

2. Measuring Expected Return Assume Mess stock has a beta of 1.2. If the risk-free rate is 7 percent and the market return is 10 percent, what is the expected return of Mess stock?

Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by about 50 percent over the next few years to satisfy demand. It would need financing to expand and accom- modate the increase in production. Recall that the yield curve is currently upward sloping. Also recall that Carson is concerned about a possible slowing of the economy because of potential Fed actions to reduce inflation. It is also considering issuing stock or bonds to raise funds in the next year. If Carson goes public, it might even con- sider using its stock as a means of acquiring some target firms. It would also consider engaging in a secondary offering at a future point in time if the IPO is successful and if its growth continues over time. It would also change its compensation system so that most of its man- agers would receive about 30 percent of their compensa- tion in shares of Carson stock and the remainder as salary.

a. At the present time, the price–earnings ratio (stock price per share divided by earnings per share) of other firms in Carson’s industry is relatively low but should rise in the future. Why might this information affect the time at which Carson issues its stock?

b. Assume that Carson Company believes that issuing stock is an efficient means of circumventing the potential for high interest rates. Even if long-term interest rates have increased by the time it issues stock, Carson thinks that it would be insulated by issuing stock instead of bonds. Is this view correct?

c. Carson Company recognizes the importance of a high stock price at the time it engages in an IPO (if it goes public). But why would its stock price be important to Carson Company even after the IPO?

d. If Carson Company goes public, it may be able to motivate its managers by granting them stock as part of their compensation. Explain why the stock may moti- vate them to perform well. Then explain why the use of stock as compensation may motivate them to focus on short-term goals even though they are supposed to focus on maximizing shareholder wealth over the long run. How can a firm provide stock as motivation but prevent its managers from using a short-term focus?