Now that we have finished our chapter for high-yield financing and the leveraged loan market, we can move on to corporate restructuring. Mergers and acquisitions are focused on corporate expansions almost all of the time. However, there are times when companies have to condense. And cut back their operations. It happens to a lot of businesses, even the best ones.
Usually, this happens because a branch or a part of the company is performing insufficiently. There are also instances when a specific division no longer qualifies for the company’s future plans.
Moreover, corporate restructuring can also be done to undo a previous unsuccessful merger or acquisition. It’s a way to get a not necessarily new, but better company structure.
It is true that financial adversity from a consolidation of high advantage and weak economic appeal often leads to a lot of sell-offs. However, there are also times when overall deal volume increases lead to a high volume of sell-offs.
You may also notice that the number of sell-off deals follows the spike and crash of the economy. This is very similar to how mergers and acquisitions follow the overall pattern of economic fluctuations. This happens in different countries in Asia, Europe, and more, not just in the United States.
What Will You Learn?
We will learn multiple classification of corporate restructuring. We will also look at the development of decision-making techniques and strategies that leads to the divestiture decision.
Companies also utilize the system used to evaluate acquisition targets. This is to find out whether it is still worth retaining a particular component of the firm. Typically, the divesting and the acquiring firms undergo an identical type of evaluation. This is as they look at the transactions from opposite sides.
Yes, the methods are similar. However, both parties may come up with a dissimilar valuation. This is because they use different inferences. Additionally, both parties may have contrasting needs.
We will also learn the shareholder wealth results of multiple types of corporate restructuring.
When the dismantled component deteriorates, and fails to generate a value to the enterprise that is proportionate with its market value, then corporate contraction may have positive stock price effects.
In cases like these, the corporation can pursue an administration of corporate restructuring. This is to build up the significance of shareholder investments.
Different Forms of Corporate Restructuring
As such, it is important to know that there are several different forms of corporate restructuring. There’s divestitures, which we will discuss in the next article, and equity carve-outs. There’s also spinoffs, split-offs, exchange offers, and split-ups.
Divestiture
This refers to the selling of a fraction of the firm to a foreign party. Usually, they pay the selling firm in cash or in marketable securities. There are also times when thy pay the selling firm in a combination of the two.
Equity carve-outs
Under divestiture is a variation called equity carve-out. It involves the selling of investment interest in an ancillary to outsiders. Now, this sale could or could not leave the parent company in control of the ancillary. In return, the new equity rewards the investors’ stake of ownership in a fraction of the dismantled selling corporation.
Here, a new legal body is born with a stockholder base. The stockholder base could be dissimilar to the parent company. A different management handles the divested company. It is regarded as an isolated firm.
Standard spin-offs
In this, they establish a new legal body. Similarly, they also circulate new shares. The only difference is that here, the shares are dispersed to stockholders on a pro rata principle.
In standard spin-offs, the investor base in the new organization is the equivalent of the old organization. This is an outcome of the corresponding distribution of shares.
Initially, the stockholders are the same. However, the spun-off firm will have its own management. It is regarded as a separate company.
One more key contrast between a spinoff and a divestiture is that the last includes a mixture of assets to the forerunner company. On the other hand, spinoffs usually do not provide the parent company a cash infusion.
Exchange Offer
Next, we have exchange offers or split-offs. This is where they issue new stakes in a subsidiary. The stakeholders in the forerunner company are also given the choice to either:
- Keep their shares
- Swap these stakes for an equity interest in the new subsidiary held by the public.
It will be noticed that this sort of exchange is a little bit similar to a spinoff. This is because new shares are issued that depicts an equity gain in a subsidiary. These shares are also removed from the forerunner company.
The difference between a split off and spinoff is that in split-offs, parent company shareholders have to part with their shares so they can get the newly issued shares.
Let’s take Pfizer, for instance. In 2013, this global company offered its shareholders an opportunity to exchange their shares for the shares of its spun-off animal health subsidiary, Zoetis.
The organization offered its investors $107.52 worth of Zoetis shares for each $100 worth of Pfizer shares. This $7.52 increase in Zoetis shares allows the shareholders to get an incentive to exchange.
It is inevitable for the parent company to lose the contribution to the profits of the separated entity. This means that the total stakes of outstanding of the forerunner company are also decreased. This may or may not offset the losses of profits in earnings per share.
Split-ups
Lastly, we have split-ups. This is where the entire firm is broken down into a string of spinoffs. As a result of this process, the parent company will cease to exist. This leaves only the newly formed companies.
In this sort of corporate restructuring, the investors of the organizations might be dissimilar. This is because stockholders exchanged their parts in the parent organization. They traded it for at least one of the units that spun off.
There are instances where corporations do a combination of more than one corporate restructuring strategies.
© Image credits to Miguel Á. Padriñán