1. Chapter 23 - Corporate Restructuring: Combinations and Divestitures
Ó 2005, Pearson Prentice Hall

2. Corporate Restructuring
1960s - Mergers of unrelated firms formed huge conglomerates.
1980s - Investors purchased conglomerates and sold off the pieces as independent companies.
1990s - Strategic mergers of related firms to create synergies.

3. Possible Benefits of Mergers
Economies of Scale
ex: reduce administrative expenses as a percentage of sales.
Tax Benefits
ex: target firm has tax credits from operating losses, and lacks the income to use the credits.
Unused Debt Potential
ex: merging with a firm that has little debt increases debt capacity.

4. Possible Benefits of Mergers
Complementarity in Financial Slack
ex: a cash-poor firm merging with a cash-rich firm will be able to accept more positive NPV projects.
Removal of Ineffective Managers
ex: ineffective target firm managers may be replaced, increasing the value of the target firm.

5. Possible Benefits of Mergers
Increased Market Power
ex: merging might increase monopoly power, but too much might be illegal.
Reduction in Bankruptcy Costs
ex: merger might improve financial condition of the combined firm, reducing direct and indirect costs of financial distress.

6. Determination of Firm Value
1) Book value: assets minus liabilities on the balance sheet. Book value is based on historical cost minus accumulated depreciation.
2) Appraisal value: firm value is estimated by an independent appraiser. This estimate is often based on the firm’s replacement cost.

7. Determination of Firm Value
3) Chop-shop or Break-up value: determines if multi-industry firms would be worth more if separated into their parts.
Firms are valued by their business segments.

8. Determination of Firm Value
4) Free Cash Flow or “Going Concern” value steps:
Estimate the target firm’s free cash flows.
Estimate the target firm’s after-tax risk-adjusted discount rate.
Calculate the present value of the target firm’s free cash flows.
Estimate the initial outflow of the acquisition.
Calculate the NPV of the acquisition.

9. Divestitures
Divestiture - Eliminating a division or subsidiary that does not fit strategically with the rest of the company.

10. Divestitures
Sell-off: selling a firm’s subsidiary or division to another company.
Spin-off: separating a subsidiary from its parent company, with no change in equity ownership.
The parent firm no longer has control over the subsidiary.

11. Divestitures
Liquidation: Selling assets to another company and distributing the proceeds from the sale to shareholders.
Going Private: A group of private investors buys all of a firm’s publicly-traded stock.
The firm is now private, and its shares are no longer traded in the secondary market.