1. Eddie McLaney, Business Finance, 9 th Edition, © Pearson Education Limited 2012 Slide 14.1 Chapter 14 Corporate restructuring (including takeovers and divestments)

2. Eddie McLaney, Business Finance, 9 th Edition, © Pearson Education Limited 2012 Slide 14.2 Objectives In this chapter we shall deal with the following: the nature of corporate restructuring the background to mergers the technicalities of mergers the regulation of mergers in the UK the economic success of mergers divestments and the various means of achieving them the means of financing divestments

3. Eddie McLaney, Business Finance, 9 th Edition, © Pearson Education Limited 2012 Slide 14.3 Mergers (takeovers) Merger = buying sufficient shares in another business to control it. It is an alternative to organic growth (organic growth is where the business expands through new, internally generated, projects). Mergers assessed by bidder business and target shareholders on NPV principles, logically from a shareholder wealth perspective.

4. Eddie McLaney, Business Finance, 9 th Edition, © Pearson Education Limited 2012 Slide 14.4 Mergers (takeovers) (Continued) Reasons for mergers: –Elimination or reduction of competition. –Safeguarding sources of supply or sales outlets. –Access to economies of scale. –Access to an underutilised asset. –Spreading risk through diversification. –Synergy (‘2 + 2 = 5’). The success of mergers is mixed; recent ones have tended to be less successful.

5. Eddie McLaney, Business Finance, 9 th Edition, © Pearson Education Limited 2012 Slide 14.5 Financing merger Financing method needs to be acceptable to bidder and appealing to target shareholders. –Cash – gives the recipient options; may have tax ramifications for recipient. –Shares – can be popular with target shareholders, but control of bidder is diluted; also has gearing ramifications for bidder. –Loan notes – may not be popular with investors who currently own equities; also has gearing ramifications for bidder.

6. Eddie McLaney, Business Finance, 9 th Edition, © Pearson Education Limited 2012 Slide 14.6 Table 14.1 Recent takeovers and mergers by industrial and commercial businesses within the UK

7. Eddie McLaney, Business Finance, 9 th Edition, © Pearson Education Limited 2012 Slide 14.7 Table 14.2 Takeovers and mergers by industrial and commercial businesses involving UK businesses during the five-year period 2005 to 2009

8. Eddie McLaney, Business Finance, 9 th Edition, © Pearson Education Limited 2012 Slide 14.8 Divestment Divestment = a business parting with some aspect of itself to: –concentrate on ‘core activities’; –rid itself of a troublesome investment; –raise cash. Management buy-outs (MBOs): –MBO = the sale of part of a business to a group of staff. –Often financed with quite a high level of debt – ‘leveraged’ buy-outs. Buy-in = a group of people outside the business buys part of a business. Sell-off = one established business selling part of its operations to another established business.

9. Eddie McLaney, Business Finance, 9 th Edition, © Pearson Education Limited 2012 Slide 14.9 Divestment (Continued) Spin-off: –Spin-off = taking a part of a business, placing it inside a new business and issuing shares to shareholders in the original business pro rata the number of shares owned by each. –Usually done for one of two reasons: –To give the spun-off business its own distinct corporate identity in an attempt to increase overall shareholder wealth. –To avoid a takeover of the whole of the business, by placing a particularly attractive part outside the rest of the business.

10. Eddie McLaney, Business Finance, 9 th Edition, © Pearson Education Limited 2012 Slide 14.10 Restructuring Act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Other reasons for restructuring include a change of ownership or ownership structure, demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning or buyout. Restructuring may also be described as corporate restructuring, debt restructuring and financial restructuring.

11. Eddie McLaney, Business Finance, 9 th Edition, © Pearson Education Limited 2012 Slide 14.11 Restructuring – cont The basic nature of restructuring is a zero sum game. Strategic restructuring reduces financial losses, simultaneously reducing tensions between debt and equity holders to facilitate a prompt resolution of a distressed situation. Corporate debt restructuring is the reorganization of companies’ outstanding liabilities. It is generally a mechanism used by companies which are facing difficulties in repaying their debts. In the process of restructuring, the credit obligations are spread out over longer duration with smaller payments. This allows company’s ability to meet debt obligations.