1. The Restructuring Environment Motives and Methods

2. Methods and Motives: Stewart and Glassman n Main Motives for Restructuring – Strengthen incentives – Better business fit – Sharpen management focus – Create pure plays with unique investment appeal – Roll back unproductive investments – Stop subsidizing un-profitable divisions – Higher value use of assets – Increased debt capacity – Reduced taxes

3. Categories of Restructuring n Asset restructuring: Change ownership status of assets n Business unit restructuring: acquisitions, joint ventures, carve-outs, spin-offs n Corporate Restructuring: change in ownership structure of a parent such as new security offers, share repurchases, leveraged ESOP, leveraged cash outs, sale or liquidation

4. Importance of Debt n Debt is cheaper than equity n Concentration of equity ownership reduces agency costs (How?) n Debt adds discipline (How and Why?)

5. Reasons for Aggressive Debt Use n Cash disgorgement: (i.e., discipline) – SOHIO: Why high ROE and MV/BV but not P/E? – Ross Johnson of RJR Nabisco: will people spend money carelessly? – Agency problems n To what degree is the market more "astute than the corporate manager? – To what degree do we rely on internal or external control? (see pg. 588) – Does technical sophistication lead to business sophistication?

6. Methods: Returning Control of Cash to the Market n Repurchase shares – Exxon and overcapacity n Leveraged Recapitalization – Does the corporation get better terms if it restructures on its own? (i.e., Compare Gulf to Exxon) n Partnerships – Mesa Petroleum: replaced R&D with interest payments

7. Returning Control of Cash to the Market n Leveraged Acquisitions – SOCAL "white knight" takeover of Gulf n Payout dividends – Is this a good idea? n Carve-outs – A partial public offering – Easier to value an "unbundled" set of units

8. Restructuring to Align Incentives with Shareholder Interests n See Stewart table on page 593 n What happens as we move from left to right? n How do incentives change with the form of compensation? n What is the allocation of risk and return?

9. The Leveraged Cash Out n Nature of the Transaction – All existing shares replaced with cash and new shares (not a buyout): cash raised with debt – Shareholders compensated for existing value – Employees and management given new incentive package: residual compensation structure ("thrift plan" for employees, ownsership paln for management n Impact on Agency Costs n Impact on Wealth and Risk allocation

10. External and Voluntary Restructuring n External: restructuring imposed on management by outside pressure from equity investors n Voluntary: restructuring initiated internally in respose to the need to do so.

11. Role of the "Social Environment" in the 1950's - 1970's Mature markets: growth slows to industry average Tax policies favor retention and reinvestment Internal capital market response: Diversify Concentrated capital

12. Lack of External Capital Market Opposition in the 1950's - 70's Passive investors Founder interest Flawed analysis Inertia

13. How does the case of Armco Steel Illustrate Inertia? Was Armco going around in circles?

14. Imperatives for Change: Voluntary Restructuring n Four Pre-conditions (necessary but not sufficient – Evidence of flawed strategy or structure – Shift in power balance to favor disadvantaged constituencies – Availability of alternative options – Leadership

15. Importance of Leadership n Restructuring requires a champion: one person usually leads the charge – Importance of concentration and focus n Why did so many internal restructuring efforts fail in the 80's? – Emphasis on TQM: participation – Japanese management: consensus – Competing constituencies

16. Burlington Northern Case n What does the Burlington Northern case teach about the importance of leadership?

17. Trigger Events: Sufficiency n Common Trigger Events: – Sudden and visible deterioration (Armco) – Change in CEO (Burlington Northern) – Internal intervention by strong personality (Household International, Burlington Northern)

18. Safeway: Internal and External Restructuring n What is the story of Safeway? n What is the "trigger event," and what is its critical role?

19. Redistributive Effects of Restructuring: Initial Inquiry n What have the redistributive effects of restructuring been to date? – Impact on investors l Broad perspective: "The market" l Narrow perspective: Institutions and Individuals – Impact on employees – Impact on Management n What role have "agency costs" played?