Ch,23 - Corporate Restructuring,
Combinations and Divestitures
? 2002,Prentice Hall,Inc,
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,
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,
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,
Possible Benefits of Mergers
? Increased Market Power
ex,merging may increase
monopoly power,but too much
may be illegal,
? Reduction in Bankruptcy Costs
ex,merger may improve financial
condition of the combined firm,
reducing direct and indirect costs
of financial distress,
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,
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,
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,
Divestitures
Divestiture - Eliminating a division
or subsidiary that does not fit
strategically with the rest of the
company,
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,
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,
Combinations and Divestitures
? 2002,Prentice Hall,Inc,
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,
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,
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,
Possible Benefits of Mergers
? Increased Market Power
ex,merging may increase
monopoly power,but too much
may be illegal,
? Reduction in Bankruptcy Costs
ex,merger may improve financial
condition of the combined firm,
reducing direct and indirect costs
of financial distress,
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,
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,
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,
Divestitures
Divestiture - Eliminating a division
or subsidiary that does not fit
strategically with the rest of the
company,
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,
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,
