Ch. 23-Corporate Restructuring. Combinations and Divestitures o 2002. Prentice Hall. nc
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
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 income to use the credit ts the operating losses, and lacks Unused debt potential ex: merging with a firm that has little debt increases debt capacity
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 • 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, f reducing direct and indirect costs financial distress
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 firms replacement coSt
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 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 firms free cash flows Estimate the target firms 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
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 riskadjusted 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 Divestiture - Eliminating a division or subsidiary that does not fit strategically with the rest of the company
Divestitures Sell-off: selling a firms 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 • 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