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Mergers and Other Forms of Corporate Restructuring

Mergers and Other Forms of Corporate Restructuring
 Sources

of Value  Strategic Acquisitions Involving Common Stock  Acquisitions and Capital Budgeting  Closing the Deal

Mergers and Other Forms of Corporate Restructuring
 Takeovers,

Tender Offers, and

Defenses  Strategic Alliances  Divestiture  Leveraged Buyouts

What is Corporate Restructuring?
Any change in a company’s: 1. Capital structure, 2. Operations, or 3. Ownership that is outside its ordinary course of business.

So where is the value coming from (why restructure)?

Why Engage in Corporate Restructuring?
      

Sales enhancement and operating economies* Improved management Information effect Wealth transfers Tax reasons Leverage gains Management’s personal agenda * Will be discussed in more detail in the following two slides.

Sales Enhancement and Operating Economies






Sales enhancement can occur because of market share gain, technological advancements to the product table, and filling a gap in the product line. Operating economies can be achieved because of the elimination of duplicate facilities or operations and personnel. Synergy -- Economies realized in a merger where the performance of the combined firm exceeds that of its previously separate parts.

Sales Enhancement and Operating Economies
Economies of Scale -- The benefits of size in which the average unit cost falls as volume increases.    

Horizontal merger: best chance for economies Vertical merger: may lead to economies Conglomerate merger: few operating economies Divestiture: reverse synergy may occur

Strategic Acquisitions Involving Common Stock
Strategic Acquisition -- Occurs when one company acquires another as part of its overall business strategy. 



When the acquisition is done for common stock, a “ratio of exchange,” which denotes the relative weighting of the two companies with regard to certain key variables, results. A financial acquisition occurs when a buyout firm is motivated to purchase the company (usually to sell assets, cut costs, and manage the remainder more efficiently), but keeps it as a stand-alone entity.

Strategic Acquisitions Involving Common Stock
Example -- Company A will acquire Company B with shares of common stock. Present earnings Shares outstanding Earnings per share Price per share Price / earnings ratio Company A $20,000,000 5,000,000 $4.00 $64.00 16 Company B $5,000,000 2,000,000 $2.50 $30.00 12

Strategic Acquisitions Involving Common Stock
Example -- Company B has agreed on an offer of $35 in common stock of Company A. Total earnings Surviving Company A $25,000,000 6,093,750 $4.10

Shares outstanding* Earnings per share

Exchange ratio = $35 / $64 = .546875 * New shares from exchange = .546875 x 2,000,000 = 1,093,750

Strategic Acquisitions Involving Common Stock


The shareholders of Company A will experience an increase in earnings per share because of the acquisition [$4.10 post-merger EPS versus $4.00 pre-merger EPS]. The shareholders of Company B will experience a decrease in earnings per share because of the acquisition [.546875 x $4.10 = $2.24 post-merger EPS versus $2.50 premerger EPS].



Strategic Acquisitions Involving Common Stock
Example -- Company B has agreed on an offer of $45 in common stock of Company A. Total earnings Surviving Company A $25,000,000 6,406,250 $3.90

Shares outstanding* Earnings per share

Exchange ratio = $45 / $64 = .703125 * New shares from exchange = .703125 x 2,000,000 = 1,406,250

Strategic Acquisitions Involving Common Stock




The shareholders of Company A will experience a decrease in earnings per share because of the acquisition [$3.90 postmerger EPS versus $4.00 pre-merger EPS]. The shareholders of Company B will experience an increase in earnings per share because of the acquisition [.703125 x $4.10 = $2.88 post-merger EPS versus $2.50...
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