Date post: | 30-Dec-2015 |
Category: |
Documents |
Upload: | oleg-garcia |
View: | 70 times |
Download: | 2 times |
Course Layout: M&A & Other Restructuring Activities
Part IV: Deal Structuring &
Financing
Part II: M&A Process
Part I: M&A Environment
Payment & Legal
Considerations
Public Company Valuation
Financial Modeling
Techniques
M&A Integration
Business & Acquisition
Plans
Search through Closing
Activities
Part V: Alternative Strategies
Accounting & Tax
Considerations
Business Alliances
Divestitures, Spin-Offs & Carve-Outs
Bankruptcy & Liquidation
Regulatory Considerations
Motivations for M&A
Part III: M&A Valuation & Modeling
Takeover Tactics and Defenses
Financing Strategies
Private CompanyValuation
Cross-BorderTransactions
Learning Objectives
• Primary Learning Objective: To provide students with an understanding of alternative exit and restructuring strategies.
• Secondary Learning Objectives: To provide students with an understanding of– Divestiture, spin-off, split-up, equity carve-out,
split-off, and tracking stock strategies– Criteria for choosing strategy for viable firms– Options for failing firms
Divestitures
• Sale of a portion of the firm to an outside party generally resulting in a cash infusion to the parent. Most common restructuring strategy.
• Motives:– De-conglomeration / Increasing Corporate Focus– Moving away from the core business– Assets are worth more to the buyer than to the
seller– Satisfying government requirements– Correcting past mistakes– Assets have been interfering with profitable
operation of other businesses
Deciding When to Sell: Financial Evaluation of Divestitures
1. Estimate unit’s after-tax cash flows viewed on a standalone basis, carefully considering dependencies with other operating divisions
2. Determine appropriate discount rate
3. Calculate the unit’s PV to estimate enterprise value
4. Calculate the equity value of the unit as part of the parent by deducting the market value of liabilities
5. Decide to sell or retain the division by comparing the market value of the division (step 3) minus its operating liabilities (step 4) with the after-tax proceeds from the sale of the division.
Potential Seller
Reactive Sale
Proceed to Negotiated Settlement
Pursue Alternative
Bidders
Public Sale or Auction
Private “One on One” or Controlled
Sale
Proactive Sale
Public Sale or Auction
Private “One on One” or Controlled
Sale
Sequence of events:
1. Qualified bidders sign nondisclosure / receive prospectus
2. Submission of non-binding bids expressed as range
3. Bids ranked by price, financing ability, form of payment, form of acquisition; and ease of deal
4. Best and final offers
Divestiture Selling Process
Choosing the Right Selling Process
Selling Process
One on One Negotiation (single bidder)
Public Auction (no limit on number of
bidders)
Controlled Auction (limited number of
carefully selected bidders)
Advantages/Disadvantages
Enables seller to select buyer with greatest synergy
Minimizes disruptive due diligence
Limits potential for loss of proprietary information to competitors
Most appropriate for small, private, or hard to value firms
May discourage some bidders concerned about excessive bidding by uninformed bidders
Potentially disruptive due to multiple due diligences
Sparks competition without disruptive effects of public auctions
May exclude potentially attractive bidders
Spin-Offs
• Spin-Offs: New legal subsidiary created by parent with new subsidiary shares distributed to parent shareholders on pro-rata basis (e.g., Medco by Merck in 2004)– Shareholder base in new company is same as
parent– Subsidiary becomes a publicly traded company– No cash infusion to parent– Tax-free to shareholders if properly structured
Spin-Offs
Stage 1 Stage 2
Parent Firm
Parent Firm Shareholders
Subsidiary
Parent Firm
Parent FirmShareholders
SubsidiaryIndependent
of FormerParent
Subsidiary StockPaid to ShareholdersAs Dividend
Parent Shareholders Own Both Parent & Subsidiary Stock
How might a spin-off create value for parent company shareholders?
Equity Carve-outs
• Two forms: Initial public offering (IPO) and subsidiary equity carve-out
• IPOs represent the first offering of stock to the public of all or a portion of the equity of a formerly privately held firm (e.g., UPS sells 9% of its shares in 1999) or a firm emerging from bankruptcy (e.g., GM in 2010)– The cash may be retained by the parent or returned to
shareholders• Subsidiary equity carve-out is a transaction in which the parent sells
a portion of the stock of a wholly-owned subsidiary to the public. (e.g., Phillip Morris’ 2001 sale of 15% of its Kraft subsidiary)– The cash may be invested in the subsidiary, retained by the
parent, or returned to the parent’s shareholders– Although the parent generally sells less than 20% of the sub’s
equity, the sub’s shareholder base may be different than that of the parent
How might an equity carveout create value for parent firm shareholders?
Equity Carve-Outs
Private Firm Sells A Portion of Its Equity
to the Public
Public/Private Equity Markets
Parent Firm SellsA Portion of Its
Subsidiary Stockto the Public
Public/PrivateEquity Markets
Subsidiary of Parent Firm
Initial Public Offering Subsidiary Equity Carve-Out
CashStock
Subsidiary Stock
Cash
Tracking Stocks
• Separate classes of common stock created by the parent for one or more of its operating units (e.g., USX creates Marathon Oil stock in 1991)
• Each class of stock links the shareholder’s return to the performance of the individual operating unit
• For the investor, such shares enable investment in a single operating unit (i.e., a pure play) rather than in the parent
• For the parent and the operating unit, such shares – Give the parent another means of raising capital, – Enable parent to retain control– Represent an “acquisition currency” for the unit, and – Provide an equity-based incentive plan to attract and maintain
key managers• May create conflict of interest
Tracking Stocks
Parent FirmParent Common
Sub 1 Tracking StockSub 2 Tracking StockSub 3 Tracking Stock
Subsidiary 1 Subsidiary 2 Subsidiary 3
Tracking StocksIssued by the Parent Firm
Value of the Tracking StockDepends on thePerformance of Subsidiary
Split-Offs
• A variation of a spin-off in which some parent company shareholders receive shares in a subsidiary in return for their parent shares. (e.g., AT&T spun-off its wireless operations in 2001 to its shareholders for their AT&T shares)
• Frequently used when a parent owns a less than 100% investment stake1 in a subsidiary in order to:– Reduce pressure on the spun-off firm’s share price,
because shareholders who exchange their stock are less likely to sell the new stock and
– Increase the parent’s EPS by reducing the number of its shares outstanding
– Eliminate minority shareholders in a subsidiary1Minority shareholders add to financial reporting costs and can become contentious if they disagree with parent
company policies. Parent firm efforts to sell its ownership stake may be difficult since potential buyers generally prefer to acquire 100% ownership of a business to avoid minority shareholders. Therefore, the parent firm may exit its ownership interest by transferring its stake to the parent firm’s shareholders through a split-off.
Split-Off Illustration
Stage 1 Stage 2
Parent Firm
Parent FirmShareholders
Subsidiary
Parent Firm
FormerParent Firm
Shareholders
Subsidiary Independentof Former
Parent
Subsidiary Stock
• Subsidiary stocknow held by formerparent shareholders.• Parent has no relationship with former subsidiary
ParentStock
Note: If the parent cannot exchange all of its subsidiary shares, it will spin off any remaining shares to current shareholders on a pro rata basis.
Kraft Foods Splits-Off Post Cereals in Merger-Related Transaction
Step 1: Kraft Implements Tax-Free Exchange Offer (a split-off)
Step 2: Kraft Sub Merged with Ralcorp Sub in a Tax-Free Forward Triangular Merger
Kraft FoodsKraft
Shareholders
Kraft Sub (Post)
Post Assets& Liabilities Incl. $300 in Kraft Debt1
Kraft Sub Shares + $660 Million Note Payable to Kraft over 10 Years2
Kraft Shares
Kraft Sub Shares
Ralcorp Kraft Sub (Post)
Ralcorp SubKraft Sub
Shareholders
Ralcorp Stock
RalcorpSub Stock
Ralcorp Stock3,4
Kraft Sub Assets & Liabilities
Kraft Sub Shares
1Kraft Foods retained the cash and Kraft Sub paid off the liability.2Kraft Food receives 100% of the Post shares plus the present value of the ten-year note, which it converted to cash by selling it to a banking consortium.3Ralcorp stock received by Kraft shareholders was valued at $1.6 billion at that time. Total purchase price for Post equaled $2.56 billion consisting of $1.6 billion in Ralcorp stock, $300 million in Kraft debt and a $660 million note payable to Kraft. The transaction had to satisfy Morris Trust regulations requiring the selling firm’s shareholders to become the majority shareholder in the merged firms. This normally requires the selling firm to have a larger market value than the buyer.4Cash received by Kraft was tax free (since it is viewed as an internal reorganization) as were the share exchange of Kraft Sub shares with Kraft shareholders and the subsequent exchange for Ralcorp stock.
Voluntary Liquidations or Bust-Ups
• Involves the sale of all of a firm’s individual operating units
• After paying off any remaining outstanding liabilities, after-tax proceeds are returned to the parent’s shareholders and the corporate shell is dissolved
• This option may be pursued if management views the growth prospects of the consolidated firm as limited
Choosing Appropriate Restructuring Strategy: Viable Firms
• Choice heavily influenced by the following:– Parent’s need for cash– Degree of operating unit’s synergy with parent– Potential selling price of operating entity
• Implications:– Parent firms needing cash more likely to divest or
engage in equity carve-out for operations exhibiting high selling prices relative to their synergy value
– Parent firms not needing cash more likely to spin-off units exhibiting low selling prices and synergy with parent
– Parent firms with moderate cash needs likely to engage in equity carve-out when unit’s selling price is low relative to synergy
Choosing Appropriate Restructuring Strategy: Failing Firms
• Choice heavily influenced by the following:– Going concern value of debtor firm– Sale value of debtor firm– Liquidation value of debtor firm
• Implications:– If sale value > going concern or liquidation value, sell
firm– If going concern value > sale or liquidation value,
reach out of court settlement with creditors or seek bankruptcy protection under Chapter 11
– If liquidation value > sale or going concern value, reach out of court settlement with creditors and liquidate or liquidate under Chapter 7
Discussion Questions
1. Divestitures, equity carve-outs, and spin-offs represent alternative restructuring strategies? Explain the primary advantages and disadvantages of each.
2. Under what circumstances might senior management prefer to divest a business unit rather than to spin-off the business?
3. Under what circumstances might senior management prefer an equity carve-out to a spin-off?
Things to Remember…
• Divestitures, spin-offs, equity carve-outs, split-ups, split-offs, and tracking stock are common restructuring strategies to enhance shareholder value
• Divestitures and equity carve-outs are more likely for operating units whose selling price is much higher than its perceived synergy with parent and whose parents need cash
• Spin-offs are more likely for operating units whose selling price and synergy are low and whose parent firm does not need cash