Ian H. Giddy/NYU Corporate Financial Restructuring-1
Prof. Ian GiddyNew York University
Corporate FinancialRestructuring
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 3
Corporate Financial Restructuring
Corporate restructuring –business and financial Structured financing techniquesDistress-induced restructuringMergers, divestitures and LBOs
Ian H. Giddy/NYU Corporate Financial Restructuring-2
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 4
A Simple Framework
A company is a “nexus of contracts” with shareholders, creditors, managers, employees, suppliers, etcRestructuring is the process by which these contracts are changed – to increase the value of all claims.Applications:
restructuring creditor claims (Conseco);restructuring shareholder claims (AT&T);restructuring employee claims (UAL)
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 5
Example
Conseco
Debt
EquityBondholders were offered the chance to get a more senior position in exchange for deferring repayment of their debt.
Ian H. Giddy/NYU Corporate Financial Restructuring-3
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 6
“Nexus of Contracts”
Shareholders
Senior lenders
Subordinated lenders
Franchisors
Salespeople
Management
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 7
Examples
Novartis – merged and divestedGetronics – solving the creditor-shareholder claim dilemma?Dynegy – restructuring assetsSAP – upgrading shareholder control rightsWestpac – structured finance
Ian H. Giddy/NYU Corporate Financial Restructuring-4
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 8
Case Studies
TDI – seeking the optimal financial structureSealed Air – borrowed heavily and paid a huge dividendFord – leveraged its financial assetsLoewen Group – what restructuring might avert bankruptcy?
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 9
Bookmark this or use giddy.orgTA:Toms Silins [email protected]
Ian H. Giddy/NYU Corporate Financial Restructuring-5
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 10
Blackboard – On-line Problem Sets
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 11
Average Impact of Restructuring on Company Performance
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
Portfolio Financial Organiz.
Source: Bowman et al, “When Does Restructuring Improve Economic Performance?”
Ian H. Giddy/NYU Corporate Financial Restructuring-6
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 12
Why and How
Why restructure? What is the fundamental problem to be solved?
How restructure?Create or preserve value, and negotiate how the gains are distributed
When restructure? Pre-emptive, or under duress?
Implementing restructuring
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 13
Why Restructure? Some Reasons
Address poor performanceExploit strategic opportunitiesCorrect valuation errors
Ian H. Giddy/NYU Corporate Financial Restructuring-7
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 14
How Restructure?
Fix the businessFix the financingFix the ownership/controlCreate or preserve valueNegotiate distribution of the value
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 15
How Restructure? Some Obstacles
There are market imperfections or institutional rigidities that make it difficult for the firm to recontractThese include:
Transaction costsTaxesAgency costsInformation asymmetries
Example: The restructuring of USX
Ian H. Giddy/NYU Corporate Financial Restructuring-8
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 16
Implementation
Restructuring: Any substantial change in a company’s financial structure, or ownership or control, or business portfolio.Designed to increase the value of the firm
Restructuring
Improvecapitalization
Change ownershipand control
Improvedebt composition
Novartis
Ian H. Giddy/NYU Corporate Financial Restructuring-9
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 18
Operating Restructuring
The increase in value that comes from the operating side:Better operating margins (usually economies of scale ie lower costs)orFuture increased sales/profits from higher growth
Novartis
Ian H. Giddy/NYU Corporate Financial Restructuring-10
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 20
Value-Based Management
Sales
Operating margin
Notional taxes
Net Working capital
Net Fixed Capital
Goodwill
NOPAT*
Invested Capital
Cost of Capital
EconomicProfit
Source: Ciba Specialty Chemicals*Net Operating Profit After Tax
Ian H. Giddy/NYU Corporate Financial Restructuring-11
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 22
Novartis: Financial Restructuring
FixedAssets
Debt
Equity
Assets LiabilitiesFixed the cash
and working capital
Fixed the capital
structureCash
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 23
Financial Restructuring
The increase in value that comes from a purely financial effect:Lower taxesHigher debt capacityBetter use of idle cash
Ian H. Giddy/NYU Corporate Financial Restructuring-12
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 24
Corporate Restructuring:It’s All About Value
How can corporate and financial restructuring create value?
OperatingCashFlows
Debt
Equity
Assets Liabilities
Fix the business
Or fix the financing
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 25
Restructuring Checklist
What mix of debt is best suited to this business?
Fix the kind of debt or hybrid financing
What can be done to make the equity more valuable to investors?
Fix the kind of equity
Value the changes new control would produce
Fix management or control
Revalue firm under different leverage assumptions – lowest WACC
Fix the financing – improve D/E structure
Value the merged firm with synergies
Fix the business – strategic partner or merger
Value assets to be soldFix the business mix – divestitures
Use valuation model – present value of free cash flows
Figure out what the business is worth now
Ian H. Giddy/NYU Corporate Financial Restructuring-13
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 26
Valuation is a Key to Unlock Value
Value with and without restructuringConsider means and obstaclesWho gets what?Minimum is liquidation value
Valuation
Going Concern LiquidationAfter Restructuring
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 27
Getting the Financing RightStep 1: The Proportion of Equity & Debt
Debt
Equity
Achieve lowest weighted average cost of capitalMay also affect the business side
Ian H. Giddy/NYU Corporate Financial Restructuring-14
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 28
Capital Structure: East vs West
VALUE OFTHE
FIRM
DEBTRATIO
Optimal debt ratio?
Nokia TPI
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 29
See Saw
Business Uncertainty
Financial Risk
Operating Leverage
Financial Leverage
Ian H. Giddy/NYU Corporate Financial Restructuring-15
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 30
Getting the Financing RightStep 2: The Kind of Equity & Debt
Debt
Equity
Short term? Long term?Baht? Dollar? Yen?
Short term? Long term?Baht? Dollar? Yen?
Bonds? Asset-backed?Convertibles? Hybrids?
Bonds? Asset-backed?Convertibles? Hybrids?
Debt/Equity Swaps?Private? Public?Strategic partner?Domestic? ADRs?
Debt/Equity Swaps?Private? Public?Strategic partner?Domestic? ADRs?
Ownership & control?Ownership & control?
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 31
Restructuring and Structured Finance: Examples
Restructuring debt to make it cash-flow responsiveConverting debt into equitySecuring asset-backed fundingSecuring mezzanine and subordinated debt financingSecuring equity-linked and hybrid financingRaising new equity capital
Ian H. Giddy/NYU Corporate Financial Restructuring-16
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 32
The Challenge
Solving corporate financing problems by creating securities that are responsive to investors’ and issuers’ needs, constraints and views.Example: Getronics (how did this work?)
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 33
Case Studies
Evaluate the financial restructuring taking place at:GetronicsDynegyConseco
Ian H. Giddy/NYU Corporate Financial Restructuring-17
Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 38
Contact Info
Prof. Ian H. GiddyNYU Stern School of BusinessTel 212-998-0426; Fax [email protected]://giddy.org