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Types of Restructuring

CFA® Exam, CFA® Exam Level 2, Corporate Finance

This lesson is part 9 of 9 in the course Mergers & Acquisitions

Strategic decisions made by corporations are not limited to expansion; sometimes the decision to downsize can benefit the company’s valuation. In this article, we will discuss the various forms of restructuring.

Divesture

This action is the sale of a business unit to an outside company (note that divestures are sometimes forced upon companies under antitrust law).  Below are some reasons for divestures:

  • Sometimes a firm may divest a business unit to raise cash.
  • Sometimes a subsidiary no longer falls within the firm’s strategic plans.
  • Sometimes a reverse synergy is created when business units are worth more separately than combined under the firm.
  • Sometimes a firm simply cannot earn an appropriate rate of return on a business unit and will sell to a buyer with better capabilities in that specific area.

Spin-offs

In this restructuring instance, a company will establish a new legal entity from one of its business units.  Spin-offs can also be forced by law.

  • Shareholders at the time of the spin-off will get a proportional amount of shares in the spun-off entity.
  • While a divesture infuses cash into the company, a spin-off does not.
  • A spin-off may be undertaken to allow company management to focus on “core” operations.

Equity Carve Out

The company sells a business unit in the form of public offering.

  • A carve out may be done to reduce exposure to a high risk business unit.
  • Carve outs create cash for the company; spin offs do not.
  • Carve outs are more expensive than spin offs because of the transactions costs associated with a new public offering.
  • While shareholders of the parent may buy shares in a carve out, a new shareholder base is created.  In a spin off, initially the existing shareholder base is intact.

Split-off

Hybrid of the spin off and carve out, where the parent will give shareholders an equity stake in the isolated business unit, but in return the company receives back some of its outstanding shares.  A split-off does not provide a cash infusion, but does reduce the parent’s shares outstanding.

Liquidation

This involves the selling of the business in pieces and is commonly associated with bankruptcy proceedings.

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In this Course

  • Overview of Mergers & Acquisitions
  • M&A: Earnings Per Share & The “Bootsrap” Effect
  • Industry Lifecycle Phase and M&A
  • Pre-Offer Defense Takeover Mechanisms
  • Post-Offer Defense Takeover Mechanisms
  • Herfindahl-Hirschman Index (HHI)
  • Valuing Target Companies
  • Merger Gains to Shareholders & Post Merger Valuation
  • Types of Restructuring

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