Cororate Restructuring Flashcards
What are the 4 life cycles companies pass through?
- start-up
- growth
- maturity
- decline
In the start up life cycle what does revenue growth, free cash flow, business risk, and debt in capital structure look like?
Revenue growth: beginning
Free cash flow: negative
Business risk: high
Debt in capital structure: close to 0%
In the growth phase life cycle what does revenue growth, free cash flow, business risk, and debt in capital structure look like?
Revenue growth: rising
Free cash flow: improving
Business risk: medium
Debt in capital structure: 0%-20%
In the mature phase life cycle what does revenue growth, free cash flow, business risk, and debt in capital structure look like?
Revenue growth: slowing
Free cash flow: peak
Business risk: low
Debt in capital structure: 20%+
In the decline phase life cycle what does revenue growth, free cash flow, business risk, and debt in capital structure look like?
Revenue growth: declining
Free cash flow: declining
Business risk: medium-high
Debt in capital structure: 20%+
What are 3 scenarios/broad categories typically chosen by management to implement changes and improve their company’s growth prospects?
- Investments: increase the size and/or scope of a company’s operations.
- Divestments: The objective of divestment actions is to improve a company’s overall financial performance by getting rid of operations that are less profitable, riskier, and/or have lower growth potential.
- Restructurings: Changes in this category do not affect the size and/or scope of a company’s operations. However, they do impact its cost and/or financial structure.
What is synergies?
- the combined effort of two or more entities (like companies, departments, or individuals) working together to achieve a greater outcome than they could individually.
What are 3 motivations of divestment(decrease) actions?
- Improve valuation metrics
- improve operational focus
- meet liquidity needs
What are 2 motivations of restructuring(improve) actions?
- Improve ROC (return on capital) metrics
- Avoid or respond to financial challenges
What are 3 reasons Investments, divestments, and restructurings are all more likely to occur during economic expansions?
- CEOs are more confident that these changes will be successful
- Financing costs are lower during periods of strong economic growth
- Desire to take advantage of inflated stock prices for equity-financed acquisitions
What’s the difference between cost synergy and revenue synergy?
- cost synergies: potential cost savings achieved by combining two companies, by eliminating redundancies
- revenue synergies: potential increase in revenue generated by the combined entity, by accessing new markets or etc.
What are 3 types of investment actions, describe them.
- Equity investments: 25-49% ownership in company, maybe eventual acquisition
- Joint ventures: Joint ventures are created when two or more companies establish a new, separate entity to pursue common objectives
- Acquisitions: like equity investments, but the acquirer purchases the majority (or all) of the target company’s shares in exchange for cash and/or stock.
What is conglomerate discount?
- conglomerate discount refers to the tendency of markets to value a diversified group of businesses and assets at less than the sum of its parts.
What are 2 types of divestments actions?
- sales: seller transfers a segment or business line to an acquirer
- spin-offs: turn one of a company’s segments into a separate, independently-operating entity (aka separate company from its parent company)
What are 3 types of restructuring actions?
- Cost restructuring: company’s plan to reduce costs and improve profitability
- Balance sheet: changing a company’s asset composition and/or capital structure.
- Reorganization: court-supervised restructuring of an insolvent company
What are 2 types of cost restructuring?
- outsourcing: use of third parties to perform internal business functions, such as IT, legal, and finance.
- offshoring: relocating certain operations to another country while still maintaining them within the company
What are the 2 main balance sheet restructuring methods?
- sale leaseback: transaction where an asset owner sells it and then leases it back from the buyer
- dividend recapitalization: when a company raises debt fund the dividend.
What is leveraged buyout?
- when a company is acquired using a large amount of borrowed money with the objective of operating them more efficiently under private ownership
What are the three steps involved in evaluating corporate investments, divestments, and restructurings?
- Initial Evaluation: what is happening and why?
- Primary Valuation: Comparable company analysis/transaction analysis, premium paid analysis.
- Modeling & Valuation: financial statements and discounted cash flows.
What is materiality?
- what information is significant to investors
What are the three questions important to materiality in the initial valuation step?
- size (size of action, scale of restructuring, etc.)
- fit (reason for business strategy, eg. mature stage company may acquire a small, private company in an unrelated sector in pursuit of growth opportunities)
- share price (change in share price after an announcement, little empirical evidence suggesting short term price movements and a company’s ability to generate excess returns)
What are 3 preliminary valuation methods?
- Comparable company analysis
- Comparable transaction analysis
- Premium paid analysis
What’s the difference between comparable company analysis and comparable transaction analysis?
- comparable company analysis: value of a comparable company usually in same industry and similar capital structure, revenue growth, & etc
- comparable transactions analysis: value of a comparable M&A transaction that actually occurred.
What is control premium/ take over premium and formula?
-premium to entice current shareholders to give up their shares (usually fall in range of 20-40%)
Take over premium = deal price - stock price/ stock price
