Corporate Restructuring Flashcards
What is Corporate restructuring according to (Thompson and Wright, 1995) ?
Corporate Restructuring involve simultaneous changes in the ownership, financial structure and incentive systems of firms
What are the three types of restructuring according to (Johnson, 1996)?
- Portfolio restructuring
- Financial restructuring
- Organisational restructuring
What is Portfolio restructuring?
Changes in the mix of assets or lines of business e.g. M&A/Takeover or divestment from a group
i.e. PepsiCo divesting Pizza Hut
What is Financial restructuring?
Financial restructuring changes the capital structure of a firm (e.g. LBO, leveraged recapitalisation)
What is Organisational restructuring? &motives
Organisational restructuring changes the organisational structure (e.g. divisional design & downsizing).
Motives:
- Align company structure with strategy
- Change the incentive structure within an organisation
Explain corporate diversification
Corporate Diversification is when a firm increases its scope either through related or unrelated diversification.
Related -
- Exploit scope economies in an expanded product range (e.g. VW, Audi, and Skoda)
- Exploit synergies between by increasing the range of assets (e.g. Disney and Pixar)
Unrelated -
- No scope economies or synergies exploited
Explain Corporate Divestment
Corporate Divestment is when a firm is refocusing or downscoping to focus on core business and cut loss-making parts.
A specific type of this refocusing is Downscoping:
- reduces product lines and/or geographic operations
- reduces corporate assets/resources under managers’ control
Explain the framework used to explain the drivers (antecedents) of corporate restructuring
via Antecedents, Process and Outcomes
Antedecents (Financial Restructuring):
- Environment
- Governance
- Strategy
- Performance
Process:
- Restructuring
Outcomes:
- Strategy
- Employee effects
- Performance
Explain how the Environment antecedent impacts on a diversification decision
1) Competition/anti-trust policy and laws: Deregulation in industries allowed diversification e.g. financial services
2) Environmental uncertainty - Lower uncertainty – managers diversify and engage in M&A because they have confidence in generating earnings
3) Financial innovations - ‘Junk bond’ market helps finance M&As
Explain how the Environment antecedent impacts on the divestment decision
1) Competition/anti-trust policy and laws: Competition authorities can break-up of large firms e.g. brewing and pub chains in the 1990s
2) Industry conditions create an ‘aspiration induced crisis’ i.e. current firm performance is below industry performance hence need to Downscope and refocus to improve performance
3) Environmental uncertainty- With Increased uncertainty there’s a need to reduce complexity of the firm and downscope to reduce costs.
4) Financial innovation- Junk bond market helps finance acquisition of divisions/subsidiaries
Explain how governance impacts refocusing decision
Stronger corporate governance is associated with refocusing.
as BOD get involved if company performance is consistently slipping hence counselling management through strategic changes. (Johnson et al., 1996)
Explain how governance antecedent impacts the diversification decision
From an Agency perspective
Good Corporate Governance will restrict managers ability to pursue a diversification strategy that destroys firm value e.g. an effective Board of Directors rejecting M&A proposals that are not in shareholders’ interests
Explain how governance antecedent impacts the diversification decision
From a Resource contingency perspective e.g. Resource Dependency BOD
- Experienced directors are more engaged with monitoring and advising because experienced and knowledgeable directors are more enabled to contribute to decision-making
- Evidence that director experience has a positive effect on post-M&A performance (Kroll et al. 2007; McDonald et al., 2008) – consistent with resource contingency theory
Explain how governance antecedent impacts divestment decision
- When a company’s performance declines, boards are more likely to get involved in divestment decisions. Hence, effective governance will steer the company’s management towards strategic changes. (Johnson et al., 1996)
- Companies with outsider-dominated boards are more positively associated with divestment thus helping company make strategic choices. (Kolev, 2016)
- Higher management equity is financially motivating for managers to divest. Governance will verify that divestment is best thing for shareholders and not just managers own personal motivations. (Johnson et al., 1996)
Explain the role of strategy in diversification and refocusing decisions
A related diversification strategy seeks to exploit synergies between resources (Markides and Williamson, 1996) to create or increase a capability that the resources are unable to achieve independently.
Refocusing strategy: Divest resources that do not produce synergies and
Divest resources that are not relevant to a firm’s core capabilities – refocus on what the firm is good at doing.
