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Fm10e ch23




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    Fm10e ch23 Fm10e ch23 Presentation Transcript

    • Chapter 23 - Corporate Restructuring: Combinations and Divestitures  2005, Pearson Prentice Hall
    • Corporate Restructuring
      • 1960s - Mergers of unrelated firms formed huge conglomerates.
      • 1980s - Investors purchased conglomerates and sold off the pieces as independent companies.
      • 1990s - Strategic mergers of related firms to create synergies.
    • Possible Benefits of Mergers
      • Economies of Scale
      • ex: reduce administrative expenses as a percentage of sales.
      • Tax Benefits
      • ex: target firm has tax credits from operating losses, and lacks the income to use the credits.
      • Unused Debt Potential
      • ex: merging with a firm that has little debt increases debt capacity.
    • Possible Benefits of Mergers
      • Complementarity in Financial Slack
      • ex: a cash-poor firm merging with a cash-rich firm will be able to accept more positive NPV projects.
      • Removal of Ineffective Managers
      • ex: ineffective target firm managers may be replaced, increasing the value of the target firm.
    • Possible Benefits of Mergers
      • Increased Market Power
      • ex: merging might increase monopoly power, but too much might be illegal.
      • Reduction in Bankruptcy Costs
      • ex: merger might improve financial condition of the combined firm, reducing direct and indirect costs of financial distress.
    • Determination of Firm Value
      • 1) Book value : assets minus liabilities on the balance sheet. Book value is based on historical cost minus accumulated depreciation.
      • 2) Appraisal value : firm value is estimated by an independent appraiser. This estimate is often based on the firm’s replacement cost.
    • Determination of Firm Value
      • 3) Chop-shop or Break-up value : determines if multi-industry firms would be worth more if separated into their parts.
      • Firms are valued by their business segments.
    • Determination of Firm Value
      • 4) Free Cash Flow or “Going Concern” value steps:
      • Estimate the target firm’s free cash flows.
      • Estimate the target firm’s after-tax risk-adjusted discount rate.
      • Calculate the present value of the target firm’s free cash flows.
      • Estimate the initial outflow of the acquisition.
      • Calculate the NPV of the acquisition.
    • Divestitures
      • Divestiture - Eliminating a division or subsidiary that does not fit strategically with the rest of the company.
    • Divestitures
      • Sell-off : selling a firm’s subsidiary or division to another company.
      • Spin-off : separating a subsidiary from its parent company, with no change in equity ownership.
      • The parent firm no longer has control over the subsidiary.
    • Divestitures
      • Liquidation : Selling assets to another company and distributing the proceeds from the sale to shareholders.
      • Going Private : A group of private investors buys all of a firm’s publicly-traded stock.
      • The firm is now private, and its shares are no longer traded in the secondary market.