Chapter 23 -  Corporate Restructuring: Combinations and Divestitures    2005, Pearson Prentice Hall
Corporate Restructuring <ul><li>1960s  -  Mergers of unrelated firms formed huge conglomerates. </li></ul><ul><li>1980s  -...
Possible Benefits of Mergers <ul><li>Economies of Scale </li></ul><ul><li>ex: reduce administrative expenses as a percenta...
Possible Benefits of Mergers <ul><li>Complementarity in Financial Slack </li></ul><ul><li>ex: a cash-poor firm merging wit...
Possible Benefits of Mergers <ul><li>Increased Market Power </li></ul><ul><li>ex: merging might increase monopoly power, b...
Determination of Firm Value <ul><li>1)  Book value :   assets minus liabilities on the balance sheet. Book value is based ...
Determination of Firm Value <ul><li>3)  Chop-shop or Break-up value :   determines if multi-industry firms would be worth ...
Determination of Firm Value <ul><li>4)  Free Cash Flow or “Going Concern” value   steps: </li></ul><ul><li>Estimate the ta...
Divestitures <ul><li>Divestiture   - Eliminating a division or subsidiary that does not fit strategically with the rest of...
Divestitures <ul><li>Sell-off : selling a firm’s subsidiary or division to another company. </li></ul><ul><li>Spin-off :  ...
Divestitures <ul><li>Liquidation :  Selling assets to another company and distributing the proceeds from the sale to share...
Upcoming SlideShare
Loading in …5
×

Fm10e ch23

294 views

Published on

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
294
On SlideShare
0
From Embeds
0
Number of Embeds
9
Actions
Shares
0
Downloads
14
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Fm10e ch23

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

×