Capital Restructuring

Classification of Restructing:

• Investment
  • Increase the size or scope of a company, thereby increasing the revenue and perhaps revenue growth
• Divestment
  • Reduce the size or scope of a company
• Restructuring
  • Improve the cost and financing structure to increase growth, improve profitability, or reeduce risks without altering the size of company

Motivation

• Investment action motivations

  • Realize synergies
    • Cost synergies
    • Revenue synergies
  • Increase growth
  • Improve capabilities or secure resources
  • Acquire undervalued targets

• Divest

  • Focus operations and business lines
  • Valuation
    • Conglomerate discount (Focus on less markets or product portfolio)
  • Liquidity needs
  • Regulatory requirements

• Restructuring

  • Improve returns on capital
    • Opportunistic improvement
    • Forced improvement
  • Finanial challenge, including bankruptcy and liquidation

Motivations: Top-down

• High Asset price
  • Greater management confidence
  • Lower cost of financing
• Overvalued stock prices
• Industry shocks
• Regulatory changes, tech changes

Types of corporate restructuring

	Investment (increase size)	Divestment (decrease size)	Restructuring (improve)
Types	Equity investment	Sale	Costs
	Joint venture		Balance sheet
	Acquisition	Spin off	Reorganization Alter the business model
Special case		Leveraged buyout (LBO)

Investment

• Equity investment
• Joint venture
• Acquisition

Divest

• Sales/ Divestiture
  • Reallocation of capital
  • The seller and acquirer focus on strength
• Spin off: A company separates a distinct part of its business into a new, independent company
  • Remove imcompatibilites, and increase management and employee focus
  • Separating distinct businesses
  • Awarding employees with stock-based compensation

Restructuring (Forced)

• Cost restructuring: Reduce costs by improving operational efficiency and profitability
  • Outsourcing and offshoring
• Balance sheet restructuring: Shift the asset composition, change the capital structure, or both
  • Sale leaseback: Unlock the value in assets which are non-core business and improve a company's balance sheet by retiring debt and improving its credit rating.
  • Dividend recapitalization
• Reorganization: A court-supervised restructuring process

Restructing (Opportunitistic)

• Alter the business model
  • Franchaising: An owner can divest its asset and license the intellectual property to a thrid party operator.
• Cost restructuring
• Balance sheet restructuring

Leveraged Buyout

An acquirer uses a significant amount of debt to finance the acquisition of a target and then persues restructuring actions, with the goal of exiting the target with a sale or public listing. It can be a combination of all methods above.

General Steps of Restructuring

• Initial Evaluation
• Preliminary Valuation
• Modelling and Valuation

Initial Valuation

• What aand Why
• Is it material: It is material if the total transaction value of an acquisition exceeds $10\mathrm{\%}$ of the acuqirer's enterprise value
• When

Preliminary Valuation

Use relative valuation

• Comparatble company analysis

  • Take average of comparable ratios, use ratio to valuate.
  • Decide acquisition premium

• Comparatble transaction analysis

  • Take similar transactions to some financial factors (ratios), use ratio to evaluate
  • Decide acquisition premium

• Premium paid analysis

  • Takeover premium
    • The amount by which the per-share takeover price exceeds the unaffected price expressed as a percentage of the unaffected price. $PRM=\frac{DP-SP}{SP}$, where $SP$ is unaffected stock price per share.

Modelling and Valuation

It refers to change in financial statements in restructuring process.

	Pre-acquisition		Post-acquisition
	Gordon ($Mil)	David ($Mil)	Adjustment ($Mil)	Consolidated ($Mil)
Revenue	22,000	5,200	800 (Synergy)	28,000
Expense Excluding D&A	20,000	5,100	100 (Synergy)	25,000
EBITDA	2,000	100	900 (Total synergy)	3,000
Depr & Amort	600	200	200 (FV amort)	1,000
Interest Expense	240	0	60 (New interest)	300
Income Tax Expense	/	/	/	340
Net Income	/	/	/	1,360

Item	David Ltd Pre-Selling	Adjustment	David Ltd Post-Selling
Revenue	10,000	-4,000 (Sell Pro. Seg)	6,000
Total Seg. Expense Excl. D&A	6,500	-3,500 (Sell Pro. Seg)	3,000
Corporate Level Cost	2,000	-1,500 (Sell Pro. Seg)	500
EBITDA	1,500	/	2,500
Total Depr & Amort	1,000	-600 (Sell Pro. Seg)	400
Interest Expense	100	/	100
Income Tax Expense	80	/	400
Net Income	320	/	1,600
Shares Outstanding	5,200	2,000 (Repurchase)	3,200

Item	Pre-restructuring	Adjustment	Post-restructuring
Revenue	20,000	1,000 (Sales growth)	21,000
Total Operating Expense	17,200	545 (Restructuring)	17,745
One-Time Restructuring Cost	0	1,250 (Restructuring)	1,250
EBIT	2,800		2,005