Corporate Restructuring, Where
Are We Going?
Focus:
Restructuring through mergers,
acquisitions, takeovers, selloffs, spinoffs,
highly-leveraged transactions, or
investor activism
Theoretical basis:
Value Additivity Principle (VAP)
•  Mergers, acquisitions, or takeovers
V(A+B) > V(A) + V(B)
•  Selloffs or spinoffs
V(A+B) < V(A) + V(B)
Why the whole might be worth more
than the sum of the parts:
•  Operating synergy
•  Strategic considerations: RCA/NBC
example
•  Some questionable reasons for expansion
Operating synergy
•  Common product (economies of scale)
•  Common market (economies of
distribution)
•  Common technology
•  Less staff overhead
Strategic considerations:
RCA/NBC example
•  Project: Color Television
Time: Early 50s
•  Problems:
–  Without broadcasters, no demand for sets
–  Without installed sets, no incentive for
broadcasters
•  Solution: Merger of RCA and NBC
Some questionable reasons for
expansion
•  Pure diversification
•  Financial synergy
•  Target firm “undervalued”
–  Does market know something you don’t?
Why the parts may be worth
more than the whole—anergy:
•  Improved efficiency from smaller scale
•  Improved management
–  Eliminate unnecessary bureaucracy
–  Gain better focus
–  Gain greater flexibility and responsiveness to
environment
•  Completing the market
Major “merger waves” in the
United States
•
•
•
•
The first wave: 1880-1904
The second wave: 1919-1929
The conglomerate wave: 1950-1969
The deconglomeration wave: 1975-1989
–  The raiders
–  Tobin's q
–  Concern that the wave is evidence of capital market
inefficiency
•  The current wave: 1990-present
Financial market factors in today's
marketplace
•  Increased participation by institutional investors
–  Merger arbitrage specialists (“arbs”)
–  Restructuring specialists
Sleeping Giant Grows
Percent of all U.S. outstanding common stock held by institutional
investors
Concentration of Ownership
Financial market factors in today's
marketplace
•  Increased participation by institutional investors
–  Merger arbitrage specialists (“arbs”)
–  Restructuring specialists
•  Greater accessibility of capital
–  Venture capital for new companies
–  Increased IPO activity
–  R&D limited partnerships and marketing partnerships
–  Equity alliances
Technological factors that propel
restructuring
•  Changing scale economies
•  Changing communications capabilities
•  Changing information processing
capabilities
•  Changing transportation costs and patterns
•  Globalization
Voluntary restructuring
•  Sell-offs tend to increase shareholder wealth
–  Sales of whole divisions to other companies
–  Sales of assets to partnerships or trusts
•  Spin-offs tend to increase shareholder wealth even more
–  Spinning off a new corporation
–  Spinning off partnerships or trusts
•  LBOs and ESOPs
•  Joint venturing
•  Strategic alliances
Methods for gaining control over
a firm’s policies or assets:
•  Cooperative
–  Merger
–  Friendly acquisition
–  Relationship investing
•  “Tough love”
–  Investor activism
–  Independent directors
•  Uncooperative
–  Proxy fight
–  Unfriendly takeover
Methods for resisting attempts to
transfer control:
•  After the fact
–  Litigation
–  White knight
•  Before the fact
–  Shark repellant, scorched earth, or “Pac-Man”
–  Poison pills
–  Altered ownership structure
–  Altered board of directors composition
–  Legislation
Where are we going?
•  Merchant banking associations
Merchant banking associations
Specialist
Business Business
Unit 1
Unit 2
Investors
Asset
Pool 1
Asset
Pool 2
Where are we going?
•  Merchant banking associations
•  Network organizations
– natural successors to more rigid
organizational forms
Network Organizations: M-Form
Designer
1
Fabricator
1
Marketer
1
Servicer
1
Designer
2
Fabricator
2
Marketer
2
Servicer
2
Designer
3
Fabricator
3
Marketer
3
Servicer
3
Designer
4
Fabricator
4
Marketer
4
Servicer
4
Where are we going?
•  Merchant banking associations
•  Network organizations
–  natural successors to more rigid organizational forms
•  Employee ownership (as of Feb 2009)
–  19,400 programs today in U.S.A.
–  43.7million participants today in U.S.A.
–  About $1.5 trillion in plan assets today in U.S.A.
–  Growing fast
–  http://www.nceo.org
Where are we going?
•  Merchant banking associations
•  Network organizations
–  natural successors to more rigid organizational
forms
•  Employee ownership
•  Ray Miles’ ideas about guilds