Corporate Restructuring, Where
Are We Going?
Focus:
Restructuring through mergers,
acquisitions, takeovers, selloffs, spinoffs,
hi hl l
highly-leveraged
d transactions,
i
or
investor activism
Theoretical basis:
Value Additivity Principle (VAP)
• Mergers,
Mergers acquisitions,
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 g
greater flexibilityy and responsiveness
p
to
environment
• Completing the market
Major “merger waves” in the
United States
•
•
•
•
The first wave: 1880
1880-1904
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
60
50
40
30
20
10
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
0
Concentration of Ownership
Ins titutional Inves tor Holdings of Larges t 25 Ins titutions in the 10 Larges t
Corporations (as of mid-1994)
Company
General Electric
Philip Morris
Coca-Cola
Procter & Gamble
General Motors
Merck
Dupont
Exxon
American Tel & Tel
Wal-Mart Stores
% Shares Held by
All Institutions
55.6%
53.4%
52.3%
48.6%
47.3%
46.4%
43 6%
43.6%
40.9%
30.8%
30.7%
% Total Shares Held % Total Shares Held
by Top 5
by Top 25
Institutional
Institutional
Investors
Investors
8.5%
23.0%
10.8%
26.1%
20.1%
33.5%
8.8%
24.2%
9.1%
23.5%
9.1%
21.6%
11 9%
11.9%
24 5%
24.5%
8.3%
19.4%
5.1%
13.6%
7.4%
17.4%
Source: The Brancato Report (1994).
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
Sell-offs
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
D
i
1
Fabricator
F
bi t
1
Marketer
M
k t
1
Servicer
S
i
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 (updated Mar 2010)
–
–
–
–
–
18,300 programs today in U.S.A.
39 7million participants today in U
39.7million
U.S.A.
SA
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