I want 3 pages double-spaced assignment for this task. You will find the questions, instruction and material in the attached file.FIN-9759-ASSIGNM
I want 3 pages double-spaced assignment for this task. You will find the questions, instruction and material in the attached file.
FIN 9759 ASSIGNMENT DUE 5/5/22 @ 6:00 PM
1. After reviewing some of the concepts in chapter 16, provide an example of ONLY ONE of the following topics below. For this assignment you are suggesting a NEW Proposal, not one that has occurred. Select any company (NOT used in your paper) and make a recommendation as to why you are suggesting this recommendation, along with any supporting information that you can provide. Feel free to also use numbers to back up your recommendation if you like. Try to be specific and to the point as though you have been given the chance to address the CEO and Board of the company. The length of the assignment should be at least two full pages doubled spaced.
Alternative Restructuring Strategies
Experience is the name everyone gives to their mistakes.
Exhibit 1: Course Layout: Mergers, Acquisitions, and Other
Part IV: Deal Structuring and Financing
Part II: M&A Process
Part I: M&A Environment
Ch. 11: Payment and Legal Considerations
Ch. 7: Discounted Cash Flow Valuation
Ch. 9: Financial Modeling Basics
Ch. 6: M&A Postclosing Integration
Ch. 4: Business and Acquisition Plans
Ch. 5: Search through Closing Activities
Part V: Alternative Business and Restructuring Strategies
Ch. 12: Accounting & Tax Considerations
Ch. 15: Business Alliances
Ch. 16: Divestitures, Spin-Offs, Split-Offs, and Equity Carve-Outs
Ch. 17: Bankruptcy and Liquidation
Ch. 2: Regulatory Considerations
Ch. 1: Motivations for M&A
Part III: M&A Valuation and Modeling
Ch. 3: Takeover Tactics, Defenses, and Corporate Governance
Ch. 13: Financing the Deal
Ch. 8: Relative Valuation Methodologies
Ch. 18: Cross-Border Transactions
Ch. 14: Applying Financial Models to Deal Structuring
Ch. 10: Private Company Valuation
- Primary Learning Objective: To provide students with an understanding of alternative exit and restructuring strategies.
- Secondary Learning Objectives: To provide students with an understanding of
- Divestiture, spin-off, split-up, equity carve-out, split-off, and tracking stock strategies
- Criteria for choosing strategy for viable firms
- Options for failing firms
- Sale of a portion of the firm to an outside party generally resulting in a cash infusion to the parent. Most common restructuring strategy.
- De-conglomeration / increasing corporate focus
- Moving away from the core business
- Assets are worth more to the buyer than to the seller
- Satisfying government requirements
- Correcting past mistakes
- Assets have been interfering with profitable operation of other businesses
Deciding When to Sell: Financial Evaluation of Divestitures
Estimate unit’s after-tax cash flows viewed on a standalone basis, carefully considering dependencies with other operating divisions
Determine appropriate discount rate
Calculate the unit’s PV to estimate enterprise value
Calculate the equity value of the unit as part of the parent by deducting the market value of long-term liabilities
Decide to sell or retain the division by comparing the market value of the division (step 3) minus its long-term liabilities (step 4) with the after-tax proceeds from the sale of the division
Give examples of interdependencies that might exist among the operations
of a parent firm?
What is the appropriate discount rate for valuing a specific business unit
within a parent firm? (i.e., the parent’s cost of capital or the cost of capital
of the industry in which the business unit competes)
Proceed to Negotiated Settlement
Pursue Alternative Bidders
Public Sale or Auction
Private “One on One” or Controlled Auction
Public Sale or Auction
Private “One on One” or Controlled Auction
Divestiture Selling Process
Public or Controlled Auctions
Sequence of events:
1. Qualified bidders sign nondisclosure / receive prospectus
2. Submission of non-binding bids expressed as range
3. Bids ranked by price, financing ability, form of payment, form of acquisition; and ease of deal
4. Best and final offers
Choosing the Right Selling Process
One on One Negotiation (single bidder)
Public Auction (no limit on number of
Controlled Auction (limited number of carefully selected bidders)
Enables seller to select buyer with greatest synergy
Minimizes disruptive due diligence
Limits potential for loss of proprietary information to competitors
Most appropriate for small, private, or hard to value firms
May discourage some bidders concerned about excessive bidding by uninformed bidders
Potentially disruptive due to multiple due diligences
Sparks competition without disruptive effects of public auctions
May exclude potentially attractive bidders
- Spin-Offs: New legal subsidiary created by parent with new subsidiary shares distributed to parent shareholders on pro-rata basis (e.g., Medco by Merck in 2004)
- Shareholder base in new company is same as parent
- Subsidiary becomes a publicly traded company
- No cash infusion to parent
- Tax-free to shareholders if properly structured
Stage 1: Parent board declares stock dividend of subsidiary shares
Stage 2: Parent has no remaining interest in subsidiary
Paid to Shareholders
Parent Shareholders Own Both Parent & Subsidiary Stock
How might a spin-off create value for parent company shareholders?
Kraft Foods Breaks Up
In 2010, Kraft acquired British confectionery company Cadbury for $19 billion. While the firm became the world’s largest snack company with the takeover, it was still entrenched in its traditional business, groceries, on the book’s at a low historical cost. The company now owned two very different product portfolios. Between January 2010 and mid-2011, Kraft’s share price grew faster than the S&P 500; however, it continued to trade at a lower price-to-earnings multiple than such competitors as Nestle and Groupe Danone. Expressing concern that Kraft was not realizing the promised synergies from the Cadbury deal, activist investors, Nelson Peltz’s and Bill Ackman, had discussions with Kraft’s management about splitting the firm.
To avert a proxy fight, Kraft’s board announced on August 4, 2011, its intention to divide the firm into two distinct businesses. The proposal entailed separating its faster-growing global snack food business from its slower growing U.S. centered grocery business. The separation was completed through a spin-off to Kraft Food shareholders of the grocery business on October 1, 2012. The split up was justified as a means on increasing focus, providing greater opportunities, and of giving investors a choice between the faster growing snack business and the slower growing but more predictable grocery operation.
1. Speculate as to why Kraft chose not divest its grocery business and use the proceeds to either reinvest in its faster growing snack business, to buy back its stock, or a combination of the two?
2. How might a spin-off create shareholder value for Kraft Foods’ shareholders?
3. There is often a natural tension between so-called activist investors interested in short-term profits and a firm’s management interested in pursuing a longer-term vision. When is this tension helpful to shareholders and when does it destroy shareholder value?
- Two forms: Initial public offering (IPO) and subsidiary equity carve-out
- IPOs represent the first offering of stock to the public of all or a portion of the equity of a formerly privately held firm (e.g., UPS sells 9% of its shares in 1999) or a reorganized firm emerging from bankruptcy (e.g., GM in 2010)
- The cash may be retained by the parent or returned to shareholders
- Subsidiary equity carve-out is a transaction in which the parent sells a portion of the stock of a wholly-owned subsidiary to the public. (e.g., Phillip Morris’ 2001 sale of 15% of its Kraft subsidiary)
- The cash may be invested in the subsidiary, retained by the parent, used to pay off parent or subsidiary debt, or returned to the parent’s shareholders
- Although the parent generally sells less than 20% of the sub’s equity, the sub’s shareholder base may be different than that of the parent
In addition to generating cash, what other motivations may a parent firm have in
undertaking an equity carve-out?
Private Firm Sells
A Portion of Its Equity
to the Public
Parent Firm Sells
A Portion of Its
to the Public
Initial Public Offering
Subsidiary Equity Carve-Out
How does an equity carve-out differ from a spin-Off?
- Separate classes of common stock created by the parent for one or more of its operating units (e.g., USX creates Marathon Oil stock in 1991)
- Each class of stock links the shareholder’s return to the performance of the individual operating unit
- For the investor, such shares enable investment in a single operating unit (i.e., a pure play) rather than in the parent
- For the parent and the operating unit, such shares
- Give the parent another means of raising capital,
- Enable parent to retain control
- Represent an “acquisition currency” for the unit, and
- Provide an equity-based incentive plan to attract and maintain key managers
- May create conflict of interest
Issued by the
Value of the
Depends on the
Sub 1 Tracking Stock
Sub 2 Tracking Stock
Sub 3 Tracking Stock
- A variation of a spin-off in which parent company shareholders are given the option to exchange their shares in the parent tax-free for shares in a subsidiary of the parent firm. (e.g., AT&T spun-off its wireless operations in 2001 to its shareholders for their AT&T shares)
- Frequently used when a parent owns a less than 100% investment stake1 in a subsidiary in order to:
- Reduce pressure on the spun-off firm’s share price, because shareholders who exchange their stock are less likely to sell the new stock;
- Increase the parent’s EPS by reducing the number of its shares outstanding; and
- Eliminates subsidiaries with minority shareholders
1Minority shareholders add to financial reporting costs and can become contentious if they disagree with parent company policies. Parent firm efforts to sell its ownership stake may be difficult since potential buyers generally prefer to acquire 100% ownership of a business to avoid minority shareholders. Therefore, the parent firm may exit its ownership interest by transferring its stake to the parent firm’s shareholders through a split-off.
Stage 1: Exchange Offer
Stage 2: Pro rata spin-off of any remaining subsidiary shares
- Subsidiary stock
now held by former
- Parent has no relationship with former subsidiary
Note: If the parent cannot exchange all of its subsidiary shares, it will spin off any remaining shares to current shareholders on a pro rata basis.
How is value created for shareholders of the split-off business? How is value created for
parent firm shareholders?
Kraft Foods Splits-Off Post Cereals in
Merger-Related (Morris Trust)Transaction
Step 1: Kraft Implements Tax-Free Exchange Offer (a split-off)
Step 2: Kraft Sub Merged with Ralcorp Sub in a Tax-Free Forward Triangular Merger
Kraft Sub (Post)
& Liabilities Incl. $300 in Kraft Debt1
Kraft Sub Shares + $660 Million Note Payable to Kraft over 10 Years2
Kraft Sub (Post)
Owned by Kraft
Kraft Sub Assets & Liabilities
1Kraft Foods retained the cash and Kraft Sub paid off the liability.
2Kraft Food receives 100% of the Post shares plus the present value of the ten-year note, which it converted to cash by selling it to a banking consortium.
3Ralcorp stock received by Kraft shareholders was valued at $1.6 billion at that time. Total purchase price for Post equaled $2.56 billion, consisting of $1.6 billion in Ralcorp stock, $300 million in Kraft debt and a $660 million note payable to Kraft. The transaction had to satisfy Morris Trust regulations requiring the selling firm’s shareholders to become the majority shareholder in the merged firms. This normally requires the selling firm to have a larger market value than the buyer.
4Cash received by Kraft was tax free (since it is viewed as an internal reorganization) as were the share exchange of Kraft Sub (Post) shares with Kraft shareholders and the subsequent exchange for Ralcorp stock.
Kraft Objective: Raise cash by selling Post Cereals in a tax free deal for Kraft and Kraft shareholders.
Voluntary Liquidations or Bust-Ups
- Involves the sale of all of a firm’s individual operating units
- After paying off any remaining outstanding liabilities, after-tax proceeds are returned to the parent’s shareholders and the corporate shell is dissolved
- This option may be pursued if management views the growth prospects of the consolidated firm as limited
Choosing Appropriate Restructuring Strategy: Viable Firms
- Choice heavily influenced by the following:
- Parent’s need for cash
- Degree of operating unit’s synergy with parent
- Potential selling price of operating entity
- Parent firms needing cash more likely to divest or engage in equity carve-out for operations exhibiting high selling prices relative to their synergy value
- Parent firms not needing cash more likely to spin-off units exhibiting low selling prices and synergy with parent
- Parent firms with moderate cash needs likely to engage in equity carve-out when unit’s selling price is low relative to synergy
Choosing Appropriate Restructuring Strategy: Failing Firms
- Choice heavily influenced by the following:
- Going concern (standalone) value of debtor firm
- Sale value of debtor firm
- Liquidation value of debtor firm
- If sale value > going concern or liquidation value, sell firm
- If going concern value > sale or liquidation value, reach out of court settlement with creditors or seek bankruptcy protection under Chapter 11
- If liquidation value > sale or going concern value, reach out of court settlement with creditors and liquidate or liquidate under Chapter 7
Divestitures, equity carve-outs, and spin-offs represent alternative restructuring strategies? Explain the primary advantages and disadvantages of each.
Under what circumstances might senior management prefer to divest a business unit rather than to spin-off the business?
Under what circumstances might senior management prefer an equity carve-out to a spin-off?
An equity carve-out differs from a spin-off for all but which one of the following reasons?
a. Generates a cash infusion into the parent
b. Is undertaken when the unit has very little synergy with the parent
c. The proceeds often are taxable to the parent
d. Continues to be influenced by the parent’s e. management and board
e. The carve-out’s shareholders may differ from those of the parent’s shareholders
Things to Remember…
- Divestitures, spin-offs, equity carve-outs, split-ups, split-offs, and tracking stock are common restructuring strategies to enhance shareholder value
- Divestitures and equity carve-outs are more likely for operating units whose selling price is much higher than its perceived synergy with parent and whose parents need cash
- Spin-offs are more likely for operating units whose selling price and synergy are low and whose parent firm does not need cash
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