Overview of Corporate Restructuring
- Corporate restructuring involves significant changes to a company’s legal and accounting structure.
- These actions often attract significant press and analyst attention and are associated with increased securities trading volume.
- Corporate changes can be grouped into three categories:
- Investment: Increase size (e.g., acquisitions, equity investments, joint ventures).
- Divestment: Decrease size (e.g., sales, spin-offs).
- Restructuring: Improve cost and financing structure without altering size or scope.
- Investment: Increase size (e.g., acquisitions, equity investments, joint ventures).
- Leveraged buyouts (LBOs) are a special case combining elements of investment, divestment, and restructuring.
- Motivations for corporate structural change can be issuer-specific or driven by broader macroeconomic or industry changes (top-down drivers).
- Issuer-specific motivations include realizing synergies, increasing growth, improving capabilities, acquiring undervalued targets (investment); focusing operations, valuation benefits, liquidity needs, regulatory requirements, improving returns, addressing financial challenges (divestment); and opportunistic or forced improvements to cost and balance sheets (restructuring).
- Top-down drivers include high security prices and industry shocks, with all types of changes tending to be pro-cyclical.
- Issuer-specific motivations include realizing synergies, increasing growth, improving capabilities, acquiring undervalued targets (investment); focusing operations, valuation benefits, liquidity needs, regulatory requirements, improving returns, addressing financial challenges (divestment); and opportunistic or forced improvements to cost and balance sheets (restructuring).
Initial Evaluation of a Corporate Restructuring
- An analyst’s initial evaluation involves answering four key questions:
- What is happening? Identify the type of restructuring.
- Why is it happening? Understand the issuer’s motivations.
- Is it material? Assess the significance of the restructuring.
- Size: Measured relative to the issuer’s enterprise value (e.g., transaction value > 10% of acquirer’s EV for acquisitions) or the scale of the intended action (e.g., cost reduction as % of revenue).
- Fit: How the restructuring aligns with earlier actions, announced strategies, and analyst expectations.
- When is it happening? Consider the timeline for completion, including potential delays for approvals.
- Professional skepticism is crucial as management will typically present restructurings positively.
- Capital market participants typically discount the expected impact (and risk of non-completion) into security prices upon announcement.
Preliminary Valuation
- For material restructurings involving transactions, analysts conduct a preliminary valuation of the target using relative valuation methods.
- Common methods include:
- Comparable Company Analysis: Uses valuation multiples (e.g., EV/EBITDA, P/E, EV/Sales) of similar, publicly traded companies. More often used for spin-offs as acquisition multiples include premiums.
- Comparable Transaction Analysis: Uses valuation multiples from historical acquisitions of similar targets, inherently including takeover premiums.
- Premium Paid Analysis: Estimates a sale price by analyzing takeover premiums paid for comparable companies.
- Comparable Company Analysis: Uses valuation multiples (e.g., EV/EBITDA, P/E, EV/Sales) of similar, publicly traded companies. More often used for spin-offs as acquisition multiples include premiums.
- Takeover Premium Formula: PRM = (DP – SP) / SP, where DP is deal price per share and SP is unaffected stock price.
- Analysts often use data aggregators to identify comparable companies and transactions.
- Descriptive statistics (mean, median, range) of valuation multiples are calculated and used to estimate or evaluate a target’s value.
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