Mergers and acquisitions are but one form of corporate restructuring. However, while this is the focus of this book, other forms of restructuring can be related to M&As. One form of restructuring that is the opposite of M&As is sell-offs. In a sell-off a company sells part of itself to another entity. This can be done in several ways. The most common way is a divestiture, where a company simply sells off part of itself to another entity. However, downsizing can be accomplished in other ways, such as through spin-offs, where parts of a company are separated from the parent. Shares in the spun-off entity are given to shareholders of the parent company, who then become shareholders in two, as opposed to one, company. We discuss these types of transactions in Chapter 6 because they can be a way of reversing the error. Another way that a division of a parent company, perhaps one that was acquired in a deal that is now being viewed as a failure, can be separated from the parent company is through an equity carve out. Here shares in the divisions are offered to the market in a public offering. In Chapter 6 we discuss the shareholder wealth effects of these different types of transactions. However, we can point out now that, in general, the shareholder wealth effects of these various forms of downsizing tend to be positive. We will review the research, which convincingly shows this over an extended time period.
Another form of corporate restructuring on which we do not focus in this book but which is related to the world of M&As is restructuring in bankruptcy. Bankruptcy is not just an adverse event in a company’s history that marks the end of the company. There are various forms of bankruptcy, and some of them are more of a tool of corporate finance where companies can make changes in their operations and financial structure and become a better company. Such restructurings can come through a Chapter 11 filing. The Chapter 11 filing refers to the part of the U.S. Bankruptcy Code that allows companies to receive protection from their creditors—an automatic stay. Other countries have bankruptcy laws that allow for restructuring, but many, such as Great Britain and Canada, are more restrictive on the debtor than the United States.
While operating under the protection of the bankruptcy court, the debtor in possession, as the company that did the Chapter 11 filing is called, prepares a reorganization plan, which may feature significant changes in the debtor company. These changes may provide for a different capital structure, one with less debt and more equity. It may also provide for asset sales, including sales of whole divisions, which supplies a cash infusion and which may be used to retire some of the debt that may have led to the bankruptcy.
In the 1990s, many of the companies that ate at the debt trough in the fourth merger wave, were forced to file for Chapter 11 protection. One of them was the Campeau Corporation which became a very different company after the company emerged from bankruptcy protection. As with most Chapter 11 reorganizations, the equity holders, which included the deal makers who dreamed up this highly leveraged acquisition, incurred significant losses as the market penalized them for their poor financial planning. Part of the focus of this book is to determine how such merger failures can be prevented.
One of the options available for companies that have made poor deals is to proactively make some of the needed restructuring changes without having to go down the bankruptcy road. Sometimes, however, the situation is such that the pressure of the laws of the bankruptcy court is needed to force all relevant parties, including different groups of creditors who have different interests and motivations, to agree to go along with the proposed changes.
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