Mergers, Acquisitions, and Corporate Restructurings, 6th Edition

CHAPTER ELEVEN11

Corporate Restructuring

ALTHOUGH THE FIELD OF mergers and acquisitions (M&As) tends to focus on corporate expansion, companies often have to contract and downsize their operations. This need may arise because a division of the company is performing poorly or simply because it no longer fits into the firm's plans. Restructuring may also be necessary to undo a previous merger or acquisition that was unsuccessful. While we see that many sell-offs are motivated by financial pressures brought on by a combination of high leverage and weak economic demand, we also see that the volume of sell-offs increases when overall deal volume increases. As such, sell-off deal volume tends to follow the ups and down of the economy just like M&As follow the overall pattern of economic fluctuations. This is the case not only in the United States but also in Asia and Europe.

In this chapter, the different types of corporate contraction are considered, and a decision-making methodology for reaching the divestiture decision is developed. The methods used to value acquisition targets are also used by companies to determine whether a particular component of the firm is worth retaining. Both the divesting and the acquiring firms commonly go through a similar type of analysis as they view the transaction from opposite sides. Even though the methods are similar, the two parties may come up with different values because they use different assumptions or have different needs.

This chapter considers ...