- Chapter 13.ppt

?2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - - - - - - - - Chapter 13 - - - - - - - - Financial Restructuring Value of the Firm Start with the value of an all equity firm Sources of potential increases or decreases in value PV of tax shields PV of other benefits or costs of leverage PV of benefits or costs of control changes PV of benefits or costs from MAs PV of benefits or costs of changes in strategies, policies, operations, organization structure (restructuring) PV of costs of financial distress Leverage and Leveraged Recapitalizations Value enhancement of capital structure decisions Acquisition of other firms Debt as a source of funding for acquisition activity Takeover of firm to capture unused tax benefits of debt Defense against being acquired by others Increase debt level to make firm less attractive Use debt to reorganize management control of firm Effects of the use of leveraged recaps Leveraged recap mechanism Relatively large issue of debt Payment of relatively large cash dividend to nonmanagement shareholders Share repurchases Increase in share ownership by management Has been proposed as an alternative to merger when pooling is abolished, to avoid goodwill write-offs of purchase accounting Leverage recap characteristics Book leverage measured by total debt to total capitalization increases from 20% to about 70% Management ownership share increases from 9% to 24% on average Market response to announcement of leveraged recap — defensive Defensive leveraged recap — action taken in response to actual takeovers or indications of likely takeover bid Both positive and negative returns Market response to announcement of leveraged recap — proactive Cumulative positive abnormal return of about 30% Return to bondholders of positive 5% Action is a part of a longer-run program of improving the performance of the firm Subsequent performance High rate of financial distress Main factors influencing post-pe