Corporate Restructuring

Acquisitions, divestitures, spin-offs and cost or balance-sheet restructurings can change a company's value more in a year than a decade of organic growth, for better or worse. This module shows how to classify a restructuring and its motives, screen it quickly for materiality, value the companies involved with comparable company, comparable transaction and premium analyses, and measure its effect on pro forma EPS, leverage and the cost of capital. Level II item sets usually combine a valuation range, a pro forma calculation and a judgement on whether the deal creates value.

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What you will learn

1. Classify corporate restructurings as investment, divestment or restructuring actions and explain the motives behind each.

Investment actions: equity investments, joint ventures, acquisitions; divestments: sales, spin-offs, carve-outs; restructurings: cost and balance-sheet.
Credible acquisition motives are synergies, growth, capabilities and undervaluation; diversification and EPS bootstrapping are doubtful.
Spin-offs raise no cash; US GAAP uses carrying amount, IFRS (IFRIC 17) generally fair value.
Divestitures can remove a conglomerate discount when the parts are worth more separately.
Under IFRS 16 and ASC 842 a sale-leaseback brings a lease liability onto the balance sheet.

2. Describe the initial evaluation of a proposed restructuring, including what is being done, why, and whether it is material.

Ask what is happening (type, terms, financing, conditions), why (rationale, alternatives, incentives) and whether it is material.
Materiality: deal size relative to the company's market cap or EV and target metrics relative to the acquirer's.
A rough threshold of about 10% of company value signals a need for detailed analysis.
Small deals can still be material if they change strategy, risk or leverage.
Early warning signs: high premium, overvalued stock as currency, vague synergies, poor track record.

3. Value companies involved in a restructuring using comparable company analysis, comparable transaction analysis and premiums paid analysis.

CCA gives a minority, standalone value; add a takeover premium to estimate a deal price.
CTA multiples already include the control premium; do not add another.
Premium = deal price / unaffected price - 1; apply the mean or median premium to the target's unaffected price.
Convert enterprise value to equity value by subtracting net debt before dividing by shares.
Acquirer gain = PV of synergies - premium paid.

4. Measure how a transaction changes pro forma EPS, leverage (net debt to EBITDA) and the weighted average cost of capital.

Pro forma NI = NI_A + NI_T + after-tax synergies - after-tax financing costs - after-tax amortisation of acquired intangibles.
Goodwill is not amortised under IFRS 3 or ASC 805 (public companies); acquired intangibles are.
All-share deal: accretive if acquirer P/E > P/E paid; cash deal: accretive if target earnings yield > after-tax cost of funds.
Pro forma net debt / EBITDA includes the target's debt, the new debt and the target's EBITDA plus synergies.
More debt changes WACC weights and raises the costs of both debt and equity.

5. Evaluate investment, divestment, cost and balance-sheet restructuring decisions in a case setting and reflect them in forecasts and valuation.

Acquirer gains if standalone value plus PV of synergies exceeds the price paid.
Divestment: compare value retained, after-tax sale proceeds and spin-off value.
Cost restructuring NPV = PV of after-tax savings - after-tax one-off costs.
IAS 37 provisions follow an announced formal plan; ASC 420 exit costs are generally recognised when incurred.
Rebuild forecasts on a continuing-operations basis after a divestment.

Module at a glance

Restructurings are investment actions (stakes, JVs, acquisitions), divestments (sales, spin-offs, carve-outs) or restructurings (cost and balance-sheet).
Initial evaluation asks what is happening, why, and whether it is material relative to the company.
CCA gives a minority value to which a takeover premium is added; CTA multiples already include it; premiums apply to the unaffected price.
Pro forma EPS adds the target's earnings and after-tax synergies and deducts after-tax financing costs and amortisation of acquired intangibles.
Pro forma net debt / EBITDA includes acquisition debt, the target's debt, its EBITDA and synergies.
Accretion is not value creation: the acquirer gains only if the PV of synergies exceeds the premium.
Compare keep, sell (after tax) and spin-off values for divestments; value cost programmes on after-tax savings and costs.

This free module has 5 lessons, 15 practice questions with full explanations.

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