Group Members:

Ahmad Awais Bilal Aziz Abdul Razzak M. Asghar

Road MapSection 1 –

Introduction/Importance/Impacts/Benefits

Section 2 - Types of Restructuring Plans

Section 3 – Details about Restructuring Plans & Examples

What is CORPORATE CONTROL MARKET? The marketplace for transactions that are designed to change

the ownership, structure, and/or control of a company.

Mergers.

Take overs ( Friendly/Hostile)

Leveraged Buyouts (LBOs)

Management Buy Out (MBOs) and

Recapitalizations

How does Capital Control markets Help out?

From broader perspective, the capital control market serves to ensure that companies use resources effectively and discourages managers from benefiting themselves at he expense of economic growth.

In some national systems the corporate control market also serves as a monitoring mechanism for GOVERNANCE purposes.

Benefits of a Corporate Control Market ?Motivates managers Run Companies in Public

Share holders interest.

Companies use resources effectively

Discourage managers benefiting themselves expense of Economic growth.

Important link between savers and investors.

MergerTwo firms agree to integrate their operations on a relatively co-

equal basis

AcquisitionOne firm buys a controlling, 100 percent interest in another firm

with the intent of making the acquired firm a subsidiary business

within its portfolio.

Merger and Acquisition

Merger The combining of two or more companies, generally by offering thestockholders of one company securities in the acquiring company in exchangefor the surrender of their stock.Acquisition A corporate action in which a company buys most, if not all, of the targetcompany's ownership stakes in order to assume control of the target firm.Acquisitions are often made as part of a company's growth strategy whereby itis more beneficial to take over an existing firm's operations and niche comparedto expanding on its own. Acquisitions are often paid in cash, the acquiringcompany's stock or a combination of both.Hostile Takeover The acquisition of one company (called the target company) by another (called heacquirer) that is accomplished not by coming to an agreement with the targetcompany's management, but by going directly to the company's shareholders orfighting to replace management in order to get the acquisition approved. A hostiletakeover can be accomplished through either a tender offer or a proxy fight.

Leverage Buyout LBOs The acquisition of another company using a significant amount ofborrowed money (bonds or loans) to meet the cost of acquisition. Often,the assets of the company being acquired are used as collateral for theloans in addition to the assets of the acquiring company. The purpose ofleveraged buyouts is to allow companies to make large acquisitionswithout having to commit a lot of capital.

Management Buyout MBOsA transaction where a company’s management team purchases the assets andoperations of the business they manage. A management buyout (MBO) isAppealing to professional managers because of the greater potential rewards frombeing owners of the business rather than employees. MBOs are favored exit strategies for large corporations who wish to pursue the sale of divisions that arenot part of their core business, or by private businesses where the owners wishto retire. The financing required for an MBO is often quite substantial and isusually a combination of debt and equity that is derived from the buyers, financiersand sometimes the seller.

Leisure Park Enterprises Canoes Motels•Profitable

•Cash Flows

• Investor Not receiving Dividend

•Reinvesting Cash in Motels

•Sell Shares

•Intention of Manager

•New BOD Via Proxy Fight

Loss

Need cash injection

Location valuable

Tender New Management Purchase the Shares of Public Investor and Gain Control Over It. Buy the Shares Through Advertisement

Restructuring Plan for LeisurePark

If the Assets of Motel Division SoldCash Increase $400 million or $ 40 Per Share. No loss and Net income $ 48 Million and $

4.80 per share.P/E ratio 6.25 Share Price $30Increase the Wealth of Share Holders $ 50 per

share

Leisure Park Financial Data

All Amounts are in Million Dollars

Canoe Division Motel division Total Assets

Cash $10 $10 $20.00

Other Current Assets $70.00 $90.00 $160.00

Fixed Assets $120.00 $300.00 $420.00

Total Assets $200.00 $400.00 $600.00

Current liabilities $50.00 $50.00 $100.00

Share holder Equity (10,000,000) shares out standing

    $500.00

Total liabilities and share holders Equity

    $600.00

Earning before Interests, Depreciation , and Taxes (EBIDTA)

$92.00 $10.00 $102.00

Depreciation -$12.00 -$30.00 -$42.00

Earning before Interests, and Taxes (EBITA)

$80.00 -$20.00 $60.00

Taxes at 40% -$32.00 $8.00 -$24.00

Net income after Taxes $48.00 $12.00 $36.00

Cash Flow after Taxes $60.00 $18.00 $78.00

Cash Flow Before Taxes $92.00 $10.00 $102.00

Total Market value of Equity     $225.00

Market to Book Ratio     0.45

Per Share Stock Price     $22.50

Earning Per Share $4.80 -$1.20 $3.60

P/ E Ratio     6.25

Tender Offer Offer to Buy the outstanding Share upto $705% Leisurepark (500,00 Share) Market Price

$22.50Investment of $ 11.25 million.Tico Cap for $ 50 ~ $ 70 Capital gains $ 23.75

million.Existing Management Opposes the Takeover withBacking of the board the event is called Hostile takeover.

Reason for Merger To Maximise Shareholders WealthDiversification/Financial synergiesRisk reduction/diversificationDebt capacity and borrowing costs/tax shield

LiquidityEarnings growth

Reasons for AcquisitionsIncreased market power

Exists when a firm is able to sell its goods or services above competitive levels or when the costs of its primary or support activities are lower than those of its competitors

Sources of market power include Size of the firm Resources and capabilities to compete in the market Share of the market

Entails buying a competitor, a supplier, a distributor, or a business in a highly related industry

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United Air Lines and US Airways24th May,2000 United Airlines Acquisition of US Airways.Undiversified and Diversified Investors-Undiversified : Chose to own only one Stock-Diversified : Shares in Many companiesInvestment in S& P 500  is an American stock market index based on the marketcapitalizations of 500 large companies having common stock listed onthe NYSE or NASDAQ. Regulatory Disapproval on anti trust ground.

Date UAL Stock Price

UAL Airways Stock Price

Market Value of UAL

(billions)

Market Value of US

Airways (billions)

Combined Market Value

(billions)

May 22, 2000 $59.75 $25.25 $3.18 $1.70 $4.87

May 23, 2000 60.375 26.3125 3.206 1.766 4.972

May 24, 2000 53.1875 49.00 2.824 3.288 6.112

May 25, 2000 52.50 44.625 2.788 2.994 5.782

HP and CompaqMar 2002 Merger HP & Compaq Sep 3, 2001Merger of $87 Billion Global technologyHP Stock $ 22.93 Market Value of $ 44.4842 bCompaq Stock $ 12.25 Mkt. value $20.825 b$ 2.5 b After Tax synergies Predicted Increase $12.5 b It Fell $10.2 b Management Forecasting Error $22.7 Billion

Date Compaq Stock Price

HP Stock Price

Market Value of Compaq (billions)

Market Value of HP (billions)

Combined Market Value

(billions)

August 29, 2001 $13.03 $23.66 $22.15 $45.90 $68.05

August 30, 2001 $12.59 $23.11 $21.40 $44.83 $66.24

August 31, 2001 $12.25 $22.93 $20.83 $44.48 $65.31

Sept 4, 2001 $10.99 $18.77 $18.68 $36.41 $55.10

Sept 5, 2001 $10.33 $17.99 $17.56 $34.90 $52.46

Sept 6, 2001 $10.27 $17.48 $17.46 $33.91 $51.37

Sept 7, 2001 $10.51 $17.86 $17.87 $34.65 $52.52

March 14, 2001 $10.70 $19.40 $18.19 $37.64 $55.83

When Do mergers Creates Value Synergies could arise from economies of scale

and scope , Reduction in Operating costs , Reduction in Risk .

Unique Synergies and That are not available to any one else.

Conflicts of Interest b /w Managers and Share holders.

Transaction CostsTransparency

How Can Mergers Destroy Shareholder value

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Divestitures

Refers to divesture, spin-off, or some other

means of eliminating businesses that are

unrelated to firms’ core businesses

Strategic refocusing on core businesses

Often includes downsizing

26-21

Types of DivestituresSale of entire subsidiary to another firm“Spin-off”

Spinning off a corporate subsidiary by giving the stock to existing shareholders

“Carve-out”Selling a minority interest in a subsidiary

Outright liquidation of assets

26-22

Why Divestitures

Subsidiary worth more to buyer than when operated by current owner

Settle antitrust issuesSubsidiary’s value increased operated

independentlyChange strategic directionShed money losersGet needed cash when distressed

26-23

Leveraged Buyout (LB0)Small group of investors buys all publicly held stockTakes the firm privateGroup usually includes management

Purchase often financed with large amounts of high-yield debt

Investors take firm public to “cash out”

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Leveraged Buyout LBOs

Three types

Management buyoutsEmployee buyoutsWhole-firm buyouts

Spin-OffsCompany owns or creates a subsidiary whose

shares are distributed on a pro rata basis to shareholders of parent company

Subsidiary becomes publicly owned corporationParent company often will retain from 10% to

under 20% of shares of the new subsidiarySpin-off often follows the initial sale of up to

20% of the shares in an initial public offering (IPO) — transaction known as an equity carve-out

No one spends other people’s money

as carefully as they spend their own.

—Milton

Friedman

Carve OutThe partial divestiture of a business unit.A company undertaking a carve-out is notselling a business unit completely, andmay instead sell an equity stake in thatbusiness or spin the business off on itsown while retaining an equity stake itself.A carve-out allows a company to capitalizeon a business unit that may not be part ofits core operations.

WHY IPO or Going PublicAdditional Capital Investment diversification Zero Cost of Capital Easy to raise new capitalOwner DiversificationBrand ImageIncreased LiquidityEmployee Prestige and Retention

WHAT IS A MANAGEMENT BUYOUT?A management buyout or “MBO” is the purchase

of a company or business by all or some of its existing management.

The owners of the business may wish to retire.The business may no longer be considered as core

to the whole company or group.The business as a whole may be having financial

difficulties and the owners may wish to sell off assets to improve cash flows.