Corporate Restructuring and Reorganisation
What you must understand
Restructuring covers acquisitions, mergers, divestments, management buy-outs and buy-ins, demergers and spin-offs, and financial reconstruction. You must be able to value synergies, assess the gain and loss to acquirer and target shareholders, and evaluate the form of consideration (cash versus shares). Know the difference between a merger (pooling of interests conceptually) and an acquisition, and the impact on EPS and gearing. Financial reconstruction - reducing debt and interest burden in distress - requires an assessment of the scheme's fairness to creditors and shareholders and the effect on the firm's viability.
Traps in questions
- Treating synergy as automatically accruing to the acquirer - the premium paid often captures it.
- Ignoring the effect of share-based consideration on the acquirer's EPS and ownership dilution.
- Confusing a management buy-out (existing management) with a buy-in (external management).
- In reconstruction, failing to check that post-reconstruction interest cover is sustainable.
- Assuming divestment always creates value - it may simply release cash at a discount.
Worked rule of thumb
Value of synergy = value of combined entity − (value of acquirer + value of target). Gain to target = premium paid; gain to acquirer = synergy − premium. Only if synergy exceeds the premium does the acquirer gain.
Example
Acquirer worth £100m buys target worth £40m for £50m cash. Combined value with synergy is £150m. Synergy = £150m − £140m = £10m. Premium = £10m. Gain to target = £10m; gain to acquirer = £10m − £10m = £0. The acquirer captures none of the synergy.