Ch. 23-Corporate Restructuring. Combinations and Divestitures o 2002. Prentice Hall. nc
Ch. 23 - Corporate Restructuring: Combinations and Divestitures © 2002, Prentice Hall, Inc
Corporate restructuring 1960s- Mergers of unrelated firms formed huge conglomerates. 1980s- Investors purchased conglomerates and sold off the pieces as independent companies. 1990s- Strategic mergers of related firms to create synergies
Corporate Restructuring 1960s - Mergers of unrelated firms formed huge conglomerates. 1980s - Investors purchased conglomerates and sold off the pieces as independent companies. 1990s - Strategic mergers of related firms to create synergies
Possible benefits of mergers Economies of scale ex: reduce administrative expenses as a percentage of sales. Tax Benefits ex: target firm has tax credits from income to use the credit ts the operating losses, and lacks Unused debt potential ex: merging with a firm that has little debt increases debt capacity
Possible Benefits of Mergers • Economies of Scale ex: reduce administrative expenses as a percentage of sales. • Tax Benefits ex: target firm has tax credits from operating losses, and lacks the income to use the credits. • Unused Debt Potential ex: merging with a firm that has little debt increases debt capacity
Possible benefits of mergers Complementarity in Financial Slack ex: a cash-poor firm merging with a cash-rich firm will be able to accept more positive NPv projects Removal of Ineffective Managers ex: ineffective target firm managers may be replaced, increasing the value of the target firm
Possible Benefits of Mergers • Complementarity in Financial Slack ex: a cash-poor firm merging with a cash-rich firm will be able to accept more positive NPV projects. • Removal of Ineffective Managers ex: ineffective target firm managers may be replaced, increasing the value of the target firm
Possible benefits of mergers Increased market power ex: merging may increase monopoly power, but too much may be illegal Reduction in Bankruptcy Costs ex: merger may improve financial condition of the combined firm, f reducing direct and indirect costs financial distress
Possible Benefits of Mergers • Increased Market Power ex: merging may increase monopoly power, but too much may be illegal. • Reduction in Bankruptcy Costs ex: merger may improve financial condition of the combined firm, reducing direct and indirect costs of financial distress