Methods to Assess Forms of Restructuring
There are two basic forms of restructuring: financial and transactional. A financial restructuring usually takes place when the operating performance of a private company is doing well but the capital structure needs improvement. Transactional restructuring takes place when there is a need to reconfigure both the operating effectiveness and the capital structure of a private company. Many times financial and transactional restructurings can occur simultaneously.
Tax Basis in Different Businesses—Tax basis is one of the most important considerations in a restructuring process. In a situation where the tax basis is high the parent private company may consider a taxable direct sale of the asset whereas when the tax basis is low their parent private company may consider a tax-free alternative such as a spin-off or a split-off.
Break-Up Valuation—Before deciding on a type of divestiture, a parent private company should perform a break-up valuation to determine the extent to which a subsidiary is under or over-valued. The break-up valuation will determine which type of divestiture will be most appropriate.
Leverage—If the parent private company is over-leveraged, it may force the parent private company to sell certain assets whereas on the other hand if the parent private company is underleveraged it may wish to pay a special dividend to shareholders or take on additional debt.
Operating Performance—The operating performance of the parent private company is the summation of the performance of its individual subsidiaries. The parent private company may wish to divest poorly performing divisions in an effort to optimize operating efficiency or divest strong but undervalued business units to realize their true value.
Private Company Makeup—The corporate culture and overall structure and strategy of a private company may occasionally differ from its subsidiaries. It may be necessary to divest business divisions whose operations or goals conflict with overall strategic direction of the parent.
Threat of Takeover—A parent private company may consider restructuring to defend against a threat of hostile take-over. The type of threat will determine the restructuring options available to the targeted private company. If the acquirer plans to use the excess cash of the target to help finance the acquisition, the target may pay out a special dividend to shareholders thereby reducing the ability of the acquirer to complete the acquisition. On the other hand if the acquirer is eyeing specific assets of the target, the target may choose to divest those assets to realize their value on the open market thereby foiling the efforts of the acquirer.