Chapter 14 • Corporate restructuring
We shall start our consideration of the major restructuring devices that are found at
present in the UK by concentrating on two of the more important areas, namely
takeovers (mergers) and divestments. Following that we shall look briefly at some
other corporate restructuring devices found in the UK today.14.2 Takeovers and mergers
In recent years, buying existing businesses in their entirety has become a very pop-
ular way of investing and growing. For example, the foods (notably sugar) business
Tate and Lyle plcsays in its 2007 annual report: ‘We continually evaluate acquisition
opportunities that would add strategic value by enabling us to enter new markets or
add products, technologies and knowledge more efficiently than we could organ-
ically.’ Not all businesses seek to expand in this way, nor do those that have done so
necessarily do it habitually. The city pages of the national newspapers frequently tell
us of an attempt on the ownership of some business or another, often with quite large
ones as targets.
In practice this type of investment is typically effected by one business (thebidder)
buying sufficient ordinary voting shares in the other one (thetarget) to be able to exer-
cise control or even to have complete ownership.
Whether a particular situation is described as a takeoveror as a mergeris a matter
of semantics. Where the two businesses are of similar size and/or there is agreement
between the two sets of managements as to the desirability of the outcome, then it
tends to be referred to as a ‘merger’; otherwise the expression ‘takeover’ tends to be
used.
Despite certain apparent differences, from the bidder’s (investor’s) viewpoint,
between a merger and the more traditional investment opportunity, the same basic
principles should be applied to its appraisal. That is to say, a merger that would rep-
resent a net increase in the current worth of the bidder (a positive net present value)
should be pursued, if its financial objective is to be achieved.
Increasingly, particularly since the turn of the millennium, private equity funds
have been bidders and have undertaken takeovers of other businesses. In fact many
such funds were established to take over other businesses, restructure them and then
sell them on, in some cases by relaunching them as listed businesses. We discussed
private equity funds and how they operate in Chapter 1.Reasons for mergers
In theory, a business will become a bidder when it sees an opportunity to make an
investment with a positive incremental net present value. It is likely to perceive such
an opportunity either:l where it considers that the incremental cash flows from the investment, when dis-
counted at a rate consistent with the level of risk associated with those cash flows,
are positive; and/or
l where the reduction in the level of risk associated with the bidder’s existing cash
flows causes the appropriate rate for discounting those cash flows to fall, thus
increasing the NPV of the existing cash flows of the bidder.‘