Introduction. Restructuring and the boundary of the firm. Divestitures. Spinoffs. Equity carveouts. Tracking stocks. Leveraged recapitalizations. Leveraged buyouts (LBOs). Conclusions.
Corporate Restructuring focuses on two broad groups of corporate restructuring procedures: corporate break-ups and highly leveraged transactions. Corporate break-ups include techniques to sell off and/or securitize part of the firm. They include divestitures, spinoffs, equity carve-outs, and, for a brief period, tracking stock. Highly leveraged transactions involve a significant increase of debt in the firm's capital structure, either through a debt-financed special dividend in a leveraged recapitalization, or in leveraged buyouts (LBOs), in which the entire firm is acquired by a financial buyer.
Corporate restructuring may be initiated by top-level management, by divisional managers, or by outside sponsors like buyout funds. Occasionally, the restructuring is defensive, arising in response to a control threat from the market for corporate control. Regardless of who initiates the transaction, the parties are likely seeking to improve operating efficiency, increase cash flow, and, ultimately, enhance firm profitability. In break-up transactions, the evidence suggests that assets are transferred to higher-value users, while highly leveraged transactions involve optimizing capital structure, improving managerial incentives and achieving tax efficiency.
Corporate Restructuring is organized as follows. After an introduction, Section 2 introduces the so-called diversification discount and the potential costs of diversification, which motivate many breakup transactions. Sections 3 through 6 then detail the frequency, structure, and economic effect of various types of breakup transactions, beginning with divestitures (Section 3), spin-offs (Section 4), equity carve-outs (Section 5), and ending with tracking stock (Section 6). Next, the authors review highly leveraged transactions, including leveraged recapitalizations (Section 7), and provide an extensive discussion of the empirical evidence on LBOs (Section 8) before offering a conclusion and summary in Section 9.