FREE online courses on Mergers & Acquisitions - Chapter 7 - Recapitalizations

 

One way for a company to avoid a merger is to make a major change in its capital structure. For example, the company can issue large volumes of debt and initiate a self-offer or buy back of its own stock. If the company seeks to buy-back all of its stock, it can go private through a leveraged buy out (LBO). However, leveraged recapitalizations require stable earnings and cash flows for servicing the high debt loads. And the company should not have plans for major capital investments in the near future. Therefore, leveraged recaps should stand on their own merits and offer additional values to shareholders. Maintaining high debt levels can make it more difficult for the acquiring company since a low debt level allows the acquiring company to borrow easily against the assets of the Target Company.

 

Instead of issuing more debt, the Target Company can issue more stock. In many cases, the Target Company will have a friendly investor known as a "white squire" which seeks a quality investment and does not seek control of the Target Company. Once the additional shares have been issued to the white squire, it now takes more shares to obtain control over the Target Company.

 

Finally, the Target Company can do things to boost valuations, such as stock buy-backs and spinning off parts of the company. In some cases, the target company may want to consider liquidation, selling-off assets and paying out a liquidating dividend to shareholders. It is important to emphasize that all restructurings should be directed at increasing shareholder value and not at trying to stop a merger.