Abstract

We survey the empirical literature on corporate financial restructuring, including breakup transactions (divestitures, spinoffs, equity carveouts, tracking stocks), leveraged recapitalizations, and leveraged buyouts (LBOs). For each transaction type, we survey techniques, deal financing, transaction volume, valuation effects and potential sources of restructuring gains. Many breakup transactions appear to be a response to excessive conglomeration and attempt to reverse a potentially costly diversification discount. The empirical evidence shows that the typical restructuring creates substantial value for shareholders. The value-drivers include elimination of costly cross-subsidizations characterizing internal capital markets, reduction in financing costs for subsidiaries through asset securitization and increased divisional transparency, improved (and more focused) investment programs, reduction in agency costs of free cash flow, implementation of executive compensation schemes with greater pay-performance sensitivity, and increased monitoring by lenders and LBO sponsors. Buyouts after the 1990s on average create value similar to LBOs of the 1980s. Recent developments include consortiums of private equity funds (club deals), exits through secondary buyouts (sale to another LBO fund), and evidence of persistence in fund returns. LBO deal financing has evolved toward lower leverage ratios. In Europe, recent deals are financed with less leveraged loans and mezzanine debt and more high-yield debt than before. Future research challenges include integrating analyses across transaction types and financing mixes, and producing unbiased estimates of the expected return from buyout investments in the presence of limited data on portfolio companies that do not return to public status.

Corporate Restructuring

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.