Question

How do the stock prices of publicly traded companies behave when corporate and/or financial restructuring (e.g., divestiture, rationalization) is involved? Please explain why by citing two real world examples, and if appropriate, clarify the circumstances that affect the stock price movement.

Answer 1

Corporate restructuring is as an act of reorganizing the business by changing the capital investment, using state of the art technology, and displacement of capital base etc. in order to improve the performance. The need for restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company.

For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production process. In this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the corporation gain a larger market share.

There are a number of motives behind a company opting for a corporate restructuring few of them being inefficient management, to gain market leadership, to increase market share etc. but maximizing shareholders value is never a motive for restructuring the business. It becomes an implied motive and hence it is not necessary that all acquisitions or mergers should be able to create value to the shareholders.

Corporate restructuring can be classified into three fragments:

1. Asset restructuring: Asset restructuring involves the sale or spin-off of businesses within the corporate portfolio, leading to a refocused (predominantly lower) level of diversification.
2. Financial restructuring: Financial restructuring encompasses leveraged buyouts, stock repurchases, and leveraged recapitalization.
3. Organizational restructuring: Organizational restructuring entails reorganizations within the firm that do not involve the sale or disposal of assets.

Example of acquisition in Indian IT industry:

On 13th May 2011, IT firm iGate completed its acquisition procedure of its competitor Patni computers for an estimated value of $1.2 billion which was funded by $770 million debt, $330 million by issuing convertible preferred stock to Apax Partners, the PE firm with which it formed a consortium to make this acquisition, and the balance by cash. Now iGate holds more than 82.5% stake in Patni computers, now called as iGate Patni.

The deal was accepted whole heartedly by the shareholders of both the companies with the share price of Patni computers. Patni’s share price was around Rs 450 in January 2011. A week after the merger announcement, Patni’s shares on BSE closed at Rs 477.95, up 0.88%, after hitting a 52-week high of Rs 502.15 earlier in the day.