• Selected
• Entire List

Abstract:

Corporate restructuring--far from being a rare or episodic event that happens to "someone else"--is a common and important event in the professional lives of many managers. Since 1980, U.S. public companies with more than a trillion dollars in assets have filed for Chapter 11 bankruptcy or restructured their debt out of court. Over the same period, over 400 companies have spun-off businesses with a combined equity capitalization of more than $200 billion. And by some estimates, as many as 10 million employees have been laid off in the U.S. under corporate downsizing programs.

The "reach" of corporate restructuring is far greater than these statistics simply when one considers the web of relationships between restructured companies and their corporate customers, suppliers, and competitors. Through its impact on firms' market values, restructuring impacts literally millions of investors, lenders and shareholders who provide capital to these firms. The scope of corporate restructuring has also become increasingly global, as heightened competition in international product, capital, and labor markets puts tremendous pressure on companies worldwide to increase their competitiveness and maximize their market value.

"Creating Value Through Corporate Restructuring" (CVCR) at the Harvard Business School is a second-year MBA elective course; materials from CVCR are also used in various executive programs offered at the School. The course explores how corporate managers can create value by restructuring the firm's financial claims and contracts. The course highlights restructurings that address corporate underperformance and financial distress, support changes in business strategy and corporate policy, and reduce information gaps between the firm and the capital markets.

The course was started by Steve Fenster and Ron Moore in 1992, when it was called "Corporate Restructuring." This author assumed full responsibility for the course in 1995, and has developed 10 of the 17 case studies included in the curriculum. Course enrollment currently stands at two full sections of approximately 100 students apiece, and there is a waiting list.

The course is organized around three modules, corresponding to the restructuring of debt contracts, equity contracts, and employee contracts. Examples of restructurings studied in the course include bankruptcy reorganizations and workouts, spin-offs, targeted stock offerings, downsizing/layoff programs, negotiated wage give-backs, employee buyouts, mergers, and restructuring of retiree benefit (e.g., pension and medical) plans. The course features case studies of some of the most controversial and innovative restructurings of the past decade, including the downsizing of Scott Paper Company under Albert Dunlap, the employee buyout of United Airlines, USX's targeted stock offering, and the merger of Chase Manhattan and Chemical Bank.

The author has developed a general framework for thinking about corporate restructuring that can be effectively used to organize and teach the course materials. Analysis of the cases is framed in terms of the following questions: When does it make sense to restructure a firm? What kind of restructuring is most appropriate for addressing the particular problems or challenges the firm faces? To implement a restructuring, what key decisions must managers make, and what barriers must they typically overcome? How much value will the restructuring create? And what actions can managers take to ensure the capital markets fully credit the firm for the value created by restructuring?

Case studies in the course are almost all "field" cases. As such, they incorporate data and insights obtained directly from company management, giving students a unique "inside look" at the corporate restructuring process. Most of the cases come with comprehensive teaching notes. To give students a general context for analyzing the cases, case materials are supplemented with assigned readings from the academic literature on corporate restructuring. The case teaching notes, and a separate "CVCR Course Overview Note," (the full text of which is available for downloading from the SSRN Electronic Paper Collection) highlight the connections to this literature. The Overview Note describes the course framework and the major themes and issues visited in the course; it also provides detailed descriptions of the three course modules and individual case studies.

The course pedagogy emphasizes that restructuring affects firm value because of market frictions and institutional rigidities that make it difficult to recontract when the economic fortunes of a corporation change. These factors include transactions costs, taxes, agency costs, and information gaps between firms and the capital markets. These factors affect how much value restructuring creates, and what kind of restructuring managers should choose. The course also emphasizes that choosing the "right" restructuring approach often requires managers to understand the fundamental business and strategic problems facing their companies.

Abstract:
Over the past ten years, as global markets have grown increasingly competitive, the world has seen record numbers of companies dramatically restructure their assets, operations, and capital structures. This new volume brings together thirteen intensive case studies of companies that underwent major restructurings during 1992-2000. The cases cover such topics as corporate bankruptcy reorganization and debt workouts, "vulture" investing, equity spin-offs, tracking stock, asset divestitures, employee layoffs and corporate downsizing, mergers and acquisitions, highly leveraged transactions, negotiated wage give-backs, employee stock buyouts, and the restructuring of employee benefit plans. The cases were developed over an eight-year period for a course at Harvard Business School called "Creating Value Through Corporate Restructuring." The course is offered in the second-year elective curriculum of the School's MBA program, and these cases have also been used successfully in a number of executive programs at Harvard, and in graduate and undergraduate courses at many other business schools.

Abstract:
This study compares the market value of firms that reorganize in bankruptcy with estimates of value based on management's published cash flow projections. We estimate firm values using models that have been shown in other contexts to generate relatively precise estimates of value. We find that these methods generally yield unbiased estimates of value, but the dispersion of valuation errors is very wide?the sample ratio of estimated value to market value varies from below 20% to over 250%. Cross-sectional analysis indicates that the variation in these errors is related to empirical proxies for claimholders' incentives to overstate or understate the firm's value.

Abstract:
This study compares the market value of firms that reorganize in bankruptcy with estimates of value based on management's published cash flow projections. We estimate firm values using models that have been shown in other contexts to generate relatively precise estimates of value. We find that these methods generally yield unbiased estimates of value, but the dispersion of valuation errors is very wide?the sample ratio of estimated value to market value varies from below 20% to over 250%. Cross-sectional analysis indicates that the variation in these errors is related to empirical proxies for claimholders' incentives to overstate or understate the firm's value.

Abstract:
This study compares the market value of firms that reorganize in bankruptcy with estimates of value based on management's published cash flow projections. We estimate firm values using models that have been shown in other contexts to generate relatively precise estimates of value. We find that these methods generally yield unbiased estimates of value, but the dispersion of valuation errors is very wide-the sample ratio of estimated value to market value varies from below 20% to over 250%. Cross-sectional analysis indicates that the variation in these errors is related to empirical proxies for claimholders' incentives to overstate or understate the firm's value. Relevant factors include the relative bargaining strength of competing (senior vs. junior) claimholders, management's equity ownership, the existence of outside bids to acquire or invest in the debtor, and senior management turnover.


See also the related papers "Information Effects of Spin-offs, Equity Carve-outs, and Targeted Stock Offerings" by Stuart Gilson, Paul Healy, Christopher Noe, and Krishna Palepu; and "Junk Bonds, Bank Debt, and Financing Corporate Growth" by Stuart Gilson and Jerold Warner

Abstract:
This paper investigates whether a spin-off, equity carve-out, or targeted stock offering results in making the operating performance of a firm's business segments more transparent. Using a sample of 146 spin-offs, equity carve-outs, and targeted stock offerings between 1990-1995, we document significant decreases in analyst earnings forecast errors as well as divergence among individual analyst earnings forecasts following these transactions. Moreover, we find that the levels of analyst and brokerage house coverage increase significantly following these transactions. Tracking the identity of individual analysts, we find that there is substantial analyst turnover around the sample deals, and the decrease in analyst earnings forecast errors following the sample deals is greatest when firms are able to attract new analysts. Taken together, these findings suggest that firms experience improvements in the quality of analyst coverage around spin-offs, equity carve-outs, and targeted stock offerings, and these improvements are at least partially driven by changes in the composition of analyst coverage.


See also the related papers "Valuation of Bankrupt Firms" by Stuart Gilson, Edith Hotchkiss, and Richard Ruback; and "Junk Bonds, Bank Debt, and Financing Corporate Growth" by Stuart Gilson and Jerold Warner

Abstract:
Junk bonds have been portrayed as an important alternative source of debt finance for high-growth firms that rely extensively on bank debt. We investigate the role of junk bonds in corporate finance, using a sample of firms that issued junk bonds to pay down bank loans. Bank debt paydowns are the most frequent reason firms issue junk bonds. Sample firms are extremely fast growing, and the junk bond issues typically follow operating earnings declines. Our tests indicate that the looser contractual restrictions in junk bonds enable the firms to maintain financial flexibility, defined as a capital structure's ability to support activities at low transaction and opportunity cost. Alternative explanations for the bond issues have no support. For example, we find no evidence that managers reduced their reliance on bank debt to avoid monitoring by banks. Sample firms obtained most of their bank debt through revolvers, which can also provide flexibility, and firms typically reborrowed from banks to finance continued high growth.


See also the related papers "Information Effects of Spin-offs, Equity Carve-outs, and Targeted Stock Offerings" by Stuart Gilson, Paul Healy, Christopher Noe, and Krishna Palepu; and "Valuation of Bankrupt Firms" by Stuart Gilson, Edith Hotchkiss, and Richard Ruback

Abstract:
We study firms that reduced private debt by repaying bank loans with proceeds from junk bonds. The debt contracts differ dramatically, and the contractual restrictions in bank debt are tighter. Sample firms are profitable, but experience operating earnings declines just prior to the junk bond issues. The earnings declines further tighten restrictions in bank debt, and the firms have limited borrowing capacity under their existing bank revolvers. Our tests indicate that bank debt paydowns enabled the firms to maintain their ability to grow rapidly. Alternative explanations for the paydowns, such as managers' desire to avoid bank monitoring, have little support.

Abstract:

Grading class participation is hard. What gets graded is fleeting, has many dimensions, is sensitive to the context, and is benchmarked against one's experience or expectations (i.e., not a grading outline). The instructor cannot revisit the discussion as one might re-read an exam book or term paper. Content (what one says) and form of participation (how one says it) can interact in unanticipated ways. The daily change in teaching materials presents a moving target. What the instructor thinks about the case problem (or even feels) can raise or lower the bar from day to day.

The editors of FEN Educator sought a discussion of "best practice" in the area of grading class participation, and solicited the views of six seasoned case discussion leaders. Seeking helpful insights, we posed five general questions. What is your system for grading classroom discussion participation by students? How much grading weight do you give to participation? What do you look for? How do you keep records? How do you extract a grade from those records at the end of the course? The replies offer various insights about grading participation. Here is a sampling:

1. Record keeping. All the replies emphasized the importance of careful daily notes on student participation. This is not an exercise in distant recall at the end of the course. Rather, the instructor should sit down each day and note the positive (and negative) contributions.

2. Not by frequency alone... Steve Foerster, Lin Klein, and Larry Pettit emphasize that quality of contribution should be an important dimension of the evaluation. Simply noting the volume of participation misses the value of what and when the student contributed. Larry Pettit offers a number of comments on the various kinds of participation, and how they might be weighted in grading.

3. Shape student expectations of the participating grading. Andy Boynton, Steve Foerster, and Lin Klein note how important it is to explain to students what the instructor looks for, and where weight is given.

4. Weights given to class participation vary widely. Stu Gilson notes a 50% weight at Harvard, as does Larry Pettit at Virginia; Steve Foerster reports 25% at UWO; Michael Moffett notes 20% at Thunderbird; Lin Klein indicates 10-15% at UConn.

5. Grading of participation is, broadly, relative rather than absolute. Lin Klein normalizes grading; Steve Foerster notes that grades tend to be normally distributed with very small tails.

6. Student diversity: Michael Moffett notes that 62% of his students are from outside of the U.S., and that "additional sensitivity on my part is necessary regarding comfort with the English language in a technical setting and in cultural habits of open discussion." Stu Gilson mentions the "difficult balance" in drawing contributions from students with different levels of comfort with technical material.

These six points are merely an appetizer to the comments offered in the roundtable discussion. To see the entire discussion, please download document below.

Abstract:
This article provides striking evidence that U.S.-style financial reorganization leads to significant increases in the concentration of equity ownership. In a study of 77 publicly held firms that restructured their debt privately or filed for bankruptcy during the 1980s, the authors find that these firms also systematically restructured senior managers' incentives and, in the process, created a much stronger link between managers' wealth and firm performance. The creation of pay-for-performance in financially distressed firms was a direct consequence of high turnover in the top executive suite. When companies become financially distressed, compensation practices come to more closely resemble those found in venture capital firms as well as LBOs and other highly leveraged organizations.

Abstract:
In 2005 Jane Bauer-Martin, a hedge fund manager, is considering what she should do with the fund's large investment in the publicly traded bonds of Delphi Corp., a financially troubled auto parts supplier. Delphi is General Motor's key auto parts supplier, and, like GM, it is burdened with large pension and other retiree liabilities that threaten to push it into bankruptcy. Bauer-Martin is considering using various credit derivatives (credit default swaps, credit-linked notes, credit default swap indices, total return swaps, etc.) to hedge her position in Delphi debt, or to speculate on future Delphi bond prices.

Abstract:
In the summer of 2006 the chairman and CEO of Eurotunnel Group is faced with the decision whether to file for bankruptcy protection, after having failed to gain creditor approval of an ambitious out-of-court restructuring plan. The company, which has been attempting to restructure its debt and operations for the last ten years, faces a number of daunting challenges. Eurotunnel is jointly listed in the U.K. and France, and its shareholders, who are largely based in France, face the prospect of significant dilution under any restructuring plan. The current chairman and CEO has been with the company for only a year-and-a half, following a decade of senior management turbulence in which the company has seen nine different CEOs and chairmen. Eurotunnel's capital structure is staggeringly complex, and a large fraction of its debt has come to be held by U.S.-based hedge funds that specialize in investing in distressed companies. Finally, Eurotunnel's business is extremely challenging to value, and is faced with significant competition. If the current chairman/CEO decides to file for bankruptcy, he faces the additional choice whether to file for bankruptcy in the U.K. or in France, which take quite different approaches to restructuring troubled companies.

Abstract:
In mid-2007 the chairman and CEO of Eurotunnel Group, having elected to file for bankruptcy under a newly-enacted French insolvency law, awaits the outcome of a vote by creditors and shareholders. At least 50% of the shareholders must approve the plan, however they face significant dilution of their ownership interests in Eurotunnel. If the vote fails to pass, the possibility that the company may have to be liquidated becomes increasingly likely.

Abstract:
A major bankrupt retailer is poised to emerge from Chapter 11. Two activist hedge funds ("vulture investors") will own over 50% of reorganized Kmart's common stock, based on prior investments in Kmart's debt claims, and an infusion of new equity financing. The chapter 11 process has generated both costs and benefits for the company. Its future profitability, and the value of the reorganized business, are both highly uncertain.

Abstract:
A major bankrupt retailer is poised to emerge from Chapter 11. Two activist hedge funds ("vulture investors") will own over 50% of reorganized Kmart's common stock, based on prior investments in Kmart's debt claims, and an infusion of new equity financing. The chapter 11 process has generated both costs and benefits for the company. Its future profitability, and the value of the reorganized business, are both highly uncertain.

Abstract:
In 2005 new legislation was passed by the U.S. Congress, and signed into law by the President, that introduced a number of major amendments to U.S. bankruptcy law, affecting both business and consumer bankruptcies. This legislation, called the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), became effective on October 17, 2005. This note summarizes key provisions of the new law that affect business bankruptcy reorganization under Chapter 11 of the U.S. Bankruptcy Code, contrasting these provisions with corresponding provisions in the old law.

Abstract:
In addition to earnings forecasts and stock recommendations, analysts provide potentially useful information to investors in the form of written commentary and analysis. But how such fundamental research affects stock prices has been little studied. I investigate the role analysts' research played in the 1994 restructuring of UAL Corporation (parent of United Air Lines), in which employees acquired 55 percent of UAL stock in exchange for $4.9 billion in wage/benefit concessions. Focusing on the critical first two years of the buyout, my analysis suggests that analysts and investors, on average, initially gave the company little credit for the concessions. The transaction was controversial and complicated. Most analysts were negative or indifferent in their assessment of the deal. Some analysts also misinterpreted key terms of the deal. UAL managers responded by reporting an unconventional earnings measure that highlighted the financial concessions. UAL's stock price relative to the market and industry eventually doubled, but analysts' opinions of the deal did not change.

Abstract:
In April 1991, regulators seized the major subsidiaries of First Executive Corporation (FE), an insurer that invested heavily in junk bonds. During the junk bond market turmoil of 1989-1990, adverse publicity fueled a bank run at FE, forcing a $4 billion portfolio liquidation before the market rose 50-60 percent in 1991-1992. More traditional insurers did not receive commensurate press coverage, despite their substantial exposure to real estate declines, which were roughly 2.5 times the junk bond decline. Seizure of FE's subsidiaries was defensible, although FE would become solvent within a year, given average junk bond market appreciation.

Abstract:

SUBJECT AREAS: Corporate governance; Cost allocation; Diversification; Incentives; Restructuring; Steel; Valuation.
CASE SETTING: Geographic Setting: Pittsburgh, PA; Industry Setting: steel; Number of Employees: 42,500; Case Time Frame Start: 1990; Case Time Frame End: 1991.


Case No.: 9-296-050
Teaching Note: 5-298-085

REQUESTS FOR COPIES: To receive a copy of this case, please contact Harvard Business School Publishing, 60 Harvard Way, Boston, MA 02163. Phone: (800) 545-7685. E-Mail: MAILTO:custserv@hbsp.harvard.edu or you may contact Stuart Gilson by E-Mail: MAILTO:sgilson@hbs.edu


USX Corporation, a large diversified steel and energy firm, is pressured by a corporate raider to spin off its steel business in order to increase its stock price. As an alternative to the spinoff, management proposes replacing the company's common stock with two new classes of "targeted" stock that would represent separate claims against each business segment's cash flows, allowing the stock market to value each business separately (and more accurately). A targeted stock structure differs from a spin-off, in that the firm remains a single legal entity, and there is no physical separation of its assets.

This case gives students an opportunity to discuss how the terms of targeted stock should be set to maximize the market value created. The issues are complicated. For example, it may be desirable to limit management's discretion to allocate corporate overhead expenses, which will affect how the firm's earnings are distributed between different targeted stock classes. The relative voting power of different targeted stock classes will also have to be adjusted by some formula when the relative market values of the shares change. And shareholders may wish to give management the option to undo the targeted stock structure at some future date if circumstances warrant.

The case challenges students to critically assess the merits of targeted stock, and discuss whether pure financial restructuring can create value when a firm has fundamental business problems. One can question how much targeted stock truly helps investors value a firm's business segments, since segment earnings and dividends will be affected by how management allocates corporate overhead and sets transfer prices for inter-segment transactions. In addition, targeted stock may not completely address the firm's agency problems, because managers' control over corporate assets is unchanged.

Abstract:

SUBJECT AREAS: Executive compensation; Labor negotiations; Paper industry; Reengineering; Restructuring; Shutdowns.
CASE SETTING: Geographic Setting: Philadelphia, PA; Industry Setting: paper products; Number of Employees: 31,000; Case Time Frame Start: 1994; Case Time Frame End: 1994


REQUESTS FOR COPIES: To obtain a copy of this case, please contact Harvard Business School Publishing, 60 Harvard Way, Boston, MA 02163. Phone: (800) 545-7685.
MAILTO:custserv@hbsp.harvard.edu, web:http://www.hbsp.harvard.edu
or you may contact the author directly.


Case No: 9-296-048, Scott Paper Company
Case No: 5-298-088, Teaching Note


Scott Paper Company provides an inside look at a major corporate downsizing program led by the controversial turnaround manager "Chainsaw" Al Dunlap. In less than a year, Dunlap oversaw the elimination of almost one-third of the company's 34,000 hourly and salaried employees, through layoffs and asset sales. By the end of the restructuring in late 1995, when Scott was acquired by Kimberly-Clark, the market value of Scott's common stock had increased by more than $3 billion (over 200%). Dunlap's personal wealth increased over this period by nearly $100 million, reflecting his compensation and appreciation in the value of his Scott stock holdings and executive stock options.

The Scott case highlights the key challenges that senior managers face when overseeing a corporate downsizing program. One of the most important challenges is determining the extent of layoffs. The employee layoff decision is conceptually similar to the decision facing managers in a debt restructuring as to how much the firm's debt should be reduced. The analytics of the layoff decision are usually much more complicated, however. This case provides students with the opportunity to discuss how such a program should be designed and implemented to create
maximum value for stockholders and other corporate stakeholders. It also allows students to analyze the sources of value in corporate downsizing (i.e., whether stock price gains that result from downsizing reflect value creation or value transfers).

Abstract:
New issues of public high yield debt, or junk bonds, reached record levels in the 1990s. This paper studies transactions where firms issue junk bonds and use the proceeds to repay their bank debt. These substitutions represent the most frequent use of junk bonds. Our analysis suggests that firms undertake these substitutions to preserve financial flexibility--a capital structure's ability to support activities at low transaction and opportunity cost. Junk bond substitutions typically occur around negative earnings surprises. Since junk bonds contain substantially fewer and less restrictive covenants than bank debt, and also mature later, these substitutions reduce the probability of default and increase the range of activities in which firms can engage. The earnings surprises are short-term, and firms eventually reborrow from banks. Junk bond issues convey negative information about sample firms' prospects and cause stock prices to fall, but the decline is less severe for firms that benefit more from the increased financial flexibility. While giving managers increased flexibility could also harm shareholders (by allowing them to take actions that reduce firm value) our evidence does not strongly support this possibility.

Abstract:
SUBJECT AREAS: Corporate restructuring; spinoffs; valuation.

CASE SETTING: 1992, Health Care Industry. 

Intensifying competition and change in the U.S. health care industry force a large integrated health care provider to reassess its strategy of operating both hospitals and health insurance plans (HMOs). In an attempt to increase its stock price and operating performance, the company considers a number of restructuring strategies for separating the two businesses, including a corporate spinoff. Alternative options include issuing targeted stock, selling assets, establishing an ESOP, doing a leveraged buyout, and repurchasing stock. The case illustrates how a company under financial stress can use a corporate spinoff to increase its stock market value and effect real improvements in its business. The case also highlights the importance of choosing a financial restructuring strategy to fit the firm's underlying business or strategic problems.I have used the case in a second year elective MBA course on Corporate Restructuring, and in various executive programs taught at the School. The case could also easily be used in an undergraduate course in Finance, since the case is quite friendly on a technical level.Depending on his/her preference, the instructor can use the case to highlight different things, including policy issues in the U.S. healthcare industry, valuation of a company undergoing a corporate restructuring, and choice of restructuring method by a company that is undervalued or underperforming.

Abstract:
This study provides evidence that transactions costs discourage debt reductions by financially distressed firms when they restructure their debt out of court. As a result, these firms remain highly leveraged and one-in-three subsequently experience financial distress. Transactions costs are significantly smaller, hence leverage falls by more and there is less recurrence of financial distress, when firms recontract in Chapter 11. Chapter 11 therefore gives financially distressed firms more flexibility to choose optimal capital structures.