Valuation for Mergers, Buyouts, and Restructuring, Second Edition

Chapter 15

Asset Restructuring

15.1 ASSET RESTRUCTURING AND THE VALUE GAP

Asset restructuring involves actions undertaken to realign the asset side of the balance sheet and, as such, it is different from a recapitalization, which involves the realignment of the liability side of the balance sheet and may be done even when the assets of the company remain intact. For example, a firm may decide to increase debt to fund repurchasing its own stock. On the other hand, recapitalizations under distress undertaken to deal with unsustainable debt levels often require the sale of assets to generate proceeds for paying down debt. Recapitalizations were examined in Chapter 14.

Closing the value gap of a company is a common restructuring motive. The value gap can be defined as the difference between the potential value of the company and its current value. For a publicly traded company, the value gap is the difference between its potential value and its market value. For a privately held company, the gap is the difference between the potential value of its future cash flows and the value of its cash flows under present policy. In each case, the potential value is the maximum value attainable by the company itself or by an outsider — strategic buyer, financial buyer, or raider.¹ These outsiders may believe they can create value from all or some of the company's assets. In the case of a public company, it is common to think about the value gap as the difference between its takeover value and ...