Creating Value Through Corporate Restructuring
Harvard case studies in bankruptcy and workout situations.
Summary
Gilson, a Harvard Business School professor, assembled case studies of financially distressed and structurally underperforming companies and the transactions used to address them: Chapter 11 reorganisations, out-of-court debt exchanges, divestitures, spin-offs, carve-outs, tracking stock, asset sales and bankruptcy-driven acquisitions. Cases include Continental Airlines, Kmart, Flagstar, Humana, Sealed Air's leveraged recapitalisation, and the National Gypsum asbestos reorganisation.
The book's analytical contribution is treating restructuring as a set of transactions each with identifiable value sources and costs, rather than as crisis management. Gilson works through where value actually comes from in each: tax attributes and net operating loss carryforwards, the removal of cross-subsidies between businesses with different capital needs, improved incentive alignment when a divested unit's management holds equity in it, the discipline of debt in a recapitalisation, and the ability of Chapter 11 to reject leases and contracts. He is precise about the direct and indirect costs of bankruptcy and about how the choice between in-court and out-of-court restructuring depends on the number of creditor classes and on holdout problems.
The teaching notes and financial exhibits make it usable for building models. It is a casebook and requires work; it is not a narrative. The second edition updates some material. The legal environment has shifted since 2001, particularly in how creditor coalitions form and in the rise of liability management transactions, and readers should treat the bankruptcy procedure detail as requiring verification against current practice.
Key takeaways 7
- Restructuring transactions each have identifiable and separable value sources, and a manager should be able to name which one a proposed transaction is capturing.
- Spin-offs create value primarily by removing cross-subsidies between businesses with different capital requirements and by giving unit management equity in their own results.
- Out-of-court restructuring is cheaper than Chapter 11 but fails when creditor classes are numerous, because individual holdouts can extract value from a consensual deal.
- Chapter 11's power to reject leases and executory contracts is frequently the largest single source of value in a reorganisation.
- Net operating loss carryforwards are a real asset whose preservation shapes how a restructuring must be structured.
- The indirect costs of financial distress, meaning lost customers, suppliers demanding cash and departing employees, usually exceed the direct legal and advisory costs.
- A leveraged recapitalisation can create value by imposing debt service discipline on managers who would otherwise reinvest cash at low returns.
Who should read it
Investors, corporate finance teams and advisers who want a case-based treatment of where value comes from in each restructuring transaction type.
Where it sits in the reference 5
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