Which one would it be ?
Reasons for Recapitalization
There are several main reasons that motivate companies to recapitalize:
1. Stock price falls dramatically
A substantial decline in its stock price is one reason for a company’s management to consider recapitalization. Under this scenario, the main goal is to prevent a further decline in the stock price. The company will issue debt to repurchase its shares and the supply-demand forces will push the stock price up.
2. Reduce financial burden
The excess of the debt over equity can result in high interest payments for the company and eventually place a significant financial burden on it. In this case, the company’s goal is to change its capital structure by issuing new equity and repurchasing part of its debt. Thus, the company will get rid of some interest payments, reduce its risk exposure, and improve its overall financial health.
3. Prevent a hostile takeover
Recapitalization can be used as a strategy to prevent a hostile takeover by another company. The management of the target company may issue additional debt to make the company less attractive to potential acquirers.
4. Reorganization during bankruptcy
Companies facing the threat ofbankruptcyor companies that have already filed for bankruptcy can use recapitalization as a part of their reorganization strategy. A successful recapitalization is a key factor for an insolvent company to survive the process of the bankruptcy. Changes in the capital structure should satisfy all parties in the process, including the bankruptcy court, creditors, and investors. If successful, the company adopts a new capital structure that can help it continue its operations and avoid liquidation.
CFI offers complete courses in financial analysis and modeling, along with hundreds of free articles designed to help you better understand all aspects of corporate financing and money management.
