Recapitalization

AAA

DEFINITION of 'Recapitalization'

Restructuring a company's debt and equity mixture, most often with the aim of making a company's capital structure more stable. Essentially, the process involves the exchange of one form of financing for another, such as removing preferred shares from the company's capital structure and replacing them with bonds.

INVESTOPEDIA EXPLAINS 'Recapitalization'

Recapitalization can be undertaken for a number of reasons, such as defending against a hostile takeover, minimizing taxes or to implement an exit strategy for venture capitalists. Companies often want to diversify their debt-to-equity ratio to improve liquidity. A good example is when a company issues stock in order to buy back debt securities, thus increasing its proportion of equity capital as compared to its debt capital.

Generally speaking, when a company's debt decreases in proportion to its equity, it has lower leverage and thus, ceteris paribus, its earnings per share should decrease following the change, however its shares would be incrementally less risky, since the company's shareholders have fewer debt obligations which must be paid by the company before shareholders can see profits.

RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  3. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  4. Debt/Equity Ratio

    A measure of a company's financial leverage calculated by dividing ...
  5. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  6. Liquidity

    1. The degree to which an asset or security can be bought or ...
RELATED FAQS
  1. What's the difference between Google's GOOG and GOOGL stock tickers?

    The difference between Google's GOOG and GOOGL stock tickers is that GOOG shares have no voting rights while GOOGL shares ... Read Full Answer >>
  2. How can an investor determine a company's annual return from looking at its financial ...

    The funds in a share premium account cannot be used for a company's general expenses. These funds are restricted in terms ... Read Full Answer >>
  3. What is the difference between horizontal integration and vertical integration?

    Although holders of preference shares and bonds are both entitled to regular distribution payments, preference shares do ... Read Full Answer >>
  4. How does debt affect a company's beta?

    The average debt/equity ratio for the Internet sector is small, at 0.32 for the first quarter of 2015, and an average of ... Read Full Answer >>
  5. What are some advantages of ordinary shares?

    Ordinary, or common, shares have many benefits for both the investor and the issuing company. For individuals, investing ... Read Full Answer >>
  6. Can I receive dividends on ordinary shares of a company?

    Many companies pay dividends to common shareholders, providing one of the chief benefits of this type of investment. Whether ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Ratio Analysis Tutorial

    If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios.
  2. Fundamental Analysis

    Using Enterprise Value To Compare Companies

    Learn how enterprise value can help investors compare companies with different capital structures.
  3. Entrepreneurship

    Finding The Best Buyer For Your Small Business

    Learn more about the process business owners go through to seal a merger or acquisition deal.
  4. Options & Futures

    Owners Can Be Deal Killers In M&A

    A merger and acquisition advisor is often the best choice when selling a company.
  5. Mutual Funds & ETFs

    Floating-Rate Mutual Funds: Rewards And Risks

    In an economy with low interest rates, investors need to get creative in order to reap high returns.
  6. Entrepreneurship

    Why Successful Business Owners Sell Out

    Learn the motives that drive companies into the arms of an acquirer.
  7. Stock Analysis

    Google Stock: A Tale of Two Share Classes

    Google stock comes in two different flavors with different rights for shareholders.
  8. Investing

    7 Investing Mistakes Warren Buffett Regrets

    Even the “Oracle of Omaha” has made a few money mistakes investing, from losing billions by passing on stock options to companies destined to fail.
  9. Investing News

    Germany: Creating Climate For Tech Sector To Grow

    Many German companies, which are eager to catch up with the rest of the world by entering the digital age, are investing in tech startups.
  10. Professionals

    Due Diligence Tips for Investing in Alternatives

    Alternative investments can provide unique benefits to clients for whom they are suitable. But do your due diligence and beware of the risks.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center