1 Corporate Restructuring-Introduction

7/29/2019 1 Corporate Restructuring-Introduction

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14) 01-Jul-20

Dr. Pankaj Varshney

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Corporate Restructuring,

Mergers & Acquisitions

An Overview

Pankaj Varshney

[email protected]

What is Corporate Restructuring?

Mathieu (1996) : articulated actions undertaken by

firms to restore competitiveness that has eroded

substantially. These measures are taken in response to

majorchanges in the firms environment, esp. final

demand, competition , and technology

Rock and Rock (1990): corporate restructuring can

encompass a broad range of transactions but generally

alludes to substantial changes in the business portfolio

and /orfinancial structure. Restructuring radicallyalters afirms structure, asset-mixand/ororganization

so as to enhance firms value

CRMA-An Overview 2

Mathieu,N. (1996). Industrial Restructuring, World Bank Experience, Future Challenges, The World Bank, Washington.

Rock, M., & Rock,R.H. (eds) (1990). Corporate Restructuring: A Guide to creating the Premium Value Company,

McGraw-Hill, New York, pp.1-6.


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What is Corporate Restructuring?

CRMA-An Overview 3

Corporate Restructuring is a broad term, which refers

to significant re-orientation or realignment of

investments (Assets), and /or financing (Liabilities)

structure of a company, through a conscious

management action with as view to drastically alter

the quality and quantity of its future cash flows.

Corporate Restructuring

Corporate Restructuring involves:

Tata Motors acquisition of Jaguar Land Rover from Ford,

through Jaguar Land Rover Limited

Launch of Tata Sumo & Indica by Tata Motors - leading to an

expansion of business portfolio through an organic route would

not be considered as corporate restructuring

Grasims acquisition of Larsen & Toubros (L&T) cement division

through UltraTech Cement Limited

Demerger of L&Ts cement business into UltraTech Cement

Limited - reduction of its business portfolio.CRMA-An Overview 4

any change in business capacity or portfolio which is

carried out in an inorganic way


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Within a targeted or planned range if the debt/equity ratiofluctuates, such changes in the capital structure do not amount

to capital restructuring.

Borrowing of a significant amount of term loan or an issue of3/5 year NCDs do not qualify to be called corporate

restructuring .

An initial public issue, or a follow-on public issue or buy-back of

equity shares would permanently alter the capital structure ofa company, and thus, would amount to corporate

restructuring.

CRMA-An Overview 5

any change in the capital structure that is not part of

its ordinary course of business



Merger of two or more companies belonging to different

promoters

Demerger of a company into two or more with control of the

resulting company passing on to other promoters

Acquisition of a company

Sell-off of a company or its substantial assets Delisting of a company

All these would qualify to be called exercises in corporate

restructuring.

CRMA-An Overview 6

any change in the ownership of the company or

control over its management


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CRMA-An Overview

1. Asset based Restructuring Acquisitions (of Divisions /Co.)

Mergers (or Amalgamations)

Divestures (of Divisions /Co.)

Demergers (Spin-offs/Spilt-ups/

Equity Carve-outs)

Joint Venture/ Strategic Alliances

2. Financial Restructuring Leveraged Buyouts

Share Buybacks

Debt-Equity Swap

3. Change in Ownership Structure

Privatisation / Disinvestments

Targeted Share Issues (Preferential

Allotments)

Delisting of Shares

External Restructuring Internal Restructuring

1. Portfolio Restructuring Cost Reduction

by way of: Closure of units

Redundancy Programme

2. Organisational Restructuring Decentralisation

Divisionalisation

Delayering

Matrix Structures

7

Mergers

Merger is combination of 2 or more companies into 1

company.

Most frequently used form of corporate restructuring.

Primarily a strategy of inorganic growth.

May take the following forms:

Absorption

Consolidation

CRMA-An Overview 8


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Absorption

Combination of all the assets and liabilities (and

businesses, on a going concern basis) of two (or more)

companies such that one of them survives.

Combination of 2 or more companies into an existing

company.

All except one company lose their identity.

Absorption of Tata Fertilisers by Tata Chemicals

Indias largest private sector corporate entity RelianceIndustries Limited (RIL) is a result of many mega mergers of

group companies into RIL.

CRMA-An Overview 9

A B AC

Consolidation

Creation of an altogether new company owning assets,liabilities, and businesses (on going concern basis) of

two or more companies, both/all of which cease to

exist.

Combination of 2 or more companies into a new

company.

All companies are dissolved and a new company isformed.

Hindustan Computers, Hindustan Instruments, Indian Software

Co., Indian Reprographics consolidated to form HCL.

CRMA-An Overview 10

A B ZC


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Types of Mergers

Horizontal Merger: Involves firms operating and

competing in the same line of business activity.

Forming a large firm may have the benefit of

economies of scale.

Possible negative effect Monopoly power.Merger of New Bank of India with Punjab National Bank.

Vertical Merger: Involves firms operating in different

stages of the production process.

Merger of Reliance Industries with Reliance Petroleum.

Conglomerate Merger: Involves firms engaged in

unrelated types of business activities.

CRMA-An Overview 11

Amalgamation

Amalgamating company or transferor company: In the process

of absorption or consolidation, the company whose assets and

liabilities are transferred to another company and which ceases

to exist through the process of dissolution without winding up is

called amalgamating or transferor company.

Amalgamated company or transferee company: In the process

of absorption or consolidation, the company which receives the

assets and liabilities of other company or companies and

continues to survive/exist is called an amalgamated company ortransferee company.

CRMA-An Overview 12


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Motives for Mergers

Economies of Scale: Central to horizontal merger;

Economies are generated from sharing of central

services Corporate Office, Accounting, Top Mgt.

Economies of Vertical Integration: Some companies try

to gain control over the production process by

expanding back toward the output of the raw material

and forward to the ultimate consumer through merger

with the supplier or customer.

Complementary Resources: Many small firms are

acquired by large firms that can provide the missing

ingredients to the small firm.

CRMA-An Overview 13

Motives for Mergers (Contd.)

Unused Tax Shield: Sometimes a firm may have

potential tax shields but not have the profits to take

advantage, hence merger with a profitable unit.

Surplus Funds: Firms with surplus cash and shortage of

good investment opportunities often turn to mergers

financed by cash as a way to redeploy their capital.

Eliminating Inefficiencies: Firms with unexploited

opportunities to cut cost and increase sales and

earnings. Such firms are natural candidates foracquisition by other firms with better management.

CRMA-An Overview 14


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Acquisitions (Takeovers)

CRMA-An Overview

Acquisitions (Takeover): Act ofacquiring effective

control over the assets or management of another

company called target company, without the

combination of companies.

Acquiring effective control means right to control its

management & policy decisions

As companies are managed by BoD, it also means the

right to appoint (and remove) majority of directors.

Separate legal identities of the companies remain but

there is a change in control or management.

Hostile acquisition is called Takeover. Tatas acquiring VSNL

Sterlite acquiring BALCO

Daiichi Sankyo acquiring Ranbaxy 15

Ways to acquire a control

By acquiring a substantial percentage of the voting capital ofthe target company.

By acquiring voting rights of the target company throughpower of attorney or through a proxy voting arrangement.

By acquiring control over an investment or holding company,that in turn holds controlling interest in the target company.

By simply acquiring management control through a formal orinformal understanding or agreement with the existing person(s) in control of the target company.

CRMA-An Overview 16


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1. Acquisition of a target company through acquisition of its

shares

Most common method is to acquire i.e. purchase substantial

voting capital (i.e. equity capital) of the target company.

What percentage would be considered as adequate to qualify ascontrolling interest?

Absolute control: an unfettered right to take any decision.

However, in such a case, the company cannot become a listedcompany or continue to be listed company, if it was listed earlier.

Practically Absolute Control: ability to get any and all resolutions

passed in the general body meeting of the shareholders

Most of the important decisions, such as further issue of capital

other than a rights issue, buy-back of shares, reduction of capital,delisting of the company, etc., can be taken, only by passing a

special resolution, (at least 75 per cent of the shareholders by

value votes in favour of a special resolution)CRMA-An Overview 17

Acquisition

General control over a company

Some decisions (approval of annual accounts, declaration ofdividend, issue of bonus shares, appointment of directors, etc)

require only a ordinary resolution (a simple majority of the

members present and voting, either in person or through

proxies at the general meeting).

In this case, one does not need to acquire 51% of the votingcapital to have a control over a company.

Shareholding pattern needs to be evaluated.

CRMA-An Overview 18


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2. Acquisition of a target company through power of attorney

This is not a commonly used way of effecting

acquisition of a company.

It could be used only as a short-term tactic, probably

as a precursor to the substantial acquisition of shares

from existing promoters or a faction of the existing

promoters, who, pending the conclusion of

Memorandum of Understanding (MOU) to sell their

shares to the acquirer, may allow him to vote on their

behalf on certain key resolutions.

CRMA-An Overview 19

3. Through acquisition of holding company controlling the

target company

Mr. X

100%

X Investment

Pvt. limited

XYZ Limited

40%

10%

ABC Limited

Mr X sells X Investment Pvt

Ltd to ABC Ltd.

CRMA-An Overview 20


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4. Acquisition of a target company through formal or informal

agreement

Mr. X

XYZ Limited

46%

Mr. A

Mr X enters into an MoU with Mr. A.

CRMA-An Overview 21

Some acquisitions

Acquisition of Corus by Tata Steel

Acquisition of Spice Communication by Idea Cellular

Acquisition of Ranbaxy by Daiichi Sankyo

Acquisition of Hutchison Essar by Vodafone

Acquisition of Sahara Airlines by Jet Airways

Acquisition of Deccan Airways by Kingfisher Airlines

Acquisition of Copper Tires (US) by Apollo Tyres (India)

CRMA-An Overview 22


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Divestiture

Sale of all or substantially all the assets of a company or

any of its divisions for cash but not against equity.

All assets or majority of assets (fixed assets, CWIP, CA,

Investments) are sold offas one lump, hence also called

slump sale under Income Tax Act.

Selling co. pays off the related liabilities from the sale

proceeds.

However, specific liabilities like Current liabilities may

be bought by the transferee company

Divestiture is usually adopted to mobilize resources forthe core business by selling-off non-core businesses.

CRMA-An Overview 23

Divestiture

DivisionB

Division C

DivisionA

DivisionC

DivisionA Division B

Company X has three

divisions A, B & C

Assets of division B are sold for

cash, while Company X retains

division A & C.

Company X

Company X

CRMA-An Overview 24

Pre-Divestiture

Post-Divestiture


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Demerger

Assets & liabilities of a division (s) are detached from the parent

company, housed in a new independent company against which

shares are issued by the new company.

Consideration is by issue of shares and not in cash.

Demerged company

Demerged company means the company whose assets,liabilities, and business(es) are being transferred in the process

of demerger to another company in case of either spin-off or

split-up. It is also called transferor company.

Resulting company

Resulting company(ies) means the company or companies to

which assets, liabilities, loans and business(es) are beingtransferred in the process of demerger.

CRMA-An Overview 25

Demerger of Non-IT business from IT business of Wipro

Limited:

Wipro Consumer Care & Lighting (including Furniture

business), Wipro Infrastructure Engineering (Hydraulics &

Water businesses), and Medical Diagnostic Product &

Services business demerged into a separate company

Wipro Enterprises Ltd

Modes:

Spin-off

Split-up

Demerger

CRMA-An Overview 26


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Demerger - Spin-offs

A spin-off is a new, independent company created by detaching

part of a parent companys assets and operations.

Shares in the new company are distributed on a pro-rata basis,

to the parent companys shareholders.

No cash changes hands, and the shareholders of the original

parent company also become the shareholders of the newly

spun company.

Existing shareholders have the same proportion of ownership in

the new entity as in the original company.

Spin-off of Wipro Enterprises Limited from Wipro limited

Spin-off of Ultra-tech Cements from L&T

Spin-off of Dabur Pharma from Dabur India

DCM Ltd. Spunoff into three separate companies DCM

Shriram Consolidated, SIEL, DCM Shriram Industries.

CRMA-An Overview 27

Demerger - Spin-offs

DivisionB

Division C

DivisionA

DivisionC

DivisionA

DivisionB

Company X has three

divisions A, B & C

Division B is spun-off into a

separate company, while

Company X retains division A & C.

Company X

Company X

Company Z

Shares of Company Z

are issued to

shareholders of

Company Y onpro-

rata basis.

CRMA-An Overview 28


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Rationale for Spin-off

Unlocking hidden value Establish a market valuation for undervalued

assets and create a pure-play entity that is transparent and easier tovalue

Undiversification Divest non-core businesses and sharpen strategicfocus when direct sale to a strategic or financial buyer is either notcompelling or not possible

Motivating management Improve performance by better aligningmanagement incentives with Spun-off Co's performance, creatingdirect accountability to public shareholders, and increasingtransparency into management performance

Eliminating dissynergies Reduce bureaucracy and give Spun-off Comanagement complete autonomy

Anti-trust Break up a business in response to anti-trust concerns

Corporate defense Divest "crown jewel" assets to make a hostiletakeover of Parent Company less attractive

CRMA-An Overview 29

Demerger - Split-up

Split-up involves transfer of all or substantially all

assets, liabilities, and businesses (on a going concern

basis) of the company to two or more companies in

which, again like spin-off, the shares in each of the new

companies are allotted to the original shareholders of

the company on a proportionate basis but unlike spin-

off, the transferor company ceases to exist.

CRMA-An Overview 30


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Spilt-up

DivisionB

Division C

DivisionA

DivisionC

Company X has three

divisions A, B & C

Company X

Company A Company C

Shares of spun-off

companies areissued to

shareholders of

erstwhile Company

X onpro-rata basis.

DivisionB

DivisionA

Company B

Each of Company Xs

divisions are spun-off

as separate companies

CRMA-An Overview 31

Company X does

not exists after the

Spilt-up.

Equity Carve-outs

Equity carve-out is a hybrid of divestiture and spin-off.

Shares in the new company are not given to existing

shareholders but are sold in a public offering, hence also

called IPO carve-out or subsidiary IPO.

o In a carve-out, a company transfers all the assets & liabilities

of one of its divisions to its 100 per cent subsidiary .

o At the time of transfer, the shares are issued to the

transferor company itself and not to its shareholders.

o Later on, the parent company sells the shares in parts to

outsiders - whether institutional investors by privateplacement or to retail investors by offer for sale.

o In case of carve-out, the consideration for transfer of

business to a new company eventually comes in the coffers

of the transferor company.CRMA-An Overview 32


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Equity Carve-outs

E.g.: Reliance Communications hived-off tower

business to Reliance InfraTel and sold 5% stake in RITL

to international investors.

Typically, the parent continues to have an equity stake

in the subsidiary and does not relinquish immediate

control.

Minority interest, usually less than 20 percent, is sold in

an IPO.

Sale of a minority stake, (15 or 20%), leaves the parent

in control and may not reassure investors who worry

about lack of focus or poor fit.

Allows more incentive to perform, in the reduced sizeof operations, managers efforts will not go unnoticed.

CRMA-An Overview 33

Equity Carve-outs

DivisionB

Division C

DivisionA

DivisionC

DivisionA

DivisionB

Company X has three

divisions A, B & C

Divisions B is spun-off into a

separate company, while

Company X retains division A & C.

Company X

Company X

Company Z

Shares of Company Z

are issued to the

public

CRMA-An Overview 34


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Privatization (Disinvestment)

Privatization (or disinvestment) is sale of shares by the

government (the principal shareholder) in a

government-owned company to private investors.

Sale of equity stake by GoI in Oil India, NHPC,

ONGC,MMTC etc.

Motives for privatization:

Increased efficiency: exposed to the discipline of

competition

Share ownership: Special terms for employees/

small investors (Maruti)

Revenue for the government.

CRMA-An Overview 35

Share Buyback

A company buys its own shares from its shareholders

using its own resources.

Buy-back of securities has been allowed since 1998 by

incorporating sections 77A, 77AA and 77B

Governed by SEBI (Buyback of Shares) Regulations

Mode of rewarding the shareholders, besides being a

method of capital restructuring.

Modes of Share Repurchase:

Open Market Repurchase Tender Offer

Dutch Auction

CRMA-An Overview 36


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Share Buyback

CRMA-An Overview 37

Year Amount (Rs. crore) No. of Issues

1998-99 1 1

1999-00 300 12

2000-01 1,297 142001-02 2,154 27

2002-03 1,011 31

2003-04 52 8

2004-05 3,600 11

2005-06 363 10

2006-07 295 7

2007-08 2,004 10

2008-09 4,218 46

2009-10 824 20

2010-11 4,295 20

2011-12 13,765 31

2012-13 1,694 21

2013-14

(as on 31/05/13)159 4

Total 36,032 273

Source:

Prime Database,(as of 24/06/13)

Reduction of Capital

Company is allowed to extinguish or reduce liability onany of its shares in respect of share capital not paid up

or is allowed to cancel any paid-up share capital which

is lost or is allowed to pay off any paid-up capital which

is in excess of its requirements u/s 100 to 104 of the

Companies Act, 1956

By extinguishing or reducing the liability in respect of sharecapital not paid-up

By writing off or cancelling the capital which is lost By paying off or returning excess capital that is not required by

the company

CRMA-An Overview 38


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Delisting

Delisting of a company refers to delisting of its equity

shares from all stock exchanges where its equity shares

are listed.

Also referred to as Going Private

Governed by SEBI (Delisting of Equity Shares)Regulations, 2009.

Compulsory

Voluntarily

CRMA-An Overview 39

Examples of Delisting

Alfa Laval (India) Limited

Atlas Copco (India) Ltd

Astra Zeneca Pharma India Ltd

BOC India Limited

Binani Cement Ltd

Blue Dart Express Limited

Controls & Switchgear Contactors Ltd

DSP Merrill Lynch Limited

Flextronics Software Systems Ltd.

Goodyear India Ltd

GE Capital Transportation Financial

CRMA-An Overview 40

India Gypsum Ltd

iGATE Global Solutions Limited

Jindal Photo Ltd

Nirma Limited

Rayban Sun Optics India Ltd

Saint-Gobain Sekurit India Limited

Spencer & Company Ltd.

SKF India Ltd

UTV Software Communications Ltd

Wimco ltd

Wartsila India Ltd


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Why do companies Delist?

To reduce costs of maintaining large number of

reports and having an expensive work force.

To avoid sharing a lot of information in public

domain.

Promoters delist to make use of the level of

freedom that unlisted companies enjoy.

CRMA-An Overview 41

Joint Venture

Two or more companies (called joint venture partners)

contribute to the equity capital of a new company

(called joint venture) in pre-decided proportions.

Normally, joint ventures are formed to pool the

resources of the partners and carry out a business or a

specific project beneficial to both the partners but

which none of the partners wants to carry out under

its own corporate entity .

Joint venture partners may otherwise be competitors but may bewanting to collaborate only for a specific project or business.

Neither of the partners may be willing to dilute control on theirbusiness by accepting funding, especially equity funding, in their

own balance sheet.CRMA-An Overview 42


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Joint Venture

The joint venture entity is manned by a separate

management team.

The joint venture may own its assets independently

from its parent firms.

Partner firms play an active role in the joint venturesstrategic decisions.

To ensure that management control of the commonbusiness or project is shared in the agreed proportion

through charter of the joint venture company.

To ensure that rewards of the common business or theproject are shared in the predetermined ratio without

the possibility of manipulation in favour of either side.CRMA-An Overview 43

Some Joint Ventures

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SBI Life : JV between State Bank of India (76%)and BNP

Paribas Cardif(24%).

Bharati-Walmart Private Limited: JV between Bharati

Enterprises (India) and Walmart (USA).

Maruti Suzuki (Before disinvestment) JV Between GoI &

Suzuki Motors (Japan).

Sony-Ericsson : JV between the Japanese consumer

electronics company Sony Corporation and the Swedishtelecommunications company Ericsson to make mobile

phones.

Tata AIG, ICICI Lombard, etc.


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Why Joint Ventures?

For foreign partner Government restrictions

Access to local distribution channels

For local partner

Access to new technology and processes

Opportunity for larger chunk of revenue

Pre-empt creation of JV with a rival

Strategic Alliance

CRMA-An Overview 46

A strategic alliance is when two or more businesses

join together for a set period of time.

A strategic alliance is a partnership between firms

whereby resources, capabilities, and core

competences are combined to pursue mutual

interests.

The businesses, usually, are not in direct competition,

but have similar products of services that are directedtowards the same target audience.

Strategic alliance is a primary form ofco-operative

strategy.


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Generally, strategic alliances are arrangements betweentwo or more entities that are created achieve mutual

goals through collaboration.

The two or more firms (partner) that unite to pursue

upon a set of agreed goals.

Each partner retains its business independence.

The partner firms share the benefits of the alliance and

control over the performance of assigned tasks.

Usually non-equity, loosely structured relationship.

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Features of Strategic Alliance

Gain a Means of Distribution in International Market:

It may be beneficial for an exporter to ally with

international partner, to understand the functioning

and the international market network.

Overcome Legal or Regulatory Barriers: In some

countries it is mandatory to have local partners in order

to conduct business. Thus, alliances offer suitable

options.

Diversification: It may be advantageous to enter into

an alliance, as a business guide to minimize pitfalls in a

new business territory.

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Why form Strategic Alliances?


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Microsoft & Nokia : to develop Windows-based mobile

handset.

GSK & Dr Reddys Labs : to manufacture drugs under

GSK brand name for emerging markets.

Pfizer & Biocon: To market Biocons insulin biosimilar

products in world markets.

Starbucks & Barnes and Nobles : to provide in-house

coffee shops, benefiting both retailers.

Starbucks & United Airlines alliance has resulted in

their coffee being offered on flights with the Starbuckslogo on the cups.

Some Strategic Alliances

1 Corporate Restructuring-Introduction

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