Chapter 1

Mergers, Acquisitions And

Corporate Restructuring

Prasad G. Godbole

Copyright © 2009 Vikas Publishing House Pvt. Ltd. All rights reserved. Copyright © 2009 Prasad G. Godbole. All rights reserved.

Section 1: CONCEPTS, STRATEGIES AND TACTICS


Chapter 1



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R 1Why Corporate Restructuring?

Increased Competition Advent of a new and more efficient

technology Emergence of new markets Emergence of new classes of consumers Demographic changes Business cycles

‘Wise organizations undertake changes to increase their cutting edge over the competitors and enhance their leadership position.’

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However, not all the changes that a company undergoes would qualify to be termed as ‘ corporate restructuring’.

Why Corporate Restructuring?

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Definition

Corporate restructuring can be defined as any change in the business capacity or portfolio that is carried out by an inorganic route

or

Any change in the capital structure of a company that is not a part of its ordinary course of business

or

Any change in the ownership of or control over the management of the company or a combination of any two or all of the above


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I. (a) Any change in the business capacity or portfolio carried out by inorganic route

Tata Motors launched Sumo and later, Indica- leading to an expansion of its business portfolio. However, these products were launched from Tata Motor’s own manufacturing capacity in through an organic route. Hence, it would not qualify as ‘corporate restructuring’

Tata Motors’ acquisition of Jaguar Land Rover from Ford, through Jaguar Land Rover Limited is ‘corporate restructuring’

Grasim’s acquisition of Larsen & Toubro’s (L&T) cement division through UltraTech Cement Limited is an example of ‘corporate restructuring’

(b) Change in the business portfolio could also be in the

nature of reduction of business handled by a company

In the case of Grasim and L&T, the demerger of L&T’s cement business into UltraTech Cement Limited was reduction of its business portfolio and thus, amounted to ‘corporate restructuring’ of L&T.


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II. Any change in the capital structure of a company that is not in the ordinary course of its business

Capital structure refers to debt equity ratio, i.e. the proportion of debt and equity in the total capital of a company.

This capital structure is never static and changes almost daily.

Within a targeted or planned range if the debt/equity ratio fluctuates, such

changes in the capital structure do not amount to ‘capital restructuring’.

Borrowing of a significant amount of term loan or an issue of five year non-convertible debenture 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 of a company, and thus, would amount to ‘corporate restructuring’.


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III. Any change in the ownership of a company or control over its management

a) Merger of two or more companies belonging to different promoters

b) Demerger of a company into two or more with control of the resulting company passing on to other promoters

c) Acquisition of a company

d) Sell-off of a company or its substantial assets

e) Delisting of a company

All these would qualify to be called exercises in ‘corporate

restructuring’.

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The Activities or Changes which are not termed ‘Corporate Restructuring’

I. Initial creation of a corporate structure Its various examples are:

– Incorporation of a limited company– Conversion of a proprietary concern into a company– Conversion of a partnership firm into a company– Conversion of a private company into a public company

II. Change in the internal command structure or hierarchy The command structure of an organization or its hierarchy simply means the reporting

relationships among the employees, managers, top management and their various functions.

– Functional organization– Divisional organization– Matrix organization

Continued…

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The Activities or Changes Which are Not Termed ‘Corporate Restructuring’

With businesses having become more complex along with the acceptance of newer concepts of organization building such as tutorship, mentorship, etc., the hierarchies have stopped strictly falling into one of the three types mentioned in the earlier slide.

Any migration of an organization from functional to divisional or to matrix type or to any new or hybrid type or vice-versa would not be a case of ‘ corporate restructuring’.

III. Change in the business process This is also called ‘reengineering’. ‘Reengineering, properly, is the

fundamental rethinking and redesign of business processes to achieve dramatic improvement in critical, contemporary measures of performance, such as cost, quality, service and speed.’

It refers to the radical redesigning of business processes and not to the ownership and control or to the capital structure of the organization.

Reengineering is also outside the ambit of ‘corporate restructuring’.

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IV. Downsizing It is another form of organizational change in which the business

organization substantially cuts down on its manpower, recurring cost and/or capital expenditure, either as an objective itself or as a result of reengineering.

Downsizing is also outside the purview of ‘corporate restructuring’.

V. Other activitiesActivities such as outsourcing, enterprise resource planning, total

quality management, franchising alliances, networking alliances and licensing do not classify as corporate restructuring activities.

The Activities or Changes which are not termed ‘Corporate Restructuring’

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Major Forms of Corporate Restructuring

Merger

Consolidation

Acquisition

Divestiture

Demerger (spin off/split up/split off)

Carve Out

Joint Venture

Reduction of Capital

Buy-back of Securities

Delisting of Securities/Company

Chapter 1

Documents

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