Corporate Restructuring 3 Module

8/9/2019 Corporate Restructuring 3 Module

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CORPORATE

RESTRUCTURINGRESTRUCTURING

THIRD MODULETHIRD MODULE



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CONTENTS

Corporate restructuring

-different methods of restructuring

-joint ventures

-sell off and spin off -divestitures

-equity carve out

-leveraged buy outs (LBO)

± management buy outs -master limited partnerships

-employee stock ownership plans (ESOP)



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WHAT IS CORPORATE RESTRUCTURING

corporate restructure means actions taken to expand or

contract a firm's basic operations or fundamentally change itsasset or financial structure.

Corporate restructuring refers to a broad array of activities that expand

or contract a firm¶s operations or substantially modify its financial structure

or bring about a significant change in its organisational structure and internal

functioning.



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It includes activities such as

Mergers,

Purchases of business units,

Takeovers,

Slump sales,

Demergers,

Leveraged buyouts, Organizational restructuring, and

Performance improvement initiatives.

We will refer to these activities collectively as mergers,acquisitions, and restructuring (a widely used, though not a veryaccurate, term) or just corporate restructuring.



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Categories of Corporate Restructuring

Corporate restructuring activities can be divided into 2 broad categories:

1. Operational Restructuring refers to:-

outright or

partial purchase or

sale of companies or product lines or

downsizing by closing unprofitable, non-strategic facilities.

2. Financial Restructuring:

refers to the actions taken by the firm to change its total debt & equity

structuring.

Ownership restructuring

Business restructuring

Asset restructuring



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CHARACTERISTICS

1. To improve the co., Balance sheet, (by selling unprofitable division from its corebusiness).

2. To accomplish staff reduction ( by selling/closing of unprofitable portion)

3. Changes in corporate mgt

4. Sale of underutilized assets, such as patents/brands.

5. Outsourcing of operations such as payroll and technical support to a moreefficient 3rd party.

6. Moving of operations such as manufacturing to lower-cost locations.

7. Reorganization of functions such as sales, mktg, & distribution

8. Renegotiation of labor contracts to reduce overhead

9. Refinancing of corporate debt to reduce interest payments.

10. A major public relations campaign to reposition the co., with consumers.



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Need for restructuring

1. To respond to particular business needs.

2. To create friendly & comfortable working system

3. To make organization more competent

4. To make it as counter strategies

5. Growth & globalization

6. To have financial strength & synergy to compete.



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PURPOSE OF CORPORATE RESTRUCTURING

To enhance the share holder value. The co., should continuously evaluate its:

1. portfolio of businesses,

2.capital mix,

3. ownership &

4. assets arrangements to find opportunities to increase the share holders¶

value.

To focus on asset utilization and profitable investment opportunities

To reorganize or divest less profitable or loss making

businesses/products

The co., can also enhance value through capital Restructuring, itcan innovate securities that help to reduce cost of capital.



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Corporate

Restructuring

Expansion

y Mergers & acquisition

y Tender offers

y Joint venture

Sell-offs

y Spin- offs

y Split-offs

y Split-ups

y Equity carve outs

Corporate Control

y Premium Buy-backs

y Standstill Agreements

yAnti-takeover Amendments

y Proxy contests

Changes in Ownership Structure

y Exchange offers

y Share Repurchase

y Going Private

y Leveraged Buy-outs

FOR MS OF CORPORATE RESTRUCTURING



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A. Tender offer

A tender offer is a public offer made to theshareholders of a company by a potential acquirer topurchase their stock at a price much higher than the

current market value of the stock. If all goes asplanned, the shareholders who accept the tender offer make a significant profit on their holdings, and theacquirer gains control of the company.

In other words An offer to purchase some or all of shareholders' shares in a corporation. The priceoffered is usually at a premium to the market price.



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B. JOINT VENTURE

Joint ventures are new enterprises owned by two

or more participants. They are typically formed for

special purposes for a limited duration.

It is a contract to work together for a period of time

each participant expects to gain from the activity

but also must make a contribution.



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Examples for JV

P ARTNERS Product Strategic Objective

GM & TOYOTA Autos Cut-cost

Ford / Measurex Factory

automation

Cut-cost

Boeing/

Mitsubishi/

Fuji/ Kawasaki

Small air-craft Cut-cost, share

technology



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CHARACTERISTICS OF JOI N T V E N TURE

1. Contribution by partners of:

a) Moneyb) Knowledge

c) Property

d) Skill

e) Effort or other assets to a common undertaking.

2. Limited scope and duration

3. Generally it involves two firms

4. Joint property interest in the subject matter of the venture

5. Right of mutual control or mgt of the enterprise.

6. Right to share in the profit.

7.Joint production of single product

8.No sharing of assets/ information beyond venture

9. Limited risk



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Reasons for forming a joint venture

Build on company's strengths

Spreading costs and risks

Improving access to financial resources

Economies of scale and advantages of size

Access to new technologies and customers

Access to innovative managerial practices



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M OTI V ES T O JOI N T V E N TURE

1. To share investment expenses or combine a large co.

2. Learning-experience

3. Sharing of risk

4. Antitrust authorities permit Joint-venture than merger because it

increases the no., of firms.



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RATIONAL FOR JOINT VENTURES

1. To augment insufficient financial or technical ability to enter a particular line

or business.

2. To share technology & generic mgt skills in orgn, planning & control.

3. To diversify risk

4. To obtain distribution channels or raw materials supply

5. To achieve economies of scale

6. To extend activities with smaller invt than if done independently

7. To take advantage of favorable tax treatment or political incentives



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International joint venture:

To reduce the risk of expanding into a foreign environment

The contribution of the local conditions, which may be essential to the

success of the venture.

Example:US steel/ Pohang iron & Steel ± steel (Product) ± raise capital & expand

market



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Reasons for the failure of JV

The hoped ± for technology never developed

Preplanning for the joint venture was inadequate

Agreement could not be reached on alternativeapproaches to solving the basic objectives of the JV

Managers with expertise in one company refused toshare knowledge with their counter parts in the JV

Mgt difficulties may be compounded because of inability of parent companies to share control or compromise on difficult issues



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C. SELL OFF

Selling a part or all of the firm by any one of means:

sale, liquidation, spin-off & so on .

Or

General term for divestiture of part/all of a firm by any

one of a no. of means: sale, liquidation, spin-off and so

on.



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PARTIAL SELL-OFF

A partial sell-off/slump sale, involves the sale of abusiness unit or plant of one firm to another.

It is the mirror image of a purchase of a business unitor plant.

From the seller¶s perspective, it is a form of contraction;

from the buyer¶s point of view it is a form of expansion.

For example:

when Coromandal Fertilizers Limited sold its cementdivision to India Cement Limited, the size of Coromandal Fertilizers contracted whereas the size of India Cements Limited expanded.



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Motives for Sell off

Raising capital

Curtailment of losses

Strategic realignment

Efficiency gain



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DEMERGERS STRUCTURE

Demergers are one type of spin-offs: (under/section 391)

A = Demerging Company

B = Resulting Company: may or may not have existed earlier

A transfers undertaking to B

B issues shares to shareholders of A

X Y Y

Company BCompany A

Transfers undertaking Y

Shareholders of

AIssues shares



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SPIN OFF¶S

Spin-off is a transaction in which a co., distributes ona pro-rata basis all the shares it owns in a subsidiaryto its own shareholders.

In a spinoff an undertaking or division of a companyis spun off into an independent company.

After the spinoff, the parent company and the spun

off company are separate corporate entities.

Ex: AT &T



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Feature

No cash exchange (money is not received by the original parent). subsidiaries assets are not revalued.

The transactions is treated - stock dividend and a tax-free exchange.

Proportion of ownership:The existing stockholders have the same proportion of ownership in

the new entity as in the original firm.

Separation of control

The new entity exists as a separate decision-making unit.

It may develop policies & strategies different from those of theoriginal parent.

so, spin-off represents a form of a dividend to existing shareholders.



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SPLIT ± OFF

A transaction in which some, but not all, parent co.,shareholders receive shares in a subsidiary in return for relinquishing their parent co., share.

In other words««««««.

some parent company shareholders receive the subsidiary¶sshares in return for which they must give up their parentcompany shares

Features A portion of existing shareholders receives stock in a

subsidiary in exchange for parent co., stock.



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SPLIT - UP

In a s plit-up, a company is split up into two or more independentcompanies.

As a sequel, the parent company disappears as a corporate entity

and in its place two or more separate companies emerge.

In other words a transaction in which a co., spins off all of itsubsidiaries to its shareholders & ceases to exist.

F eatu

r es

The entire firm is broken up in a series of spin-offs.

The parent no longer exists and

Only the new offspring survive.



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DIVESTITURES

Represent the sale of a segment of a company(assets, a product line, a subsidiary) to a 3rd party for cash and or securities

Ex: VSNL

F eatur es:

It is used as a means of eliminating or separating:a) Product line

b) Division

c) Subsidiary.

It represents the sale of a segment of a co., to a 3rd

party.

The assets are revalued, by the sale, for purpose of future depreciation by the buyer.



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M OTI V ES FOR DI V ESTITURES

Change of focus or corporate strategy

Unit unprofitable can mistake

Sale to pay off leveraged finance

Antitrust

Need cash

Defend against takeover

Good price.



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Equity carve-out

A transaction in which a parent firm offers some of a

subsidiaries common stock to the general public, to bring

in a cash infusion to the parent without loss of control.

In other words««««««««..

Equity carve outs are those in which some of a

subsidiaries shares are offered for a sale to the generalpublic, bringing an infusion of cash to the parent firm with

out loss of control



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Features of ECO

It is the sale of a minority or majority voting control in asubsidiary by its parents to outsider investors. These are

also referred to as ³split-off IPO¶s´

A new legal entity is created.

The equity holders in the new entity need not be the same as the

equity holders in the original seller.

A new control group is immediately created.¶



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Difference between Spin-off and Equity carve outs:

1. In a spin off , distribution is made pro rata to shareholders of the parent co as a dividend, a form of non cash payment toshareholders

In equity carve out , stock of subsidiary is sold to the publicfor cash which is received by parent co

2. In a spin off , parent firm no longer has control over subsidiaryassets

In equity carve out, parent sells only a minority interest insubsidiary and retains control

Corporate Restructuring 3 Module

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