CORPORATE RESTRUCTURING

Corporate restructuring is the process of redesigning one or more aspects of a company.

The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction.

Here are some examples of why corporate restructuring may take place and what it can mean for the company

So, restructuring is…

Financial Restructuring

Portfolio & Asset

Restructuring

Organisatio

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Managemen

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Restructurin

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Restructuring types3 broad types

Expansion: Mergers, Acquisitions, Takeovers, Tender offer, Joint Venture

Contraction: Sell offs, Spin offs, Split offs, Split ups, Divestitures, Equity Carve outs

Corporate Control: Takeover Defences, Share Repurchases, Exchange Offers, Proxy Contests

Changes in Ownership: Leveraged Buyout, Going Private

Types of Restructuring

A merger refers to the process whereby at least two companies combine to form one single company. Business firms make use of mergers and acquisitions for consolidation of markets aswell as for gaining a competitive edge in theindustry.

Merger is a financial tool that is used for enhancing long-term profitability by expanding their operations. Mergers occur when the merging companies have their mutual consent as different from acquisitions, which can take the form of a hostile takeover.

Merger

Mergers or Amalgamation may take two forms

ABSORPTION CONSOLIDATION

Merger or amalgamation may take two forms:1. Absorption is a combination of two or more companies into an existing

company.2. Consolidation is a combination of two or more companies into anew

company. In merger, there is complete amalgamation of the assets

and liabilities as well as shareholders’ interests and businesses of the merging companies. There is yet another mode of merger. Here one company may purchase another company without giving proportionate ownership to the shareholders’ of the acquired company or without continuing the business of the acquired company

Merger or Amalgamation

Strategic benefit: competition, entry, risk and cost reduction Complementary resources e.g. Technology and Marketing

Tax benefits :accumulated losses, unabsorbed depreciation, government incentives, sales and excise duty benefits

Utilization of surplus funds Managerial effectiveness Diversification Lower financing costs Earnings growth etc.

Reasons for merger

Types of merger

HORIZONTAL

VERTICAL

CONGLOMERATE

CONCENTRIC

MERGER

A Type of Merger occurred when two companies competing in the same line of Business Activities.

The Effect on the Market Would be Either Large or a little to No Effects.

Number of firms in an industry will be reduced due to Horizontal Mergers and this may lead firms to Earn huge monopoly profits.

Horizontal mergers are regulated by government for their negative effect on competition.

Eg: In May 2010 Bank of Rajasthan with ICICI bank AND ACC cement with Damodar cement.

HORIZONTAL MERGER

A Merger between two companies producing different goods or services for one Specific Finished Products.

It refer to a situation where a product manufacturer merges with the supplier of Inputs or Raw Materials. Also Known as Vertical Foreclosure´.

Cost Reduction and Minimization Of Transportation cost. Two Types Of Vertical Mergers Backward Vertical Mergers. HLL &TATA tea with tea gardens in Assam & West Bengal. BPL. with Uptron colour picture. Forward Vertical Mergers Oil companies buying up service stations Disney’s With American Broadcasting Co

VERTICAL MERGER

A Merger Between Firms that are involved intotally unrelated business activities .

Two Types of Conglomerate mergers; i.e. Pure and Mixed.

The main reason behind this kind of Merger are increasing Market Share, Synergy and Cross Selling.

They also Merged to diversify and reduce their risk Exposure.

Ex: the Merger between Walt Disney company and the American Broadcasting Company

CONGLOMERATE MERGER

A type of merger where the two companies coming together to share some common expertise that may posses mutually advantageous. The Common Expertise may be Managerial or Technological Know-how that may not be Industry or Product Specific.

In short combining two or more businesses in order to pool expertise.

A Merger between a Motor cycle Manufacturer and an Automobile Manufacturer would be an Example

CONCENTRIC MERGER

Analysis of merger offer-motive ,impact on stock price effect on brand image.

Approval form Board of Directors of both the companies for the merger

Approval of merger by shareholders ,bankers, trustees Intimation to stock Exchange where these firms are

listed.

LEGAL PROCEEDURE FOR MERGER

Submission of application to the court Submission of general meeting report of the chairman

to court Hearing the petition & confirmation of merger. Filling Court Order with ROC by the firms. Integration of assets and liabilities

LEGAL PROCEEDURE FOR MERGER

This involves fusion of one or more companies where the companies lose their individual identity and the new company comes into existence to take over the business of companies being liquidated.

The merger of Brook Bond India Limited and Lipton India Limited resulted in formation of a new company Brook Bond Lipton India Limited

AMALGAMATION

The term takeover is understood to connote hostility. When an acquisition is a ‘forced’ or‘ unwilling’ acquisition, it is called a takeover.

A holding company is a company that holds more than half of the nominal value of the equity capital of another company, called a subsidiary company, or controls the composition of its Board of Directors. Both holding and subsidiary companies retain their separate legal entities and maintain their separate books of accounts

TAKEOVER

This involves fusion of a small company with a large company where the smaller company ceases to exist after the merger.

The merger of TATA OIL MILLS company limited (TOMCO) with Hindustan lever limited.(HLL) is an example of absorption

ABSORPTION

A tender offer is a formal offer to purchase a given number of a company’s shares at a specific price.

Tender offer can be used in two situations.1. First, the acquiring company may directly approach the

target company for its takeover. If the target company does not agree, then the acquiring company may directly approach the shareholders by means of a tender offer.

2. Second, the tender offer may be used without any negotiations, and it may be tantamount to a hostile takeover.

TENDER OFFER

This involves making a public offer for acquiring the shares of a target company with a view to acquire management control in that company.

Take over by TATA Tea of consolidated coffee limited (CLL) is an example of tender offer where more than 50% of share holders of CLL sold their holdings to TATA Tea at the offered price which was more than the investment price.

TENDER OFFER

Acquisition may be defined as an act of acquiring effective control over assets or management of a company by another company without any combination of businesses or companies. A substantial acquisition occurs when an acquiring firm acquires substantial quantity of shares or voting rights of the target company

This involves buying assets of another company. The assets may be tangible assets like manufacturing units or intangible like brands.

HLL buying brands of lakme is an example of asset acquisition

ASSET AQUISITION

This Involves two companies coming together and forming a new company whose ownership is changed. Generally this strategy is adopted by MNC’s to enter into foreign companies.

DCM Group and Daewoo Motors entered into a joint venture to form DCM Daewoo Limited to manufacture auto mobiles in India

JOINT VENTURE

Demergers means split or division of a company. Such divisions may take place for various internal or external factors. Internal factors generally consist of split in the family rather than lack of competition on the part of management.

For Example DCM Limited was divided into four separate companies which are being managed by different family members of Late Shri Ram.

DEMERGERS

This type of demerger involves division of company into wholly owned subsidiary of parent company by distribution of all its shares of subsidiary company on a pro-rata basis.

For Example Kotak Mahindra finance limited formed a subsidiary called Kotak Mahindra Capital Corporation by spinning off its investment banking division

SPIN-OFF

Spin offs are a distribution of subsidiary shares to parent company shareholders:

As such, no money (necessarily) comes into the parent company as a result

No shares (or assets) of the subsidiary are sold to the market(IPO) or to acquirer.

Eg; Dr.Reddy formed new drug development company “Perlecan Pharma”

Sun Pharma demerged its R&D as a separate entity Sun Pharma Advance Research company to reduce R&D cost

CENTRAL FEATURES OF SPIN-OFFS

The firm sell a part (20% or less) of its wholly-owned subsidiary’s common stock in the market. This is similar to spin –offs, expect that some part of share holders of this subsidiary company is offered to public through a public issue and the parent company continues to enjoy control over the subsidiary company by holding controlling interest in it

EQUITY CARVE OUTS

This type of demerger involves the division of the parent company into two or more separate companies where parent company ceases to exist after the demerger. New business entities took place for parent firm

SPLIT-UPS

These are sale of segment of a company for cash or for securities to an outside party.

Selling assets, divisions, subsidiaries to another corporation or combination of corporations or individual

DIVESTITURES

Selling corporation typically receives consideration for the assets sold

Cash Securities Other assets Divestitures are typically taxable events for selling

corporation (new basis for purchaser) Example of Divestiture: JAGUAR LAND ROVER was

divested from FORD MOTOR

FEATURES OF DIVESTITURES

This involves sale of tangible or intangible assets of a company to generate cash.

ASSET SALE

In the conventional method, thus a company is absorbed by the profitable one (called normal merger). On the other hand, if reverse situation takes place i.e. if sick company extends its embracing arm to the profitable company and in turn absorbs it in its fold, this action is called reverse merger. It’s a merger of healthy company into a loss making company as compared to a normal merger where weaker units merge into stronger one.

The first case of reverse merger formulated by BIFR envisaged the merger of healthy company Sagar Real Estate Developer Limited with sick textile company SLM Maneklal industries limited.

REVERSE MERGER

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