Corporate restructuring

Corporate Restructuring

MeaningCorporate restructuring refers to the changes in ownership,

business mix, assets mix and alliances with a view to enhance the

shareholder value.

Hence, corporate restructuring may involve ownership

restructuring, business restructuring and assets restructuring.

Forms of Corporate Restructuring 1) Merger or Amalgamation

Merger or amalgamation may take two forms:

• Absorption

• Consolidation

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.

Forms of Merger

Forms of Corporate Restructuring (cont..)

(1) Horizontal Merger Acquisition of a company in the same industry in which the acquiring

firm competes increases a firm’s market power by exploiting

(2) Vertical Merger

Acquisition of a supplier or distributor of one or more of the

firm’s goods or services

(3) Conglomerate Merger Acquisition by any company of unrelated industry

Forms of Corporate Restructuring (cont..)

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.

Takeover – 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.

Forms of Corporate Restructuring (cont..)

Limit competition.

Utilise under-utilised market power.

Overcome the problem of slow growth and

profitability in one’s own industry.

Achieve diversification.

Gain economies of scale and increase income

with proportionately less investment.

Establish a transnational bridgehead without

excessive start-up costs to gain access to a

foreign market

Motives of Corporate Restructuring

Utilise under-utilised resources–human and

physical and managerial skills.

Displace existing management.

Circumvent government regulations.

Reap speculative gains attendant upon new

security issue or change in P/E ratio.

Create an image of aggressiveness and strategic

opportunism, empire building and to amass vast

economic powers of the company.

Motives of Corporate Restructuring (Cont..)

Legal Procedures for merger and acquisition

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Legal Process of Merger & Acquisition

Process (Cont…)Approval of Merger Information to stock

Exchange

Approval of Board of Directors

Application in High Court Shareholders & Creditors meeting

Sanction by High Court

Process (Cont…)Filing of Court Order Transfer of Assets &

LiabilitiesPayment By cash or

Securities

Methods of Valuation

In order to apply DCF technique, the following information is required:

• Estimating Free Cash FlowsRevenues and expensesCor.tax and depreciation:Working capital changes

• Estimating the Cost of Capital• Terminal Value

Discounted Cash flow Method

Calculation of financial synergy(1) Pooling of Interests Method:

In the pooling of interests method of

accounting, the balance sheet items and the profit

and loss items of the merged firms are combined

without recording the effects of merger. This

implies that asset, liabilities and other items of the

acquiring and the acquired firms are simply added

at the book values without making any

adjustments.

Calculation of financial synergy (cont..)

Particulars

Share Capital

Fixed Assets

Liabilities

Current Assets

Company X

200

150

250

250

Company y

240

170

200

120

After Merger

= 440

= 320

= 450

= 370

After merger both balance sheet will be combined is

called pooling of interest method

(2) Purchase Method

Under the purchase method, the assets

and liabilities of the acquiring firm after

the acquisition of the target firm may be

stated at their exiting carrying amounts or

at the amounts adjusted for the purchase

price paid to the target company.

Calculation of financial synergy (cont..)

Particulars

Share Capital

Fixed Assets

Liabilities

Current Assets

Company X

200

150

250

250

Company X

240

170

200

120

If you paid for the company X Rs. 100 than the value of firm is equal to

Firm value = Total Assets – total liabilities

150 = 400-250

So share capital is shown at Rs.100. and Rs.50 is shown as capital premium

A divestment involves the sale of a company’s assets, or product lines, or divisions or brand to the outsiders.

It is reverse of acquisition.

Motives: Strategic changeSelling cash cowsDisposal of unprofitable businessesConsolidationUnlocking value

Divestiture

Strategic Alliance “A strategic alliance is a voluntary, formal arrangement

between two or more parties to pool resources to achieve a

common set of objectives that meet critical needs while

remaining independent entities.”

Example -

Joint VenturesA joint venture (JV) is a business agreement in which

parties agree to develop, for a finite time, a new entity

and new assets by contributing equity. They exercise

control over the enterprise and consequently share

revenues, expenses and assetsICICI GROUP

INDIAPRUDENTIAL

GROUP

Sell-offWhen a company sells a part of its business to a third party, it is

called sell-off.

It is a usual practice of a large number of companies to sell-off

to divest unprofitable or less profitable businesses to avoid

further drain on its resources.

Sometimes the company might sell its profitable but non-core

businesses to ease its liquidity problems.

Spin-offWhen a company creates a new company

from the existing single entity, it is called a spin-off.

The spin-off company would usually be created as a subsidiary.

Hence, there is no change in ownership. After the spin-off, shareholders hold shares in

two different companies.

An employee stock ownership plan (ESOP) is an employee-

owner scheme that provides a company's workforce with an

ownership interest in the company. In an ESOP, companies

provide their employees with stock ownership, often at no cost

to the employees. Shares are given to employees and may be

held in an ESOP trust until the employee retires or leaves the

company. The shares are then sold.

E.g. First company introduce ESOP is Inforsys.

Employee Stock Ownership

Leverage Buy-out (LBO)A leveraged buy-out (LBO) is an acquisition of a company in which

the acquisition is substantially financed through debt. When the

managers buy their company from its owners employing debt, the

leveraged buy-out is called management buy-out (MBO).

The following firms are generally the targets for LBOs:

High growth, high market share firms

High profit potential firms

High liquidity and high debt capacity firms

Low operating risk firms

The evaluation of LBO transactions involves the same analysis as for

mergers and acquisitions. The DCF approach is used to value an

LBO.