MeaningCorporate restructuring refers to the changes inownership, business mix, assets mix and alliances with a view toenhance the shareholder value.Hence, corporate restructuring may involve ownershiprestructuring, business restructuring and assets restructuring.
Forms of Corporate Restructuring1) 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 Corporate Restructuring (cont..)Forms of Merger(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 MergerAcquisition 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.
Forms of Corporate Restructuring (cont..)Takeover – The term takeover is understood to connote hostility. Whenan acquisition is a ‘forced’ or ‘unwilling’ acquisition, it is called atakeover.A holding company is a company that holds more than half of thenominal value of the equity capital of another company, called asubsidiary company, or controls the composition of its Board ofDirectors. Both holding and subsidiary companies retain their separatelegal entities and maintain their separate books of accounts.
Motives of Corporate Restructuring 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 (Cont..) 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.
Legal Procedures for merger and acquisition Permission for merger Information to the stock exchange Approval of board of directors Application in the High Court Shareholders’ and creditors’ meetings Sanction by the High Court Filing of the Court order Transfer of assets and liabilities10 Payment by cash or securities
Process (Cont…) Approval of Board of Approval of Merger Information to stock Directors ExchangeSanction by High Court Shareholders & Creditors Application in High Court meeting
Process (Cont…) Filing of Court Order Transfer of Assets & Payment By cash or Liabilities Securities
Methods of ValuationDiscounted Cash flow Method In order to apply DCF technique, the following information is required: • Estimating Free Cash Flows Revenues and expenses Cor.tax and depreciation: Working capital changes • Estimating the Cost of Capital • Terminal Value
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 Company X Company y After Merger Share Capital 200 240 = 440 Fixed Assets 150 170 = 320 Liabilities 250 200 = 450 Current Assets 250 120 = 370After merger both balance sheet will be combined is calledpooling of interest method
Calculation of financial synergy (cont..)(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.
Company X Company XParticularsShare Capital 200 240Fixed Assets 150 170Liabilities 250 200Current Assets 250 120If you paid for the company X Rs. 100 than the value of firm is equal toFirm value = Total Assets – total liabilities 150 = 400-250So share capital is shown at Rs.100. and Rs.50 is shown as capital premium
DivestitureA 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 change Selling cash cows Disposal of unprofitable businesses Consolidation Unlocking value
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 Ventures A 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 assets ICICI GROUP INDIA PRUDENTIAL GROUP
Sell-off When 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-off When 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.
Employee Stock Ownership An employee stock ownership plan (ESOP) is an employee- owner scheme that provides a companys 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.
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.