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M & a

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  • 1. Corporate restructuring Corporate restructuring is one of the most complex and fundamental phenomena that management confronts. Each company has two opposite strategies from which to choose: to diversify or to refocus on its core business. While diversifying represents the expansion of corporate activities, refocus characterizes a concentration on its core business. From this perspective, corporate restructuring is reduction in diversification. Corporate restructuring is an episodic exercise, not related to investments in new plant and machinery which involve a significant change in one or more of the following Pattern of ownership and control Composition of liability Asset mix of the firm. It is a comprehensive process by which a company can consolidate its business operations and strengthen its position for achieving the desired objectives: Synergetic Competitive Successful It involves significant re-orientation, re-organization or realignment of assets and liabilities of the organization through conscious management action to improve future cash flow stream and to make more profitable and efficient. Meaning and Need for 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. Restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production process. In this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the corporation gain a larger market share. Corporate restructuring may also take place as a result of the acquisition of the company by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout. What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the takeover took place In general, the idea of corporate restructuring is to allow the company to continue functioning in some manner. Even when corporate raiders break up the company and leave behind a shell of the original structure, there is still usually a hope, what remains can function well enough for a new buyer to purchase the diminished corporation and return it to profitability. Purpose of Corporate Restructuring - To enhance the share holder value, The company should continuously evaluate its:1. Portfolio of businesses,2. Capital mix,3. Ownership &4. Asset arrangements to find opportunities to increase the share holder’s value. To focus on asset utilization and profitable investment opportunities.
  • 2. To reorganize or divest less profitable or loss making businesses/products. The company can also enhance value through capital Restructuring, it can innovate securities that help to reduce cost of capital. Characteristics of Corporate Restructuring –1. To improve the company’s Balance sheet, (by selling unprofitable division from its core business).2. To accomplish staff reduction ( by selling/closing of unprofitable portion).3. Changes in corporate management.4. Sale of underutilized assets, such as patents/brands.5. Outsourcing of operations such as payroll and technical support to a more efficient 3rd party.6. Moving of operations such as manufacturing to lower-cost locations.7. Reorganization of functions such as sales, marketing, & 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 company with consumers. Examples of LBO 1. Metromedia John W. Kluge (kloo gy), an immigrant from Germany, was for many years a food broker in Washington, D.C. In 1959 he and some friends bought control of the Metropolitan Broadcasting Corporation (MBC) which was a television network (far smaller than NBC, CBS, and ABC) and owned two radio stations. Kluge changed the name to Metromedia and proceeded to build up over 25 years its holdings to seven television stations and 14 radio stations. Metromedia also owned the Ice Capades and the Harlem Globetrotters. Kluge was always open to new ventures for making a profit. For example, he bought the depreciation rights to the $100 billion of New Yorks buses and subways. Because of his sometimes unorthodox ventures he felt constrained by having to report to public stockholders even though he held 25 percent of Metromedia. In 1983 he decided to take Metromedia private through a leveraged buyout. Kluge and his backers had to raise $1.45 billion to purchase 28.6 million shares, refinance Metromedias existing debt, purchase employee stock options, and provide working capital for the transition. Ten banks led by Manufacturers Hanover Trust provided an eight year loan of $1.3 billion taking Metromedias assets as collateral. The rate of interest was 1.5 percent above the prime rate and there was a covenant that required Metromedia to maintain a minimum net worth of $100 million. Kluge made a per share offer to the shareholders of Metromedia of $30 in cash and subordinated debentures having a face value of $22.50. The market value of these fifteen year debentures which would not pay interest until the sixth year was estimated to be $9.50 to $10.00. A threatened stockholder suit brought an increase in the offer by $1 per share. The offer was accepted and Kluge ended up with 93 percent of the voting stock of Metromedia.
  • 3. Metromedias ratio of long-term debt to equity was 3.5 and Moodys and Standard & Poors loweredthe rating of Metromedias debentures. In June of 1984 Metromedia went private. Six months laterKluge had Drexel Burnham Lambert sell $1.3 billion of junk bonds to replace his bank loan. It was thebiggest junk bond issue up to that point but it sold out within two hours.In 1985 Kluge sold six of Metromedias seven television stations to a group headed by RupertMurdock for $1.5 billion and the remaining station (in Boston) was sold to the Hearst Corporation for$450 million. In 1986 he sold off a billboard operation for $710 million and the Harlem Globetrottersand Ice Capades for $30 million. In 1986 the chain of radio stations was sold for $285 million. This lefttelecommunications as the main element of Metromedias operations. But a few months later Klugesold Metromedias cellular telephone and paging operations to Southwestern Bell for $1.65 billion.Altogether Kluge sold $4.6 billion of Metromedias assets. 2. Gibson Greeting CardsThis company was founded in 1850 and became a corporation in 1895. In 1964 CIT FinancialCorporation acquired Gibson Greeting Cards, but in 1980 CIT Financial was acquired by RCA andGibson became a subsidiary of RCA. Gibson was doing well. In 1984 it was the third largest greetingcard company with sales of $304 million. RCA was however implementing a policy of concentratingon its core business of NBC, Hertz, electronics, and communications and decided to sell GibsonGreeting Cards. It was sold to Wesray Corporation, a creation of former Secretary of the TreasuryWilliam Simon. The price was $81 million. Wesray gave Gibson management 20 percent of thecompany. The new Gibson stockholders, including Simon, invested $1 million. The funds came in partfrom loans from General Electric Credit Corporation ($40 million), Barclays American Business Credit($13 million). The rest came from Gibson selling and leasing back its three major manufacturing anddistribution facilities. Thus the price was actually only $54 million. General Electric Credit Corporationgot warrants to purchase 2.3 million shares at 14 cents per share and additional interest in proportionto any dividends paid by Gibson Greeting Cards. The interest rate in 1982 on Gibsons debt averaged19 percent. Eighteen months after Wesray bought Gibson it cashed in by a public offering of 10million shares at $27.50. William Simon realized a payoff of $66 million on an investment of about onethird of a million dollars. Later the Gibson stock price fell to $18 but rebounded to $28 when atakeover battle developed between Walt Disney Production and Saul Steinberg. 3. Thatcher GlassIn 1981 Dart & Craft, a major consumer goods manufacturer, decided to sell off its subsidiaryThatcher Glass. Dart & Craft felt the glass container industry had little growth potential. ThatcherGlass was the third largest bottle manufacturer in the nation and had sales of about $350 million andprofits of about $30 million. A new company, Dominick International, was formed to buy Thatcher.This new company included the president of Thatcher Glass. Dominick International offered $120million in cash and $18 million in subordinated debentures and preferred stock. A group of banks,including Manufacturers Hanover Trust and Chase Manhattan provided $110 million at an interestrate of 22.5 percent. There was $4 million of equity and $3 million of Dominick preferred stock. Therest was raised by other high interest loans. The buyout was completed in 1983 and Thatcher had adebt ratio of 95 percent. This means the debt/equity ratio was about 19. By the end of 1984Thatchers sales had dropped sharply due to increased competition from plastic and aluminumcontainers. Thatcher reacted by cutting prices and laying off 80 percent of its 4,000 employees. In
  • 4. 1985 Thatcher filed for bankruptcy and attempted to reorganize under a new president. DominickInternational sold off three of Thatchers six plants and realized $40 million on the sale. Thus the thirdlargest bottle manufacturer in the U.S. folded as a result of the leveraged buyout. 4. Federated Department StoresFederated Department Stores was a company running a collection of relatively high end retailers. Thecompany had lots of stores but did not have a mass marketing strategy. Tthe hostile LBO ofFederated Department Stores became the target of a hostile leveraged buyout by Robert Campeau, aCanadian financier. Robert Campeau believed he could realize a major gain in value for thecorporation with a change in management. He acquired Federated at a price that was nearly doubleits pre-acquisition market value. This was risky enough, but he amplified the risk by using debt tocover about 97 percent of the acquisition costs. This was a leverage ratio (debt/equity) of about 32 to1. Leverage ratios in excess of 9 to 1 have a notably higher rate of failure. The safe levels of theleverage ratio depends upon the nature of the business, the stability of the rate of return on capital.American banks typically operate with leverage ratios of 15 to 1 but this is acceptable because of thepredictability and stability of their earnings. Manufacturing corporations in the U.S. operate withleverage ratios which are typically in the range of 0.5 to 1 or 1 to 1.Robert Campeau acquired Federated in 1989. In 1990 Federated filed for bankruptcy. Whilefinancially the LBO of Federated was a failure Campeau was able to bring about some adjustmentsbefore the collapse that improved the performance of the company. The improvements were just notenough and not soon enough to cope with the financial burden of high interest payments to cover thehigh acquisition price.Baker and Smith cite some very interesting results of Steven Kaplan of the University of Chicagowhose research indicated that the reforms carried out did increase the value of the company eventhough financial distress drove the company into bankruptcy.Failures of M & AMergers and acquisitions may seem to be beneficial, resulting in the amalgamation of two conglomerates. They havebeen found to lead to cost cuts and increased revenues. However, merger and acquisition failures are not uncommon.These failures may harm the companies, tarnish their credibility in the market, and ruin the confidence of theirshareholders.Studies reveal that approximately 40% to 80% of mergers and acquisitions prove to be disappointing. The reason is thattheir value on the stock market deteriorates. The intentions and motivations for effecting mergers and acquisitions mustbe evaluated for the process to be a success. It is believed that when two companies merge the combined output willincrease the productivity of the merged companies. This is referred to as "economies of scale." However, this increase inproductivity does not always materialize.There are several reasons merger or an acquisition failures. Some of the prominent causes are summarized below:If a merger or acquisition is planned depending on the (bullish) conditions prevailing in the stock market, it may be risky.
  • 5. There are times when a merger or an acquisition may be effected for the purpose of "seeking glory," rather than viewingit as a corporate strategy to fulfill the needs of the company. Regardless of the organizational goal, these top levelexecutives are more interested in satisfying their "executive ego."In addition to the above, failure may also occur if a merger takes place as a defensive measure to neutralize the adverseeffects of globalization and a dynamic corporate environment.Failures may result if the two unifying companies embrace different "corporate cultures."It would not be correct to say that all mergers and acquisitions fail. There are many examples of mergers that haveboosted the performance of a company and addressed the well-being of its shareholders. The primary issue to focus onis how realistic the goals of the prospective merger are.Mergers and acquisitions in Indiaare on the rise. Volume of mergers and acquisitions in India in 2007 are expected to grow two fold from 2006 and four times comparedto 2005.India has emerged as one of the top countries with respect to merger and acquisition deals. In 2007, the first two months aloneaccounted for merger and acquisition deals worth $40 billion in India. The estimated figures for the entire year projected a total of morethan $ 100 billions worth of mergers and acquisitions in India. This is two fold growth from 2006 and a growth of almost four times from2005.Mergers and Acquisitions in different sectors in IndiaSector wise, large volumes of mergers and mergers and acquisitions in India have occurred in finance, telecom, FMCG, constructionmaterials, automotives and metals. In 2005 finance topped the list with 20% of total value of mergers and acquisitions in India takingplace in this sector. Telecom accounted for 16%, while FMCG and construction materials accounted for 13% and 10% respectively.In the banking sector, important mergers and acquisitions in India in recent years include the merger between IDBI (IndustrialDevelopment bank of India) and its own subsidiary IDBI Bank. The deal was worth $ 174.6 million (Rs. 7.6 billion in Indian currency).Another important merger was that between Centurion Bank and Bank of Punjab. Worth $82.1 million (Rs. 3.6 billion in Indiancurrency), this merger led to the creation of the Centurion Bank of Punjab with 235 branches in different regions of India.In the telecom sector, an increase of stakes by SingTel from 26.96 % to 32.8 % in Bharti Telecom was worth $252 million (Rs. 10.9billion in Indian currency). In the Foods and FMCG sector a controlling stake of Shaw Wallace and Company was acquired by UnitedBreweries Group owned by Vijay Mallya. This deal was worth $371.6 million (Rs. 16.2 billion in Indian currency). Another important onein this sector, worth $48.2 million (Rs 2.1 billion in Indian currency) was the acquisition of 90% stake in Williamson Tea Assam byMcLeod Russell India In construction materials 67 % stake in Ambuja Cement India Ltd was acquired by Holcim, a Swiss company for$634.9 million (Rs 27.3 billion in Indian currency).Mergers and Acquisitions in India in 2007Some of the important mergers and takeovers in India in 2007 were -Mahindra and Mahindra acquired 90% stake in the German company Schoneweiss.Corus was taken over by TataRSM Ambit based at Mumbai was acquired by PricewaterhouseCoopers.Vodafone took over Hutchison-Essar in India.
  • 6. Every investor approaches due diligence differently. Some angel investors may request information in a detailed manner all at once, while others may simply request information at different times or stages. Regardless of an investor’s method to obtain information on a potential company, it is a proven fact that exercising thorough due diligence is indicative of more profitable returns. The following documents may be requested in due diligence. General Corporate Materials These documents include: The company’so articles of Incorporation (and all amendments)o bylaws (and all amendments), minute book (including all minutes and resolutions of shareholders and directors, executive committees, and other governing groups)o organizational charto list of shareholders (and number of shares held by each) Copies ofo agreements (relating to options, voting trusts, warrants, puts, calls, subscriptions, and convertible securities)o active status reports (in the state of incorporation for the last three years) A list ofo all states where the company is authorized to do business (and annual reports for the last three years)o all states, provinces, or countries where the company owns or leases property, maintains employees, or conducts businesso all of the companys assumed names and copies of registrations A Certificate of Good Standing from the Secretary of State of the state where the company is incorporated Financial Information The most recent financial statementso that have been audited for three years (including the auditors reports)o that have not been audited (including comparable statements of the previous year) The auditors letters and replies for the past five years A schedule ofo all indebtedness and contingent liabilitieso inventoryo accounts receivableo accounts payable A description of depreciation and amortization methods and changes in accounting methods over the past five years Any analysis ofo projections, capital budgets, and strategic planso fixed and variable expenseso gross margins If availableo the companys credit reporto analyst reports The companys general ledger A description of the companys internal control procedures Physical Assets A schedule ofo fixed assets and their locationso sales and purchases of major capital equipment during the last three years All U.C.C. (Uniform Commercial Code) filings All leases of equipment Real Estate A schedule of the companys business locations Copies of all real estate leases, deeds, mortgages, title policies, surveys, zoning approvals, variances, or use permits Intellectual Property A schedule ofo domestic and foreign patents and patent applicationso trademark and trade nameso copyrightso (copies of) and copies of all consulting agreements, agreements regarding inventions, licenses, or assignments of intellectual property to or from the companyo (summary of) any claims or threatened claims by or against the company regarding intellectual propertyo A description of
  • 7. o important technical know-howo methods used to protect trade secrets and know-how Anyo "work for hire" agreementso patent clearance documents Employees and Employee Benefits A list ofo employees, including positions, current salaries, salaries, and bonuses paid during last three years, and years of serviceo (and description of) benefits of all employee health and welfare insurance policies or self-funded arrangements A description ofo all employee problems within the last three years, including alleged wrongful termination, harassment, and discriminationo any labor disputes, requests for arbitration, or grievance procedures currently pending or settled within the last three yearso workers compensation claim historyo unemployment insurance claims history Copies ofo collective bargaining agreements, if anyo all stock option and stock purchase plans and a schedule of grantso All employment, consulting, nondisclosure, nonsolicitation, or noncompetition agreements between the company and any of its employees Resumes of key employees The companys personnel handbook and a schedule of all employee benefits including holiday, vacation, and sick leave policies Summary plan descriptions of qualified and nonqualified retirement plans Licenses and Permits Copies of any governmental licenses, permits, or consents Any correspondence or documents relating to any proceedings of any regulatory agency Environmental Issues Environmental audits, if any, for each property leased by the company A listo of hazardous substances used in the companys operationso of environmental permits and licenseso identifying and describing any environmental litigation or investigationso identifying and describing any known superfund exposureo identifying and describing any contingent environmental liabilities or continuing indemnification obligationso A description of the companys disposal methods Copies of all correspondence, notices, and files related to EPA, state, or local regulatory agencies Tax matters Federal, state, local, and foreign income tax returns for the last three years States sales tax returns for the last three years Employment tax filings for three years Excise tax filings for three years Anyo audit and revenue agency reportso tax settlement documents for the last three yearso tax liens Material Contracts A schedule of all subsidiary, partnership, or joint venture relationships and obligations, with copies of all related agreements Agreementso loan and bank financing contracts, line of credit, or promissory notes to which the company is a partyo security, mortgages, indentures, collateral pledges, and similar contracts (including guaranties to which the company is a party)and any installment sale contractso distribution, sales representative, marketing, and supply contractso any options and stock purchase contracts involving interests in other companieso nondisclosure or noncompetition agreements to which the company is a partyo
  • 8. Copies of all contracts between the company and any officers, directors, five-percent shareholders, or affiliates Any letters of intent, contracts, and closing transcripts from any mergers, acquisitions, or divestitures within the last five years The companys standard quote, purchase order, invoice, and warranty forms All other material contracts Product or Service Lines A list of all existing products or services and products or services that are under development Copies of all correspondence and reports related to any regulatory approvals or disapprovals of any of the companys products or services A summary ofo all complaints or warranty claimso results of all tests, evaluations, studies, surveys, and other data regarding existing products or services and products or services under development Customer Information A schedule ofo the companys twelve largest customers in terms of sales thereto and a description of sales thereto over a period of two yearso unfilled orders Any supply or service agreements A description or copy ofo the companys purchasing policieso the companys credit policyo the companys major competitors A list and explanation for any major customers lost over the last two years All surveys and market research reports relevant to the company or its products or services The companys current advertising programs, marketing plans, budgets, and printed marketing materials Litigation Issues A schedule of all pending litigation A description of any threatened litigation Copies of insurance policies possibly providing coverage as to pending or threatened litigation Documents relating to any injunctions, consent decrees, or settlements to which the company is a party A list of unsatisfied judgments N. Insurance Coverage A schedule ofo (and copies of) the companys general liability, personal and real property, product liability, errors and omissions, key- man, directors and officers, workers compensation, and other insuranceo the companys insurance claims history for past three years Professionals A schedule of all law firms, accounting firms, consulting firms, and similar professionals engaged by the company in the past five years Articles and Public Relations Copies of all advertising and marketing articles relating to the company within the past three years Press releases and clippings Analyst reports

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