Before split, reliance ind was the only listed company of the group.
When a hybrid debt issue is subordinated to another debt issue from the same issuer. Mezzanine debt has embedded equity instruments (usually warrants) attached, which increase the value of the subordinated debt and allow for greater flexibility when dealing with bondholders. Mezzanine debt is frequently associated with acquisitions and buyouts, where it may be used to prioritize new owners ahead of existing owners in case of bankruptcy.
Corporate restructuring can make a business more
appealing to prospective stakeholders because such a
financial management tactic typically decreases
expenses, improves operational effectiveness, raise EPS
and provides a foundation for much better overall
• Businesses, just like people, by no means ever stop
changing. Increasing competitive challenges, continuing
shareholders’ requirements, management’s choices with
attendant positive and negative results combined with
an ever-changing legal and political ecosystem, all
require that businesses continue to reinvent themselves
and adjust to a constantly changing business climate.
MEANING OF 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, surviving a currently adverse economic climate,
or acting on the self-confidence of the corporation to move in
an entirely new direction.
• Corporate Restructuring is a comprehensive process by which
a company can consolidate its business operations and
strengthen its position for achieving its short-term and longterm corporate objectives. Corporate Restructuring is vital for
the survival of a company in a competitive environment.
• a. Corporate restructuring can be defined as any change in
the business capacity or portfolio that is carried out by an
inorganic route or
• b. Any change in the capital structure of a company that is not
a part of its ordinary course of business or
• c. Any change in the ownership of or control over the
management of the company or a combination thereof.
• a.1 Any change in the business capacity or portfolio carried
out by inorganic route.
• Tata Motors launched Sumo and later, Indica-leading to an
expansion of its business portfolio. However, these products
were launched from Tata Motor’s own manufacturing
capacity in through an organic route. Hence, it would not
qualify as ‘corporate restructuring’
• Tata Motors acquisition of Jaguar Land Rover from Ford,
through Jaguar Land Rover Limited is ‘corporate restructuring’
• a.2 Change in the business portfolio could also be in the
nature of reduction of business handled by a company.
In the case of Grasim and L&T, the demerger of L&T’s cement
business into UltraTech Cement Limited was reduction of its
business portfolio and thus, amounted to ‘corporate
restructuring’ of L&T.
b. Any change in the capital structure of a company that is
not in the ordinary course of its business.
(a) Car finance loan
(b) Scheduled repayment of a term loan, etc. keeps on
changing the debt-equity ratio within planned or targeted
range. Such changes do not qualify as Corporate
• (a) An initial public issue
• (b) Follow-on public issue
• (c) buy-back of equity shares may alter the capital structure of
a Company permanently. Such activities are not in the
ordinary course of business of company- amounts to
c. Any change in the ownership of a company or control over
a) Merger of two or more companies belonging to different
b) Demerger of a company into two or more with control of
the resulting company passing on to other promoters
c) Acquisition of a company
d) Sell-off of a company or its substantial assets
e) Delisting of a company
All these would qualify to be called exercises in ‘corporate
EXAMPLE OF CORPORATE RESTRUCTURING
• Grasim’s proposed merger of Cement Businesses
achieves many other important objectives like
strengthening Promoter Group’s control over cement
business, improving future cash flow position, etc.
REASONS FOR CORPORATE RESTRUCTURING
• To enhance liquidity
• To lower the cost of capital
• To reduce risk
• To avoid loss of control
• To improve shareholder value
PROCESS FOR CORPORATE RESTRUCTURING
• While looking at the concept of corporate restructuring, there
is process to make it successful in achieving its stated
objectives. For that a company must understand the
objectives which are to be achieved and put forward the
options or their opinions to achieve them. On selecting the
appropriate option, a company can execute the same.
NEEDS OF CORPORATE RESTRUCTURING:
1) To expand the business or operations of the company.
2) To carry on the business of the company more economically or
3) To focus on its core strength
4) Cost Reduction, by deriving the benefits of economies of scale.
5) To obtain tax advantages by merging a loss-making company with a
6) To have access to better technology.
7) To improve the debt-equity ratio.
8) To have a better market share.
9) To overcome significant problems in a company.
• Merger is an arrangement whereby the assets of two or more
companies become vested in or under the control of one
company, which may or may not be one of the original two
companies, which have as its shareholders, all or substantially
all, the shareholders of the two companies. A merger is a
transaction that results in the transfer of ownership and
control of a corporation.
• It is when one company purchases another company of an
approximately similar size. The two companies come together
to become one. Two companies usually agree to merge when
they feel that they can do something together that they can’t
do on their own. “Combining of two or more commercial
organizations into one in order to increase efficiency and
sometimes to avoid competition”.
TYPES OF MERGER
A merger occurring between companies producing similar
goods or offering similar services. This type of merger occurs
frequently as a result of larger companies attempting to
create more efficient economies of scale.
A merger between two companies producing different goods
or services for one specific finished product. This type of
merger occurs in between firms that have actual or potential
buyer- supplier relationship.
A merger between firms that are involved in totally unrelated
business activities is known as conglomerate merger.
Example- a simple example would be American Broadcasting
Company (ABC) which has highest broadcasting channels
joining Waltdisney that creates cartoon characters to
promote cartoon channels in America.
2) REVERSE MERGER
• It is when a private company purchases control of a public
company and then carries out a merger with a private
company. With a reverse merger, the private company
shareholders receive most of the shares of the public
company and control of the Board. A reverse merger is a
quick way of going public with the time-table being only a
couple of weeks. The reason a reverse merger is so quick is
that the public company has already completed all the
necessary paper-work and reviews in order to become public.
• The combining of two or more firms to form an entirely new
entity is known as consolidation. Assets and liabilities of the
firms are absorbed by the new company. In a consolidation,
two or more companies merge to form one new, larger
company. All of each company's assets and liabilities then
become the property of the new company. In consolidation,
two or more corporations come together to form a
completely new corporation.
• Example- company A and Company B consolidate to form
• Acquisition is when one firm buys the assets or shares of
another firm. It is also called takeover. In this process of
restructuring, one company overpowers the other company
and the decision is mainly taken during downturns in
economy or during declining profit margins.
• It implies the acquiring firm is larger than the target. It can be
friendly or hostile.
• The combined operations then run under the name of the
powerful entity who also takes over the existing stocks of the
• It is the process of combining or uniting multiple entities into
one form. The term amalgamation is not defined under the
Companies’ Act, 1956.
• Generally speaking, amalgamation is a legal process by which
two or more companies are joined together to form a new
entity or one or more companies are to be absorbed or
blended with another.
• As a consequence, the amalgamating company loses its
existence and its shareholder becomes the shareholder of the
new or amalgamated company.
6) JOINT VENTURE
• A contractual agreement joining together two or
more parties for the purpose of executing a
particular business undertaking is known as joint venture.
Two parties, (individuals or companies), incorporate a
company in India.
• The business of one party is transferred to the company and,
as a consideration for such a transfer; shares are issued by the
company and subscribed by that party. The other party
subscribes to the shares in cash. The parties subscribe to the
shares of the joint-venture company in agreed proportion, in
cash, and start a new business.
• All parties agree to share in the profits and losses of
the enterprise. The parties in the JV share in the
management, profits, and losses, according to a joint venture
agreement (contract). Joint ventures are often entered into
for a single purpose - a production or research activity. But
they may also be formed for a continuing purpose.
• Sony-Ericsson is a joint venture by the Japanese consumer
electronics company Sony Corporation and the Swedish
telecommunications company Ericsson to make mobile
• The stated reason for this venture is to combine Sony's
consumer electronics expertise with Ericsson's technological
leadership in the communications sector. Both companies
have stopped making their own mobile phones.
7) BUY-BACK OF SECURITIES
• The repurchase of outstanding shares (repurchase) by a
company in order to reduce the number of shares in the
market is called buy-back of securities. Companies will buy
back shares either to increase the value of shares still
available or to eliminate any threats by shareholders who may
be looking for controlling powers.
• In other words, Buyback is the reverse of issue of shares by a
company where it offers to take back its shares owned by the
investors at a specified price; this offer can be binding or
optional to the investors.
SHARE BUY-BACK is when a company makes an offer to buyback some of its own shares.
There are several types of buy-backs. Three common types
• an equal access scheme - when the company offers to buy
back the same proportion of each shareholders shares;
• a selective buy-back - when the company offers to buy back
shares from only one or some of its shareholders; or,
the company may buy the shares on the exchange where the
shares are traded.
8) DELISTING OF SECURITIES
• To be able to understand the meaning of delisting, one has to
first understand the meaning of the word “Listing”. Listing
means admission of a Company’s securities to the trading
platform of a Stock Exchange, so as to provide marketability
and liquidity to the security holders.
• “Delisting” is totally the reverse of listing. To delist means
permanent removal of securities of a listed company from a
stock exchange. As a consequence of delisting, the securities of
that company would no longer be tradeable at that stock
• "Delisting" i.e. the said removal from a Stock Exchange, may be
Voluntary (i.e. at the will of the Company) or Compulsory (i.e.
out of a penal action by the Stock Exchanges, for the reason of
any violations/ lapses).
• The act of splitting off a part of an existing company to
become a new company, which operates completely separate
from the original company is known as demerger.
Shareholders of the original company are usually given an
equivalent stake of ownership in the new company.
• A demerger is often done to help each of the segments
operate more smoothly, as they can now focus on a more
TYPES OF DEMERGER
• It is a kind of Demerger when an existing Parent Company
distributes on a pro rata basis all the shares it owns in a
controlled Subsidiary to its own shareholders.
• It results into two separate public corporations with same
equity ownership proportion as earlier. No money transaction
is involved. Subsidiary’s assets are not revalued.
• Transaction is treated as Stock Dividend and tax-free
Spin Offs & Split Ups
Company A without Subsidiary B
Shareholders own shares of combined company.
Own the equity in subsidiary implicitly.
Spin Offs & Split Ups
Company A after spinoff
Shares of company
New company B
Old shareholders still own shares of company A,
which now only represent ownership of A without
EXAMPLE:• THE PEPSI SPIN-OFF
• Reduced Profitability
▫ Pepsi losing ground to Coke.
▫ Pepsi’s Pizza Hut and KFC chains under intense pressure from
competitors ( McDonald and Burger King )
▫ In 1997, PepsiCo spun-off (100%) KFC, Pizza Hut, and Taco Bell
into a separate corporation – Tricon Global Restaurants Inc.
• Spun-Off its bottling operation into an independent Public
▫ Better focus on Pepsi beverage operations and Frito Lay snack
▫ Its concentration and bottling setup looking a lot more like Coke.
• It is the division of a company into two or more parts through
transfer of stock and parent company ceases to exist.
Accomplished usually by initial carve-outs and spin-offs of
individual parts from one or more core activities.
• In a split-up, the existing corporation transfers all its assets to
two or more new controlled subsidiaries, in exchange for
subsidiary stock. In other words, a single company splits into
two or more separately run companies.
• HEWLETT-PACKARD AND AGILENT
• Initial Public Offering – First stage of Split-Up
On November 18, 1999, HP completed $2.2 billion IPO of its Test
and Measurement Equipment subsidiary, Agilent Technologies.
• Spun-off Agilent in 1999 for the more promising computer
▫ Asian Economic crisis, Low sales growth
▫ Avoid overlap of capabilities between the computer business
and the instrumentation business.
▫ More focus on producing computers.
Spin Offs & Split Ups
Example of Split-ups in Indian companies:RELIANCE INDUSTRIES
Reliance Industries was split into 5 listed companies in
the year 2005-06.
• Split-offs is a type of reorganization where the stock of a subsidiary is
offered in exchange for shares in the parent company. In a split-off, the
parent company offers its shareholders the opportunity to exchange their
Parent Co shares for new shares of a subsidiary (Split Co).
• This tender offer often includes a premium to encourage existing Parent
Co shareholders to accept the offer. If the tender offer is oversubscribed,
meaning that more Parent Co shares are tendered than Split Co shares are
offered, the exchange is conducted on a pro-rata basis.
• If the tender offer is undersubscribed, meaning that too few Parent Co
shareholders accept the tender offer, Parent Co will usually distribute the
remaining unsubscribed Split Co shares pro-rata via a spin-off.
EXAMPLE- Parent Co might offer its shareholders $11.00 worth of Split Co stock in
exchange for $10.00 of Parent Co stock (a 10% premium).
EQUITY CARVED OUT
• In an equity carve-out, the parent company (Parent Co) sells a
portion of its interest (equity stock) in a subsidiary (Sub Co) to
the public in an initial public offering. Also known as an IPO
carve-out or Split off IPO.
• A newly publicly listed company is created, but the parent
keeps a controlling stake in the newly traded subsidiary.
Subsidiary’s shares are offered for sale for increasing cash
Company before Equity carve-out
Company A without subsidiary B
Company after Equity carve-out
Company A without subsidieary B
X % of sub B equity sold
To market for cash
X % of
• Disposition or sale of an asset by a company is called divestiture. A
company will often divest an asset which is not performing well,
which is not vital to the company's core business. In other words
a divestiture or divestment is the reduction of an asset or business
through sale, liquidation, exchange, closure, or any other means for
financial or ethical reasons. It is the opposite of investment.
• Let's assume Company XYZ is the parent of a food company, a car
company, and a clothing company. If for some reason Company XYZ
wants out of the car business, it might divest the business by selling
it to another company, exchanging it for another asset, or closing
down the car company.
• The restructuring usually takes place when a business is
struggling and losing money. A third party will be brought in
to assess the way that the business is being run, and then
make recommendations based on what they found that will
help make the business run more efficiently.
• A strong corporate restructuring firm will have experts in a
wide variety of areas that can examine all aspects of a
business to help find solutions. A good corporate
restructuring firm will not just identify problems of where
money is being lost, but also offer solutions that a company
can implement in order to solve those problems.
• A leveraged buyout (LBO) is an acquisition (usually of a
company but it can also be single assets like a real estate)
where the purchase price is financed through a combination
of equity and debt and in which the cash flows or assets of
the target are used to secure and repay the debt. As the debt
usually has a lower cost of capital than the equity, the returns
on the equity increase with increasing debt. The debt thus
effectively serves as a lever to increase returns which explains
the origin of the term LBO.
• LBOs are a very common occurrence in today's "Mergers and
Acquisitions" (M&A) environment. The term LBO is usually
employed when a financial sponsor acquires a company.
However, many corporate transactions are part-funded by
bank debt, thus effectively also representing an LBO.
• LBOs mostly occur in private companies, but can also be
employed with public companies (in a so-called PtP
transaction, Public to Private).
• As financial sponsors increase their returns by
employing a very high leverage (i.e., a high ratio of
debt to equity), they have an incentive to employ as
much debt as possible to finance an acquisition. This
has in many cases led to situations, in which
companies were "overlevered", meaning that they
did not generate sufficient cash flows to service their
debt, which in turn led to insolvency or to debt-toequity swaps in which the equity owners lose control
over the business and the debt providers assume the
• A leveraged buyout or LBO is a type of aggressive
business practice whereby investors or a larger
corporation utilizes borrowed funds (junk bonds,
traditional bank loans, etc.) or debt to finance its
• Both the assets of the acquiring corporation and
acquired company function as a form of secured
collateral in this type of business deal.
• In addition, any interest that accrues during the buyout
will be compensated by the future cash flow of the
acquired company. Other terms used synonymously with
an LBO are “hostile takeover,” “highly-leveraged
transaction,” and “bootstrap transaction.”
• Once the control of a company is acquired, the firm is then
made private for some time with the intent of going public
again. During this “private period,” new owners (the buyout
investors) are able to reorganize a company’s corporate
structure with the objective of making a substantial profitable
• Some comprehensive changes include downsizing
departments through layoffs or completely ridding
unnecessary company divisions and sectors. Buyout
investors can also sell the company as a whole or in different
parts in order to achieve a high rate on returns.
MANAGEMENT BUYOUTS OR MBO
• The most common buyout agreement is the management
buyout or MBO. In this corporate arrangement, the
company’s management teams and/or executives agree to
“buyout” or acquire a large part of the company, subsidiary,
or divisions from the existing shareholders.
• Due to the fact that this financial compromise requires a
considerable amount of capital, the management team often
employs the assistance of venture capitalists to finance this
endeavour. As with traditional leveraged buyouts, the
company is made private and corporate restructuring occurs.
An MBO can occur for a number of reasons; e.g.,
• The owners of the business want to retire and want to sell the
company to the management team they trust (and with
whom they have worked for years)
• The owners of the business have lost faith in the business and
are willing to sell it to the management (who believes in the
future of the business) in order to get some value for the
• The managers see a value in the business that the current
owners do not see and do not want to pursue
• Pros- One positive aspect of leveraged buyouts is the fact that
poorly managed firms prior to their acquisition can undergo
valuable corporate reformation when they become private.
By changing their corporate structure (including modifying
and replacing executive and management staff, unnecessary
company sectors, and excessive expenditures), a company can
revitalize itself and earn substantial returns.
(corporate restructuring) Contd.
• Cons- Corporate restructuring from leveraged buyouts can
greatly impact employees. At times, this means companies
may have to downsize their operations and reduce the
number of paid staff, which results in unemployment for
those who will be laid off. In addition, unemployment after
leveraged acquisition of a company can result in negative
effects of the overall community, hindering its economic
prosperity and development. Some leveraged buyouts may
not be friendly and can lead to rather hostile takeovers, which
goes against the wishes of the acquired firms’ managers.
(corporate restructuring) Contd.
• An example of a hostile takeover occurred when the PepsiCo
acquired the Quaker Oats Company, an American food
company well-known for its breakfast cereals and oatmeal
products. In 2001, PepsiCo, in an attempt to diversify its
portfolio in non-carbonated drinks, primarily acquired Quaker
Oats because QO owned the Gatorade brand. Even though
this merger created the fourth-largest consumer goods
company in the world, many of Quaker Oats’ managers were
against the acquisition, claiming that such a merger was
unlawful and contrary to the public interest.
SMALL AMOUNT OF CAPITAL REQUIREMENTS
• Pros- Since this type of acquisition involves a high
debt-to-equity ratio, large corporations can easily
acquire smaller companies with very little capital. If
the acquired company’s returns are greater than the
cost of the debt financing, then all stockholders can
benefit from the financial returns, further increasing
the value of a firm.
(small amount of capital requirements )Contd.
• Cons- However, if the company’s returns are less than the cost
of the debt financing, then corporate bankruptcy can result.
In addition, the high-interest rates imposed by leveraged
buyouts may be a challenge for companies whose cash-flow
and sale of assets are insufficient. The result cannot only lead
to a company’s bankruptcy but can also result in a poor line of
credit for the buyout investors
(small amount of capital requirements )Contd.
• An example of an unsuccessful leveraged buyout is the
Federated Department Stores. The Federated Department
Stores had many stores nationwide and tailored primarily to
high-end retailers. However, they lacked an effective
marketing strategy. In 1989, Robert Campeau, a Canadian
financier, bought out Federated with the hope to make
considerable changes. Only one year later, and only after
some reforms, Federated could not keep up with the financial
burdens of high interest payments and had to file bankruptcy
for 258 stores.
• Pros- As mentioned earlier, management buyout of a
company is a common business practice. Often times, MBOs
occur as a last resort to save an enterprise from permanent
closure or replacement of existing management teams by an
outside company. Many analysts strongly believe
management buyouts greatly promote executive and
shareholder interests as well as management loyalty and
(management buyout) Contd.
• Cons- Not every MBO turns out to be successful as
planned. Management buyouts can generate
substantial conflicts of interest among employees
and managers alike. Management and executive
teams can easily be lured to propose a short-term
buyout for personal profit. In addition, they can also
corruptly mismanage a company, leading to an
enterprise’s depreciated stock.
(management buyout) Contd.
• An example of a successful management buyout is
Springfield Remanufacturing Corporation, or SRC, an
engine remanufacturing plant located in Springfield,
Missouri. In 1983, SRC was at risk for permanent closure
and was being bought by an outside company until their
employees decided to buyout the company. The
management buyout of SRC resulted in extreme success.
Since 1983, it has grown exponentially from one
company within $10,000 of being shut down to a proud
assembly of 23 small businesses with a combined profit
of over $120 million today.
• Pros- Every leveraged buyout can be considered
risky, especially in reference to the existing economy.
If the existing economy is strong and remains solid,
then the leveraged buyout can greatly improve its
chances for success.
• Cons- On the other hand, a weak economy is highly
indicative of a problematic LBO. During an economic
crisis, money may be difficult to come by and dollar
weakness could make acquiring companies result in
poor financial returns. In addition, acquisition can
affect employee morale and can hinder the overall
growth of a company.
Dell readies $13-15 billion leveraged
buyout debt financing
Feb 5, 2013
NEW YORK: Computer maker Dell Inc is preparing a debt financing
package of between $13 billion and $15 billion to back its $24.4
billion leveraged buyout, banking sources following the situation told
Thomson Reuters LPC.
The final size of the debt financing depends on what portion of the
company's existing notes remain outstanding, sources added.
Dell investor sues to block Michael's leveraged
Feb 7, 2013
Michael Dell's offer to take Dell Inc private for $24.4 billion should be
blocked because the leveraged buyout is unfair to the struggling
computer company's stockholders, according to a lawsuit by an
individual investor that was filed on Wednesday.
The buyout announced on Tuesday at $13.65 per share substantially
undervalued the company's long-term prospects, according to the
lawsuit, which seeks class action status to represent all Dell investors.
• There are many advantages and disadvantages
concerning leveraged buyouts.
• First, this type of agreement can allow many large
companies to acquire smaller-sized enterprises with
very little personal capital.
• Second, since corporate restructuring can take place,
the acquired company can benefit from necessary
reorganization and reform. In addition, management
buyout can prevent a company from being acquired
by external sources or from being shut down
However, there are many disadvantages imposed by LBOs
• Often times, the restructuring can lead a company to
downsize and can even result in hostile takeovers.
• The high interest rates from the high debt-to-equity
amounts can result in a corporation’s bankruptcy,
especially if the company is not generating substantial
returns after acquisition.
• Lastly, management buyouts can produce conflicts of
interest among employees, executives, and management
teams as well as possible mismanagement by the buyout
owners. With the potential for enormous profit, it is no
wonder that leveraged buyout strategies expanded
throughout the 1980s and have recently made a
comeback in modern corporate America.
Weston, J. Fred. (2002). Takeovers, Restructuring & Corporate Governance.
Delhi: Pearson Education.
Verma, J.C. (1997). Corporate Mergers, Amalgamations & Takeovers. New
Delhi: Bharat Publishing House.
Vishwanath, Krishnamurthy. (2008). Mergers, Acquisitions and Corporate
Restructuring. Sage Publications Pvt. Ltd.
http://www.esupportkpo.com/images/Learning%20Pages%20%20Articles%20-%20Corporate%20Restructuring.pdf; last accessed on
http://dspace.upce.cz/bitstream/10195/32208/1/CL655.pdf; last accessed on
http://www.shbathiya.com/3.pdf ; last accessed on 09/02/13