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Mergers & Acquisitions-Corporate Restructuring-B.V.Raghunandan

The process of corporate restructuring including the need and modus operandi

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Mergers & Acquisitions-Corporate Restructuring-B.V.Raghunandan

  1. 1. Corporate Restructuring B.V.Raghunandan SVS College, Bantwal Karnataka, India
  2. 2. Corporate Restructuring: Meaning <ul><li>It is a process by which an organisation drastically alters its capital structure, asset mix and organisation for increasing the firm’s value and performance </li></ul>
  3. 3. Reasons for Capital Restructuring <ul><li>Globalisation </li></ul><ul><li>Liberalisation </li></ul><ul><li>Privatisation </li></ul><ul><li>Development in IT </li></ul><ul><li>Core Competence </li></ul><ul><li>Rationalisation </li></ul><ul><li>Economy of Scale </li></ul><ul><li>Diversification </li></ul><ul><li>Takeover of Sick Companies </li></ul><ul><li>Strategic Tax Planning </li></ul><ul><li>Reduction of Cost of Capital </li></ul><ul><li>Competition </li></ul><ul><li>Supply Chain Management </li></ul>
  4. 4. Methods of Restructuring <ul><li>Merger/Amalgamation </li></ul><ul><li>Consolidation </li></ul><ul><li>Acquisition </li></ul><ul><li>Take-over </li></ul><ul><li>Joint Venture </li></ul><ul><li>Divestiture </li></ul><ul><li>Leveraged Buy-out </li></ul><ul><li>Management Buy-out </li></ul><ul><li>Master Limited Partnership </li></ul><ul><li>Employee Stock Ownership Plans </li></ul><ul><li>Strategic Alliance </li></ul><ul><li>Holding Company </li></ul><ul><li>Reverse Merger </li></ul><ul><li>Pyramiding </li></ul>
  5. 5. I Merger/Amalgamation <ul><li>It is a process by which one firm acquires assets and liabilities of another firm in such a way that the latter firm ceases to exist e.g. HDFC Bank & Centurion Bank of Punjab in 2008 </li></ul><ul><li>It is cheaper and less time consuming and procedure ridden than than buying individual assets </li></ul><ul><li>It must be approved by either 2/3 majority or ¾ majority </li></ul>
  6. 6. II Consolidation <ul><li>It is a business combination by which both the acquiring firm and acquired firm lose their identities and create a new firm </li></ul><ul><li>E.g. Centurion Bank and Bank of Punjab creating Centurion Bank of Punjab in 2007 </li></ul>
  7. 7. III Acquisition <ul><li>It is a process by which one firm purchases substantial percentage of shares of another firm from the open market or directly from the shareholders through a tender offer </li></ul><ul><li>The target company or its promoters or its managers do not come into the picture </li></ul><ul><li>No formalities need be fulfilled by the target company </li></ul><ul><li>It is between the Acquiring Firm and the shareholders of the Target Company </li></ul>
  8. 8. IV Take-over <ul><li>It is a process by which control of a corporate is transferred from one group of promoters to another group </li></ul><ul><li>Cash or securities may be paid for the transfer </li></ul><ul><li>A newly elected Board of Directors </li></ul><ul><li>E.g. ADAG (Anil Dhirubhai Ambani Group) taking over Adlabs in 2007 from the promoter Manmohan Shetty </li></ul>
  9. 9. V Joint Venture <ul><li>It is a form of business combination in which two different firms contribute financial, production, organisation/marketing skills to form a new company or to carry out a particular economic activity </li></ul><ul><li>E.g: Bharti Televenture has a JV with Nokia for its network maintenance, another JV with Nokia for marketing the handsets of Nokia, and another JV with RIM for marketing Blue Berry Mobiles </li></ul>
  10. 10. Rationale/ Motive for JV <ul><li>Entry into New Markets </li></ul><ul><li>Sharing Technology </li></ul><ul><li>Complementary Products or Services </li></ul><ul><li>Distribution Network </li></ul><ul><li>Meeting Competition </li></ul><ul><li>Carrying Out a Specific task </li></ul><ul><li>Reaching Global Markets </li></ul><ul><li>Organising Skills </li></ul><ul><li>Brand Equity </li></ul><ul><li>Sharing Research Facilities </li></ul><ul><li>Sharing a License </li></ul>
  11. 11. Joint Ventures in India <ul><li>Pre-2000 </li></ul><ul><li>Post-2000-Success Story </li></ul><ul><li>A few JVs like Godrej-Proctor & gamble failed in India </li></ul><ul><li>Attempt to kill the brands of the partner </li></ul><ul><li>Family Politics and the JVs interference </li></ul><ul><li>Each partner had an ultimate objective contrary to that of the JV </li></ul><ul><li>Automobiles </li></ul><ul><li>Consumer Electronics </li></ul><ul><li>Telecommunication </li></ul><ul><li>Insurance </li></ul><ul><li>Pharmaceuticals </li></ul><ul><li>Hospitality </li></ul><ul><li>Space Technology </li></ul><ul><li>Information Technology </li></ul>
  12. 12. VI Divestiture <ul><li>Divestiture is the sale of a segment of a company to a third party. </li></ul><ul><li>The segment may be assets, product lines, subsidiaries or divisions </li></ul><ul><li>The sale may be for cash or securities </li></ul>
  13. 13. Motives/Objectives/Rationale <ul><li>Prejudice of Investment Analysts </li></ul><ul><li>Managerial Efficiency </li></ul><ul><li>Managerial Remuneration </li></ul><ul><li>Strategic Tax planning </li></ul><ul><li>Changing Economic Environment </li></ul><ul><li>Increased Market Spanning </li></ul><ul><li>More Focussed Merger </li></ul>
  14. 14. Methods of Divestiture <ul><li>Sell-off </li></ul><ul><li>Spin-off </li></ul><ul><li>Split-Up </li></ul><ul><li>Equity Carve-Out </li></ul>
  15. 15. A. Sell-Off <ul><li>It is a sale of part of the firm to a third party </li></ul><ul><li>The shareholders of the selling firm do not get either cash or securities </li></ul><ul><li>The selling company receives cash usually for the sale </li></ul><ul><li>E.g. L&T selling its cement division to Grasim Industries of AV Birla Group which was named as Ultratech Cement later </li></ul>
  16. 16. Advantages of Sell-off <ul><li>Better Liquidity </li></ul><ul><li>Concentrating on Core Business (Tata Steel selling its cement division to La Farge) </li></ul><ul><li>Improving Profitability </li></ul><ul><li>Increasing Efficiency </li></ul><ul><li>Reducing Business Risks </li></ul>
  17. 17. B. Spin-Off <ul><li>It is a process by which a division or department is converted into a separate company </li></ul><ul><li>Shareholders get the equity shares in the new company created </li></ul><ul><li>It is done for better accountability and also profitability accounting </li></ul><ul><li>Indiabulls Financials spinning of Indiabulls Real Estate in 2007, and again Indiabulls Securities in 2008 </li></ul>
  18. 18. Rationale/Reasons for Spin-Off <ul><li>Core Competence </li></ul><ul><li>Enhancing Responsibility </li></ul><ul><li>Profit Center </li></ul><ul><li>Protection of Crown Jewels in case of a Hostile Take-over </li></ul><ul><li>Government Regulation </li></ul><ul><li>Dividing Family Business </li></ul><ul><li>Shedding Unwanted Activities </li></ul>
  19. 19. Disadvantages of Spin-off <ul><li>Loss of Economy of Scale </li></ul><ul><li>Higher Overheads </li></ul><ul><li>Reduced Ability to Raise funds </li></ul><ul><li>No Benefit of Diversification </li></ul><ul><li>No Benefit of Synergy </li></ul><ul><li>Lower Turnover and Profitability </li></ul>
  20. 20. C. Split-Up <ul><li>It is a process by which a single company is divided into two or more companies without any company being a subsidiary </li></ul><ul><li>Shareholders get the shares in all the companies created </li></ul><ul><li>Advanced Micro Devices(AMD) split into two companies in October 2008 for Designing and Manufacturing </li></ul>
  21. 21. D. Equity Carve-out <ul><li>Equity Carve-out is the sale of shares of a subsidiary company by the Holding company for getting additional cash </li></ul><ul><li>Cash is available only to the Holding Company and not to the shareholders </li></ul><ul><li>Venture Capital and Private Equity have contributed to a major extent to the Equity Carve-out Deals </li></ul>
  22. 22. VII Leveraged Buyout <ul><li>LBO is ,” the acquisition, financed largely by borrowing, of all the stock, or assets of a hitherto public company by a smll group of investors”-Weston </li></ul>
  23. 23. Stages of LBO operation <ul><li>A. First Stage: Raising Funds </li></ul><ul><li>B. Second Stage: Creating an Shell Company or an SPV and Transferring the Funds raised </li></ul><ul><li>C. Third Stage: Purchasing the Shares or Assets </li></ul><ul><li>D. Fourth Stage: Putting the Taken-Over Company on Track </li></ul><ul><li>E. Fifth Stage: Taking the Company Public again-Second IPO </li></ul>
  24. 24. VIII Management Buy-Out <ul><li>MBO is a process by which the substantial part of the shares of the company are purchased by the Executives of the company from the promoters </li></ul><ul><li>When the promoters are planning to sell a firm, the managerial personnel may buy the same from the promoters </li></ul>
  25. 25. Differences between LBO & MBO <ul><li>LBO </li></ul><ul><li>MBO </li></ul><ul><li>Outside Firm Purchases </li></ul><ul><li>SPV is Created </li></ul><ul><li>Shareholders lose the share </li></ul><ul><li>Another set of Promoters manage the company </li></ul><ul><li>Executives of the same company purchases </li></ul><ul><li>No SPV is created </li></ul><ul><li>Only Promoters sell the shares </li></ul><ul><li>Mangers and Promoters become one and the same </li></ul>
  26. 26. IX Master Limited Partnership <ul><li>It is a type of limited liability partnership where the limited liability portion of the partnership interests are divided into units and traded just like equity shares </li></ul><ul><li>It enjoys the limited liability of a company and also unlimited existence and at the same time getting the tax treatment of a partnership </li></ul>
  27. 27. Categories of MLP <ul><li>Roll Up MLP: Combination of two or more partnership into one publicly traded partnership </li></ul><ul><li>Acquisition MLP: An MLP offering units to the public with a view to using the proceeds to buy assets for the MLP </li></ul><ul><li>Liquidation MLP: MLP formed out of the liquidation of a corporate </li></ul><ul><li>Roll-Out MLP: MLP formed by exchange of operating assets of a corporate for the units of an MLP </li></ul>
  28. 28. Advantages of MLP <ul><li>Tax Advantage </li></ul><ul><li>Converting a Corporate into an MLP for easier decision making </li></ul><ul><li>The benefits of a corporate like limited liability and Unlimited existence </li></ul><ul><li>Best Suited for Professionals </li></ul><ul><li>No limitation of partnership like limited existence </li></ul>
  29. 29. X Employee Stock Ownership Plan <ul><li>ESOP is a stock bonus plan investing primarily in the securities of the employer firm </li></ul><ul><li>In India, it is known as Employee Stock Options </li></ul><ul><li>It is in the form of options convertible into equity shares of the employing company in the future </li></ul><ul><li>They are provided to attract talents at the top managerial positions and to get their loyalty </li></ul>
  30. 30. Benefits of ESOPs <ul><li>Attracting Managerial Talent </li></ul><ul><li>Getting the Loyalty </li></ul><ul><li>Giving Ownership Interest to the Managers </li></ul><ul><li>Helping MBO in the future </li></ul><ul><li>Executive Compensation Plan </li></ul><ul><li>Inducing the Mangers to perform well </li></ul>
  31. 31. XI Strategic Alliance <ul><li>It is an agreement among two or more firms to co-operate in order to achieve a commercial objective </li></ul><ul><li>In the form of JV, Franchising, Supply Agreement, Purchase Agreement, Marketing Agreement, Technology Supply Agreement, Technical Support Agreement etc. </li></ul><ul><li>Based on trust and preset priorities </li></ul>
  32. 32. XII Holding Company <ul><li>It is a company that has controlling interest in another company. It owns majority of shares in another company, which is called the subsidiary company </li></ul>
  33. 33. Holding Company <ul><li>Advantages </li></ul><ul><li>Disadvantages </li></ul><ul><li>Independent Operation </li></ul><ul><li>Separate Profit Center </li></ul><ul><li>Better Accountability </li></ul><ul><li>Quick Decisions </li></ul><ul><li>Independent Valuation in the Financial Markets </li></ul><ul><li>Core Competence </li></ul><ul><li>No economy of Scale </li></ul><ul><li>More Overheads </li></ul><ul><li>Lacking Synergy </li></ul>
  34. 34. XIII Pyramiding <ul><li>Establishing a large number of holding companies and subsidiaries with crossholdings for easier ownership of a large number of companies with a limited amount of funds </li></ul><ul><li>Involves buying a company and using its cash reserves to take over a second company and using the cash reserves and borrowings of second and third companies to take over a third company </li></ul><ul><li>E.g. Manu Chabria’s Jumbo Group taking over Dunlop, Shaw Wallace, Nihon Electronics etc with only a limited capital </li></ul><ul><li>Financially Imprudent and Dangerous </li></ul>
  35. 35. THANK YOU

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The process of corporate restructuring including the need and modus operandi


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