Corporate restructuring in India a study of some selected companies

CORPORATE RESTRUCTURING
Dr. Rakesh Kumar Sharma
School of Humanities & Social Sciences ,Thapar Institute of
Engineering & Technology
(Deemed to be University)
Patiala

PRESENTATION PLAN
• Introduction
• Does Restructuring create shareholder value
• Need and purposes of restructuring
• Why engage in Corporate Restructuring?
• Tools or strategies of corporate restructuring
• Exchange ratio in M & A
• Legal procedure in M & A
• Planning for M & A
• Mega Merger of SBI with its associates.

• The corporate restructuring, often compared to medical
surgery, is a process of treatment for ailing companies
based on the professional diagnosis.
• Just as the goal of medical surgery lies in the recovery of a
patient, the aim of a corporate restructuring is the
rehabilitation of a distressed company.

• It is the fundamental change in a company's business or
financial structure or fixed assets or ownership with the
motive of increasing the company's value to shareholders
or creditors.
• Hence , 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 long-term corporate objectives.

• Corporate restructuring refers to change in the
ownership, business mix; assets mix alliances with
a view to enhance shareholder value. Hence
corporate restructuring may involve:
Ownership
Restructuring
Business
Restructuring
Assets
Restructuring

DOWNSIZING
• A downsize refers to reducing the size of a
company by eliminating workers and/or divisions
within the company. It is sometimes referred to as
"trimming the fat".

ULTIMATE OBJECTIVE OF AN
ORGANISATION
PRODUCT
EXTENSION
CAPACITY
EXPANSION
INTERNAL
GROWTH
MERGERS
ACQUISITIONS
EXTERNAL
GROWTH
WEALTH MAXIMISATION

DOES RESTRUCTURING
CREATE VALUE?
• The key principle behind corporate restructuring
is to create shareholder value over and above that
of the sum of the parts.
• Corporate Restructuring creates value only if:
Value of the combined entity as a result of the
corporate restructuring is greater than the sum of
value of individual companies.
• C > A + B Value creation
• C<= A + B Value destruction

NEED/PURPOSE OF CORPORATE
RESTRUCTURING
• To expand the business or operations of the
company.
• To carry on the business of the company more
economically or more efficiently.
• To focus on core strength cost reduction by
deriving the benefits of economies of scale.

CONTD…..
• Obtaining tax advantage by merging a loss making
company with a profit making company .
• To have access to better technology.
• To have better market share.
• To overcome significant problems in a company.
• To become globally competitive & eliminate
competition.

WHY ENGAGE IN
CORPORATE RESTRUCTURING?
• Sales enhancement and operating economies.
• Accelerate growth rate.
• Improved management.
• Wealth transfers.
• Tax reasons.
• Leverage gains.
• Management’s personal agenda.
• Provide liquidity to shareholders.

TECHNIQUES OR STRATEGIES OF
Expansion Techniques
Divestment Techniques
Other Techniques

EXPANSION TECHNIQUES
Merger/Amalg
amation
Acquisition
Takeover
Strategic
Alliances
Joint ventures

WHAT IS 'AMALGAMATION'
• Amalgamation is the combination of one or more
companies into a new entity.
• An amalgamation is distinct from
a merger because neither of the combining
companies survives as a legal entity.
• Rather, a completely new entity is formed to
house the combined assets and liabilities of
both companies.

MERGER/ AMALGAMATION
Mergers can be of four types; namely:
A) Horizontal Mergers
B) Vertical Mergers
C) Congeneric Merger
D) Conglomerates Merger

MERGER THROUGH
ABSORPTION.
Absorption:
• Absorption is a combination of two or more
companies into an existing company. All
companies except one lose their identity in a
merger through absorption.
• An example of this type of merger is the
absorption of Tata Fertilizer Ltd.by the Tata
Chemicals Ltd (TCL).

MERGER THROUGH
CONSOLIDATION
• Consolidation is a combination of two or more
companies into new company. In this form of
merger , all companies are legally dissolved and a
new company is created.
• In a consolidation, the acquired company transfers
its assets , liabilities and shares to new company
for cash or exchange of shares.
• An example of consolidation is the merger or
amalgamation of Hindustan computers Ltd.
Hindustan Instruments Ltd.

ACQUISITION
• An acquisition or takeover does not necessarily
entails full, legal control. A company can effective
control over the another company by holding
minority ownership

TAKEOVER
• Takeover occurs when acquiring firm takes over
the control of the targeted firm.
(A)Friendly Takeover
(B)Hostile Takeover

STRATEGIC ALLIANCE
• A strategic alliance is an arrangement between
two companies to undertake a mutually
beneficial project while each retains its
independence. The agreement is less complex
and less binding than a joint venture, in which two
businesses pool resources to create a separate
business entity.
• The basic idea behind alliances is to minimize risk
while maximizing your leverage.

JOINT VENTURE
• Two or more businesses joining together under a
contractual agreement to conduct a specific
business enterprise with both parties sharing
profits and losses.
• The venture is for one specific project only, rather
than for a continuing business relationship as in a
strategic alliance.

DIVESTMENT TECHNIQUES
Demerger
a) Spin off
b) Split up
c) Split off
Leverage buy out
Sell off Liquidation

SPIN-OFFS
• A spinoff occurs when a subsidiary becomes an
independent entity. The parent firm distributes
shares of the subsidiary to its shareholders
through a stock dividend.
• Since this transaction is a dividend distribution,
the subsidiary becomes a separate legal entity
with a distinct management and board.

SPLIT UP
• Split up involves transfer of all or substantially all
assets, liabilities, loans & businesses (on going
concern basis) of the company to two or more
companies in which, again like spin off, the shares in
each of new companies are allotted to original
shareholders of the company on proportionate basis.
• But unlike spinoff transferor company ceases to exist.

SPLIT OFF
• Split off is a spin off with the difference that in
split off, all the shareholders of the transferor
company do not get shares in transferee company
in the same proportion in which they held shares
in the transferor company.

LEVERAGE BUYOUT (LBO)
• Leverage Buyout (LBO)
• The acquisition of another company using a
significant amount of borrowed money (bonds or
loans) to meet the cost of acquisition. Often, the
assets of the company being acquired are used as
collateral for the loans in addition to the assets of
the acquiring company.

SELL-OFFS
• A sell-off , also known as a divestiture , is the
outright sale of a company subsidiary. Normally,
sell-offs are done because the subsidiary doesn't
fit into the parent company's core strategy.
• The market may be under valuing the combined
businesses due to a lack of synergy between the
parent and subsidiary. As a result, management
and the board decide that the subsidiary is better
off under different ownership.

OTHER TECHNIQUES
Reverse Merger Equity Carve out
Going Private Share Repurchase

REVERSE MERGER
• A reverse takeover or reverse merger
takeover (reverse IPO) is the acquisition of a
public company by a private company so that the
private company can bypass the lengthy and
complex process of going public.

EQUITY CARVE-OUTS
• A parent firm makes a subsidiary public through
an initial public offering of shares, amounting to a
partial sell-off. A new publicly-listed company is
created, but the parent keeps a controlling stake in
the newly traded subsidiary.

GOING PRIVATE
• Making a public company private through the
repurchase of stock by current management
and/or outside private investors.
• The most common transaction is paying
shareholders cash and merging the company into a
shell corporation owned by a private investor
management group.
• Treated as an asset sale rather than a merger.

EXCHANGE RATIO IN M & A
• The exchange ratio measures the ratio of shares
the acquiring company is offering the target firm
for one share of the target firm.
• Exchange ratio is calculated in accordance to the
merger or acquisition agreement.

Example -- Company A will acquire Company B with
shares of common stock.
Present earnings Rs.20,000,000 Rs.5,000,000
Shares outstanding 5,000,000 2,000,000
Earnings per share Rs.4.00 Rs.2.50
Price per share Rs.64.00 Rs.35.00
Price / earnings ratio 16 12
Company A Company B

LET Company B has agreed on an offer of
Rs.35 in common stock of Company A.
Surviving Company A
Total earnings Rs.25,000,000
Shares outstanding* 6,093,750
Earnings per share Rs. 4.10
Exchange ratio = Rs. 35 / Rs.64 = .546875
* New shares from exchange = .546875 x 2,000,000
= 1,093,750

• The shareholders of company a will experience an
increase in earnings per share because of the
acquisition [Rs.4.10 post-merger EPS versus
Rs.4.00 pre-merger EPS].
The shareholders of company b will experience a
decrease in earnings per share because of the
acquisition [.546875 x Rs.4.10 = Rs.2.24 post-
merger EPS versus Rs.2.50 pre-merger EPS].
THE EXAMPLE CONCLUDES -

LEGAL PROCEDURES FOR MERGER
AND ACQUISITION
The general law relating to mergers, amalgamations
and reconstruction is embodied in sections 391 to
396 of the Companies Act, 1956 which jointly deal
with the compromise and arrangement with
creditors and members of a company needed for a
merger.

INDIAN COMPANY ACT 1956
Section-391
Empowers the Tribunal to sanction a compromise
or arrangement between a company and its
creditors/ members subject to certain conditions.
Section-392
This section gives the power to the Tribunal to
enforce and/ or supervise such compromises or
arrangements with creditors and members.

Section 393
Provides for the availability of the information
required by the creditors and members of the
concerned company when agreeing to such an
arrangement.
Section 394
Makes provisions for facilitating reconstruction
and amalgamation of companies, by making an
appropriate application to the Tribunal.
. Indian Company Act, 1956

Section 395
Gives power and duty to acquire the shares of
shareholders dissenting from the scheme or
contract approved by the majority.
Section 396
Deals with the power of the central government to
provide for an amalgamation of companies in the
national interest.
. Indian Company Act, 1956

Both the amalgamating company or companies and the
amalgamated company should comply with the
requirements specified in sections 391 to 394 and
submit details of all the formalities for consideration of
the Tribunal.
Compliance

•Sections 394, 394A of the Companies Act deal with
the procedures and the requirements to be followed
in order to effect amalgamations of companies
•And provisions relating to the powers of the
Tribunal and the central government in the matter
of bringing about amalgamations of companies.
Procedures and Requirements

1. After the application is filed, the Tribunal
would pass order for fixation of date of hearing
2. To make Provision to send copy of application
to Registrar of companies & regional director of
company.
3. Official Liquidator Confirm that the affairs of
the company have not been conducted in a
manner prejudicial to the interest of the
shareholders or the public.
Legal Procedure or Steps in M &A

4. Before sanction M & A- Notice to Central Govt.
5.Tribunal should take into consideration the
representations, if any, made to it by the
government before passing any order granting
or rejecting the scheme of amalgamation.
6. Tribunal would give the petitioner company
an opportunity to meet all the objections which
may be raised by shareholders, creditors, the
government and others.
Legal Procedure Contd……

7. To Sanction or approve M & A.
8. Thus by the order of the Tribunal, the properties
or liabilities of the amalgamating company get
transferred to the amalgamated company.
Legal Procedure contd…….

PRE M & A
• Intent-A set of motives and/or objectives to undertake the
purchase of a competitor or a Business.
• Information-A wide variety of facts and data necessary to
maintain and reinforce a purchasing decision.
• Value -The worth of an acquisition deal created mainly from
anticipated synergistic benefits of the combining company
• Price -A payment of necessary capital to acquire a target
company or a business
• Approach A variety of surrounding procedures to persuade
the target firm to finalize an intended acquisition deal

Post-M & A
• Approach-A variety of surrounding procedures to
reconcile a pre-determined acquisition intent to
the target firm, while minimizing problems and
obstacles
• People-A group of the merging company’s
organizational members, who have either positive
or negative perceptions toward an acquisition deal
• Culture -A set of important assumptions, such as
norms, value and politics, that members of an
organization share in common.

Contd...
• Organization-A wide variety of organizational
configurations, including formal and informal
structures, systems, and processes.
• Strategy-A set of consistent alignment efforts to
achieve long-term goals of the merging company
based upon the acquisition intent.

POST- M &A PERFORMANCE
EVALUATION
• Accounting Profits-A set of conventional measures
of financial performance (i.e., ROE, ROI, Profit
Margin, etc)
• Stock Returns -The acquiring firm’s stock price
changes either surrounding acquisition announcement
date or certain periods of time after the deal is
announced.
• Market Share -The ratio of sales revenue of the
combined firm to the total sales revenue of all firms
in the particular industry, including the merged firm
itself.

CONTD.....
• Operating Efficiency -Value-added gains from
realized synergies, including operational and
managerial synergies.
• Operation Cash Flow -Sales, minus cost of goods
sold and selling administrative expenses, plus
depreciation and goodwill expenses
• Link
• C:UsersrakeshDesktopQuestionnaire.doc

Pre-Acquisition Management-Intentions
Accelerate growth of
the acquiring
company
Utilize synergistic
attributes of the
acquired company
with reference to
the acquiring
company
Achieve the personal
goals, vision, and
particular objectives
of the acquiring
company’s chief
executive
Broaden the
acquiring company’s
customer base by
extending products
and services
Capture scale
economies to save
costs through
combining two
firms within an
industry
Expand capacity at
less cost

M & A- INTENTIONS
• There are explicit intents that have driven
recent merger and acquisition activities by
Indian firms.
Accelerate growth of the acquiring company.
Capture scale economies to save costs through
combining two firms within an industry.
Utilize synergistic attributes of the acquired
company with reference to the acquiring company.
Expand capacity at less cost.

KEY SUCCESS FACTORS IN PRE
ACQUISITION PHASE
• There are key success factors in the pre acquisition
phase that will determine a successful acquisition
deal in the Indian companies.
 Identify the target’s capital expenditure requirements
(Information).
 Identify strategic relatedness between the acquirer and the
target (Information).
 Identify the target’s capital structure and cost of capital
(Information).
 Identify the trends of target’s overall performance
(Information).
 Identify potential operating synergy (i.e., improved operating

CONTD....
 Identify the trend of target’s cash flow from operations
(Information).
 Method of payment (i.e., cash, stock, etc.) (Approach)
 Identify the target’s property locations of market served
(Information).
 Identify potential improvements in brand & reputation
(Information).
 Broad involvement throughout of the acquirer’s key staff
and employees in the planning of an acquisition
(Organization).

KEY SUCCESS FACTORS-POST ACQUISITION
INTEGRATION PHASE
There are key success factors in the post acquisition
integration phase that will determine a successful
acquisition deal in the Indian companies.
 Establish a post-acquisition strategy early in the process
(Approach).
 Establish an effective communication strategy to keep the
target’s employees well informed (Approach).
 Identify and retain key employees and managers of the
target (People).
 Move rapidly as planned.

CONTD.....
 Determine the degree of post-acquisition integration (i.e.,
extensive, moderate, no interruption of the target’s
autonomy) (Approach)
 Establish a sense of unity between the two firms (Culture)
 Align acquisition intent and operating strategy (Strategy).
 Develop a formal integration plan by top management
teams of both companies (Approach).
 Identify a new set of opportunities for enhancement of
competitive position of merged firm (Strategy)

PERFORMANCE EVALUATION
CRITERIA
• There are appropriate performance evaluation criteria that
can determine a successful acquisition transaction in the
Indian companies.
 Operating Cash Flow (i.e., Sales, minus cost of
goods/services sold and selling administrative expenses,
plus depreciation and goodwill expenses (Cash Flow).
 Free Cash Flow Per Share (Cash Flow).
 Market share gains (or losses) (Market Share)
 Stock price changes surrounding the deal announcement
dates (Stock Returns).

MEGA MERGER OF SBI WITH
ITS FIVE SUBSIDIARIES

ORIGIN OF STATE BANK OF
INDIA
• In fact, SBI came into existence when Bank of
Bengal, Bank of Madras and Bank of Bombay
amalgamated to form Imperial Bank of India in 1921
which was subsequently converted to State Bank of
India in 1955.

KEY STRENGTHS OF SBI
• Biggest State Bank of India(SBI) is an Indian
Multinational, public sector bank.
• It is a government-owned corporations with its
headquarters in Mumbai, Maharashtra.
• SBI has 14000 branches, including 191 foreign
offices spread across 36 countries.
• SBI has ranked 232nd on the Fortune Global 500 list
of the World’s corporations as of 2016
• SBI has currently five associates namely State bank
of Hyderabad, State bank of Patiala, State bank of
Mysore, State bank of Travancore and State bank of
Bikaner and Jaipur.

Mega Merger
• State Bank of Patiala (SBP) (founded 1917)
• State bank of Travancore (SBT) (founded
1945)
• State Bank of Mysore (SBM) (founded 1913)
• State Bank of Bikaner & Jaipur(SBBJ)(founded
1963)
• State Bank Of Hyderabad (SBH) (founded
1941)
• Bharatiya Mahila Bank(founded 2013)

CONTD.....
• Merger of SBI with its 5 associate banks and
Bharatiya Mahila Bank which took place on 1 April,
2017 is the largest merger in history of Indian
Banking Industry.
• SBI to reach this point of success where post-merger
it is at 45th position among top banks of the world.

CONTD....
• In history of SBI it is not the first time when SBI
has merged with other banks.
• Earlier in 2008, State Bank of Saurashtra was
merged with SBI and in 2010 State Bank of Indore
was merged with SBI.

REASONS OF MERGER
Government of India provides subsidy and
contribution for bad debt recovery and share capital
to SBI and its associate banks.
It will become easy for government to provide aid to
this single amalgamated bank instead of giving it
separately to SBI and its associate banks.

CONTD.....
Profitability of SBI was going down for last few
years and this merger will be able to show better
position of profitability in books of SBI.
Net profit of the group fell from Rs. 12,225 crores in
Financial Year 2016 to Rs. 241 crores in Financial
Year 2017 and the losses were mainly due to
associate banks

CONTD.....
To recover loans which have turned bad and to reduce
NPA of SBI and associate banks in future, merger of
SBI with associate banks was important.
For reconstruction of SBI and associate banks in face
of financial crises so that it can meet its liabilities.
With the merger, SBI has become bigger than before.
Now it has a larger asset base and ranks 45th among
top banks of the world.

Contd......
Management of bank will become easier as earlier all
the branches were managed by separate management
though the holding was same and it used to make the
whole process cumbersome.
Cost of managing large number of branches will
reduce which will increase profitability of bank.

EFFECTS OF MERGER
• As a result of merger SBI will be among top 50 large
banks of the world. Now SBI will have an asset base
of Rs. 37 lakh crores.
• Presently number of SBI offices along with its
associates are 809 which is likely to be reduced to
approximately 687 after merger.

CONTD.....
• Employees will be reallocated mainly to customer
interface operations of those branches which are
likely to be shut down.
• The task has been lightened as around 13000
employees have retired this year and 3600 have taken
voluntary retirement. However, bank will hire less
employees in this financial year.

CONTD.......
• Out of total asset base of SBI, 28 shares of SBI will
be given to shareholders of SBBJ who had 10 shares
and shareholders of SBM and SBT having 10 shares
will get 22 SBI shares each as only these associate
banks are listed with stock exchange.
• Rest two banks i.e. SBP and SBH are not listed with
the stock exchange.

CHALLENGES OF MEGA-
MERGING
• Overlap of branches
SBI today runs the largest bank in the country in terms
of assets as well as branch network. They have
branches in every nook and corner of the country. At
many places SBI group has more than sufficient
branches.

TOO BIG TO MANAGE
• SBI is going to become the largest bank in India.
The merged SBI entity would have 24,000 plus
branches, 58,000 ATMs and 2.7 lakh employees.
This is going to become another challenge to the
top management.

HUGE BAD LOANS
• This huge portfolio of bad loan makes the bank
suffer from bad debts. The five associate banks for
instance have stressed loans at a staggering Rs
35,396 crore level.
• This amount is almost half of SBI's Rs 66,117 crore
stressed loans in 2015-16.
• It would be a huge task to resolve the bad loans
given the challenging operating environment.

PEOPLE-SIDE ISSUES
• In mergers it is not the two economic entities
joining together, but also people with so much of
career aspirations and expectations must join
together.
• People’s concerns and their willingness to work
with others are mostly ignored during a typical
merger. SBI must address the issues like employee
delight, morale and career.

TO SUM UP…….
 Restructuring offers tremendous opportunities for
companies to grow & add value to the shareholders
 It unlocks the true potential of the company
 It is a Strategy for Growth & Expansion

Contd….
• Further this study with the help of statistical tools had
short listed following the most important
determinants of successful merger and acquisition in
Indian concerns.
• The most important merger and acquisition objective
that inspired acquirers in the Indian was to accelerate
the growth of their firm.
• The most important critical success factor for the Indian
companies before the deal is completed was Identify the
target’s capital expenditure requirements. and Identify
strategic relatedness between the acquirer and the
target.
• Reliable and valid information about the target was

Contd….
• The most significant key success factor in the post-
acquisition integration stage for the Indian
companies is to establish a post-acquisition strategy
early in the process.
• Development of an effective post-acquisition
transition strategy immediately after the deal is
closed is the most crucial dimension in the post-
acquisition integration phase.
• Company’s executives gave more priority to pre-
acquisition management strategy than to the post
acquisition integration process.

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