Business Restructuring

Introduction:

• One of the dictionary meaning of word “restructuring” is “rearrangement” thus business restructuring refers to rearrangement of corporate structure .

• It is a process by which a business organizations alters its present structure in order to create a new structure in the place of its existing structure.

• Business restructuring may involve change in the asset structure, liability structure or both of them.

Importance:

In today’s world, along with increasing focus on globalization and liberalization, there is free competition amongst businesses. So Business restructuring helps to identify the opportunities.

It helps the business to survive and stay the fittest from the rest others.

It plays an important role in the external and internal growth of the organization.

Advantages:

Strategic Benefit

Economies of Scale

Economies of Scope

Economies of Vertical Integration

Complementary Resources

Tax Shields

Utilization of Surplus Funds

Managerial Effectiveness

Reasons:

To reduce the cost of operations for the company.

To make company more competitive as compared to other peers in industry.

To reduce the interest burden for the company.

To utilize the excess capacities.

company will go for corporate restructuring so as to improve shareholders confidence in the company.

Another reason for corporate restructuring is when company is into too many businesses or over diversified it may want to & concentrate only on one business

Advantages:

ACQUISITION-

Acquisition

An Acquisition is an act of acquiring effective CONTROL by one company over assets or management of another company.

Acquisition is also called as “TAKEOVER”

Types of Acquisitions

Asset Purchase Slump Sale. eg- Grasim sold sponge iron unit to

Welspun power for 1030 crore. Itemized Sale. Share Purchase. eg – Daiichi sankyo company ltd has

acquired controlling stake of Ranbaxy.

Case Study- TATA - JLR deal

Features of this acquisition- Tata Motors Ltd. announced the acquired

two iconic British brands - Jaguar and Land Rover (JLR) from the US-based Ford Motors for US$ 2.3 billion.

Purchase consideration were JLR's manufacturing plants, two advanced design centers in the UK, national sales companies spanning across the world, and also licenses of all necessary intellectual property rights.

Why did TATA go for JLR? (Adv. Of Acquisition)

Expanding its international footprint leveraging on in-house capabilities Enter the high-end premier segment of the

global automobile market latest technology due to two advance design

studios and technology Instant recognition competitive advantage as Corus was the main

supplier of automotive high grade steel to JLR and other automobile industry in US and Europe

Case Against Acquisition- (Disadvantages Of Acquisition)

Ford purchased JLR at $5 bn and sold at almost half the price to TATA after operating it for losses.

Ford failed to re-brand and integrate these luxury brands with its product portfolio

Increased the earnings volatility. Had to Fuse in another US$ 1 billion in JLR. Tata Motors raised $3 billion (about Rs 12,000

crore) through bridge loans for 15 months from a clutch of banks, including JP Morgan, Citigroup, and State Bank of India

MERGER

Definition of Merger?

The combining of two or more companies , generally by offering the stockholders of one company securities in the acquiring company in exchange of the surrender of their stocks.

Types of Mergers?

A) Vertical merger: Merger with supplier or customers. Ex : Kochi Refineries Ltd merges into

Bharat Petroleum Corporation India.

B) Horizontal merger: Between firms in the same kind of business. Ex : Centurion Bank of Punjab merging into

HDFC

Case study on ADIDAS-REEBOK Merger!!!

In August 2005,german Adidas Salomon AG announced to acquire Reebok at an estimated value of $3.78 billion.

At that time Adidas reported net income of $423 million per year whereas Reebok had an net income of $209 million.

Merger was a sense because both companies competed for no.2 and no.3 positions following Nike being at the top.

The facts of case-study??

Why merger done??

Advantages of merger??

Dis-advantages of merger??

DE-MERGER

Demerger

 The tranfer by a company of one or more of its business division to another company which is newly set.

It is a converse of merger. It result into two company i.e., demerged

company and resultant company.

Types of demergers

The demergers may be of two types:- Split-up Demergers. Spin-off Demergers. Divestiture.

Case Study On bajaj company The effective date of demerger of baja

company was on 20th february 2008. Bajaj was demergered into Bajaj Auto

Ltd. and Bajaj finance ltd. After demerger of bajaj 5.6% growth in

the company.

Other formssubsidiarisation: Transferring a business to a wholly owned

subsidiary Under this option business gets transferred to

a subsidiary and the parent company continue to hold 100% equity stake in the subsidiary

Eg: EID Parry (india) limited transferred the parryware division to a wholly owned subsidiary

(Parryware glamourooms pvt. Ltd.)

Buyback of Shares Buyback is acquiring its own shares from

the existing shareholders by the company.

E.g.: Philips Electronics India Limited Gitanjali Gems Limited

objectives To return surplus cash to shareholders as

an alternative to a higher dividend payment or investing the surplus cash in existing or new operations.

Adjust or change the company’s capital structure quickly, say for those companies seeking to increase its debt/equity ratio.

To improved the various performance parameters like EPS,DPS, operating cash flow per share, etc.

To thwart the attempts of a hostile takeover.

Capital ReductionReduction of share capital may be effected inthe following ways: In respect of share capital not paid-up,

extinguishing or reducing the liability on any of its shares;

Cancel any paid-up share capital, which is lost, or is not represented by available assets. This may be done either with or without extinguishing or reducing liability on any of its Shares; or

Pay off the paid-up share capital, which is in excess of the needs of the company. This may be achieved either with or without extinguishing or reducing liability on any of its shares

E.g.: Hindalco Industries Limited under took a court scheme to write off following “Expenses” against balance in share premium account-

Impairment of assets, investments, Goodwill and other

intangible assets on consolidation. Interest on borrowing on acquisition

Diminution in value of subsidiaries Costs associated with existing

projects/divisions Consultants fees in connection with

financing of acquisition

Management Buyouts

Involves the management team’s purchase of the bulk of the firm’s shares.

Create a win-win situation for shareholders who receive a premium for their stock and management who retain control.

To avoid lawsuits, the price paid must represent a higher premium to the current market price.

Alternatively, the target may make itself less attractive by divesting assets the bidder wants.

Cash proceeds of the sale could fund other defenses such as share buybacks

Leveraged Buyouts

Borrowed funds are used to pay for all or most of the purchase price.

Can be of an entire company or divisions of a company The tangible assets of the company are used as collateral for

the loans Investors in LBOs are referred to as financial buyers because

they are primarily focused on relatively short- to intermediate-term financial returns

Stock Exchange NormsStock Exchange Norms

Presently, Stock Exchange(s) are providing various other norms before giving approval to the Companies for

‘Merger’, ‘Demerger’ ‘Reduction of Capital’

Stock Exchange Norms

Minimum Capital Requirements

Issued & paid up Equity Capital – Rs 10 crores (if there is a change in management/control)

OR

Issued & paid up Equity Capital – Rs 3 crores(If there is no change in management/control)

AND

Minimum Net Worth – 20 crores(Post amalgamation)

*BSE Stipulations

Stock Exchange Norms

Continuous Listing Norms (Transferee Co is Listed Co. & Transferor Co is Unlisted Co.)

Non- Promoter Holding – 25% of Post -merger Capital

* (The entire holding of the shareholders of the transferor company be excluded)

If Non- Promoter Holding – is less than 25% of Post merger capital, then the company has to go for offer for sale of the excess portion.

Stock Exchange’s Views

• Valuations Analysis• No undue benefit to

Promoters/Particular group

• Investors interest not to be affected• Back door Entry for the benefit of

listing • Change in Management/control

Methodology Issues

Methodology for Merger and Acquisition are different.

Types of Business. Government Regulations. Industry Specific Methods Difficult in obtaining Transaction

multiples. Issues Related to Market price method.

Adjustment in Valuation

Accounting Policy Contigent liability and assets Sales tax Exemption Preference shares ESOPs and Warrants Carried forward loss

Examination of Object Clauses Intimation of Stock Exchange Approval of the Draft Amalgamation

Proposal by the Respective Boards Application to the High Courts Dispatch of notice to Shareholders and

Creditors

Legal Procedure of Business Restructuring

Holdings of Meetings of Shareholders and Creditors

Petition to the High Court for Confirmation and passing of High Court

Filing the Order with the Registrar Transfer of Assets and Liabilities Issue of Shares and Debentures

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