corporate restructuring 3 module
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8/9/2019 Corporate Restructuring 3 Module
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CORPORATE
RESTRUCTURINGRESTRUCTURING
THIRD MODULETHIRD MODULE
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CONTENTS
Corporate restructuring
-different methods of restructuring
-joint ventures
-sell off and spin off -divestitures
-equity carve out
-leveraged buy outs (LBO)
± management buy outs -master limited partnerships
-employee stock ownership plans (ESOP)
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WHAT IS CORPORATE RESTRUCTURING
corporate restructure means actions taken to expand or
contract a firm's basic operations or fundamentally change itsasset or financial structure.
Corporate restructuring refers to a broad array of activities that expand
or contract a firm¶s operations or substantially modify its financial structure
or bring about a significant change in its organisational structure and internal
functioning.
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It includes activities such as
Mergers,
Purchases of business units,
Takeovers,
Slump sales,
Demergers,
Leveraged buyouts, Organizational restructuring, and
Performance improvement initiatives.
We will refer to these activities collectively as mergers,acquisitions, and restructuring (a widely used, though not a veryaccurate, term) or just corporate restructuring.
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Categories of Corporate Restructuring
Corporate restructuring activities can be divided into 2 broad categories:
1. Operational Restructuring refers to:-
outright or
partial purchase or
sale of companies or product lines or
downsizing by closing unprofitable, non-strategic facilities.
2. Financial Restructuring:
refers to the actions taken by the firm to change its total debt & equity
structuring.
Ownership restructuring
Business restructuring
Asset restructuring
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CHARACTERISTICS
1. To improve the co., Balance sheet, (by selling unprofitable division from its corebusiness).
2. To accomplish staff reduction ( by selling/closing of unprofitable portion)
3. Changes in corporate mgt
4. Sale of underutilized assets, such as patents/brands.
5. Outsourcing of operations such as payroll and technical support to a moreefficient 3rd party.
6. Moving of operations such as manufacturing to lower-cost locations.
7. Reorganization of functions such as sales, mktg, & 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 co., with consumers.
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Need for restructuring
1. To respond to particular business needs.
2. To create friendly & comfortable working system
3. To make organization more competent
4. To make it as counter strategies
5. Growth & globalization
6. To have financial strength & synergy to compete.
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PURPOSE OF CORPORATE RESTRUCTURING
To enhance the share holder value. The co., should continuously evaluate its:
1. portfolio of businesses,
2.capital mix,
3. ownership &
4. assets arrangements to find opportunities to increase the share holders¶
value.
To focus on asset utilization and profitable investment opportunities
To reorganize or divest less profitable or loss making
businesses/products
The co., can also enhance value through capital Restructuring, itcan innovate securities that help to reduce cost of capital.
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Corporate
Restructuring
Expansion
y Mergers & acquisition
y Tender offers
y Joint venture
Sell-offs
y Spin- offs
y Split-offs
y Split-ups
y Equity carve outs
Corporate Control
y Premium Buy-backs
y Standstill Agreements
yAnti-takeover Amendments
y Proxy contests
Changes in Ownership Structure
y Exchange offers
y Share Repurchase
y Going Private
y Leveraged Buy-outs
FOR MS OF CORPORATE RESTRUCTURING
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A. Tender offer
A tender offer is a public offer made to theshareholders of a company by a potential acquirer topurchase their stock at a price much higher than the
current market value of the stock. If all goes asplanned, the shareholders who accept the tender offer make a significant profit on their holdings, and theacquirer gains control of the company.
In other words An offer to purchase some or all of shareholders' shares in a corporation. The priceoffered is usually at a premium to the market price.
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B. JOINT VENTURE
Joint ventures are new enterprises owned by two
or more participants. They are typically formed for
special purposes for a limited duration.
It is a contract to work together for a period of time
each participant expects to gain from the activity
but also must make a contribution.
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Examples for JV
P ARTNERS Product Strategic Objective
GM & TOYOTA Autos Cut-cost
Ford / Measurex Factory
automation
Cut-cost
Boeing/
Mitsubishi/
Fuji/ Kawasaki
Small air-craft Cut-cost, share
technology
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CHARACTERISTICS OF JOI N T V E N TURE
1. Contribution by partners of:
a) Moneyb) Knowledge
c) Property
d) Skill
e) Effort or other assets to a common undertaking.
2. Limited scope and duration
3. Generally it involves two firms
4. Joint property interest in the subject matter of the venture
5. Right of mutual control or mgt of the enterprise.
6. Right to share in the profit.
7.Joint production of single product
8.No sharing of assets/ information beyond venture
9. Limited risk
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Reasons for forming a joint venture
Build on company's strengths
Spreading costs and risks
Improving access to financial resources
Economies of scale and advantages of size
Access to new technologies and customers
Access to innovative managerial practices
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M OTI V ES T O JOI N T V E N TURE
1. To share investment expenses or combine a large co.
2. Learning-experience
3. Sharing of risk
4. Antitrust authorities permit Joint-venture than merger because it
increases the no., of firms.
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RATIONAL FOR JOINT VENTURES
1. To augment insufficient financial or technical ability to enter a particular line
or business.
2. To share technology & generic mgt skills in orgn, planning & control.
3. To diversify risk
4. To obtain distribution channels or raw materials supply
5. To achieve economies of scale
6. To extend activities with smaller invt than if done independently
7. To take advantage of favorable tax treatment or political incentives
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International joint venture:
To reduce the risk of expanding into a foreign environment
The contribution of the local conditions, which may be essential to the
success of the venture.
Example:US steel/ Pohang iron & Steel ± steel (Product) ± raise capital & expand
market
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Reasons for the failure of JV
The hoped ± for technology never developed
Preplanning for the joint venture was inadequate
Agreement could not be reached on alternativeapproaches to solving the basic objectives of the JV
Managers with expertise in one company refused toshare knowledge with their counter parts in the JV
Mgt difficulties may be compounded because of inability of parent companies to share control or compromise on difficult issues
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C. SELL OFF
Selling a part or all of the firm by any one of means:
sale, liquidation, spin-off & so on .
Or
General term for divestiture of part/all of a firm by any
one of a no. of means: sale, liquidation, spin-off and so
on.
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PARTIAL SELL-OFF
A partial sell-off/slump sale, involves the sale of abusiness unit or plant of one firm to another.
It is the mirror image of a purchase of a business unitor plant.
From the seller¶s perspective, it is a form of contraction;
from the buyer¶s point of view it is a form of expansion.
For example:
when Coromandal Fertilizers Limited sold its cementdivision to India Cement Limited, the size of Coromandal Fertilizers contracted whereas the size of India Cements Limited expanded.
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Motives for Sell off
Raising capital
Curtailment of losses
Strategic realignment
Efficiency gain
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DEMERGERS STRUCTURE
Demergers are one type of spin-offs: (under/section 391)
A = Demerging Company
B = Resulting Company: may or may not have existed earlier
A transfers undertaking to B
B issues shares to shareholders of A
X Y Y
Company BCompany A
Transfers undertaking Y
Shareholders of
AIssues shares
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SPIN OFF¶S
Spin-off is a transaction in which a co., distributes ona pro-rata basis all the shares it owns in a subsidiaryto its own shareholders.
In a spinoff an undertaking or division of a companyis spun off into an independent company.
After the spinoff, the parent company and the spun
off company are separate corporate entities.
Ex: AT &T
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Feature
No cash exchange (money is not received by the original parent). subsidiaries assets are not revalued.
The transactions is treated - stock dividend and a tax-free exchange.
Proportion of ownership:The existing stockholders have the same proportion of ownership in
the new entity as in the original firm.
Separation of control
The new entity exists as a separate decision-making unit.
It may develop policies & strategies different from those of theoriginal parent.
so, spin-off represents a form of a dividend to existing shareholders.
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SPLIT ± OFF
A transaction in which some, but not all, parent co.,shareholders receive shares in a subsidiary in return for relinquishing their parent co., share.
In other words««««««.
some parent company shareholders receive the subsidiary¶sshares in return for which they must give up their parentcompany shares
Features A portion of existing shareholders receives stock in a
subsidiary in exchange for parent co., stock.
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SPLIT - UP
In a s plit-up, a company is split up into two or more independentcompanies.
As a sequel, the parent company disappears as a corporate entity
and in its place two or more separate companies emerge.
In other words a transaction in which a co., spins off all of itsubsidiaries to its shareholders & ceases to exist.
F eatu
r es
The entire firm is broken up in a series of spin-offs.
The parent no longer exists and
Only the new offspring survive.
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DIVESTITURES
Represent the sale of a segment of a company(assets, a product line, a subsidiary) to a 3rd party for cash and or securities
Ex: VSNL
F eatur es:
It is used as a means of eliminating or separating:a) Product line
b) Division
c) Subsidiary.
It represents the sale of a segment of a co., to a 3rd
party.
The assets are revalued, by the sale, for purpose of future depreciation by the buyer.
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M OTI V ES FOR DI V ESTITURES
Change of focus or corporate strategy
Unit unprofitable can mistake
Sale to pay off leveraged finance
Antitrust
Need cash
Defend against takeover
Good price.
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Equity carve-out
A transaction in which a parent firm offers some of a
subsidiaries common stock to the general public, to bring
in a cash infusion to the parent without loss of control.
In other words««««««««..
Equity carve outs are those in which some of a
subsidiaries shares are offered for a sale to the generalpublic, bringing an infusion of cash to the parent firm with
out loss of control
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Features of ECO
It is the sale of a minority or majority voting control in asubsidiary by its parents to outsider investors. These are
also referred to as ³split-off IPO¶s´
A new legal entity is created.
The equity holders in the new entity need not be the same as the
equity holders in the original seller.
A new control group is immediately created.¶
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Difference between Spin-off and Equity carve outs:
1. In a spin off , distribution is made pro rata to shareholders of the parent co as a dividend, a form of non cash payment toshareholders
In equity carve out , stock of subsidiary is sold to the publicfor cash which is received by parent co
2. In a spin off , parent firm no longer has control over subsidiaryassets
In equity carve out, parent sells only a minority interest insubsidiary and retains control