Corporate Restructuring

Download Corporate Restructuring

Post on 19-Nov-2014




2 download

Embed Size (px)


<p>By: Chandan Kumar Nayak: 09BS0000591 Chintan Shah: 09BS0000616 Debashis Behera: 09BS0000640 Deepak Jha: 09BS0000664 Payal Desai: 09BS0000682 Nisha Rani: 09BS0001458</p> <p>y Introduction y Economic rationale of Corporate</p> <p>Restructuring. y Types of Mergers. y Debt Restructuring. y Expansions And Tender Offer. y Sell Offs , Spin Offs and Divestiture. y Legal aspects and accounting aspects. y Conclusion</p> <p>y Corporate restructuring is the process of redesigning</p> <p>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, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction. Here are some examples of why corporate restructuring may take place and what it can mean for the company.</p> <p>Economic Rationale of Corporate RestructuringTypes of Corporate Restructuring</p> <p>Integration of Existing Companies</p> <p>Restructuring of Existing Companies with or without split-up of Balance Sheet</p> <p>Through Transfer of Assets Mergers (Amalgamation) Absorption, Consolidation</p> <p>Through Transfer of Equity Acquisition Takeover5 / 37</p> <p>y Expansion: Mergers, Acquisitions, Takeovers, Tender offer,</p> <p>Joint Venturey Contraction: Sell offs, Spin offs, Split offs, Split ups,</p> <p>Divestitures, Equity Carve outsy Corporate Control: Takeover Defenses, Share Repurchases,</p> <p>Exchange Offers, Proxy Contestsy Changes in Ownership Structures: Leveraged Buyout,</p> <p>Going Private, ESOPs, MLPs (Master Limited Partnerships)</p> <p>y Strategic benefit: competition, entry, risk and cost reduction y Complementary resources: e.g. Technology and Marketing y Tax benefits: accumulated losses, unabsorbed depreciation,</p> <p>government incentives, sales and excise duty benefitsy Utilization of surplus funds y Managerial effectiveness y Diversification y Lower financing costs y Earnings growth etc.</p> <p>y Horizontal Mergers. y Vertical Mergers. y Conglomerate Mergers. y Concentric Mergers.</p> <p>y A Type of Merger occurred when two companies</p> <p>competing in the same line of Business Activities. y The Effect on the Market Would be Either Large or a little to No Effects. y Number of firms in an industry will be reduced due to Horizontal Mergers and this may lead firms to Earn huge monopoly profits. y Horizontal mergers are regulated by government for their negative effect on competition.</p> <p>y A Merger between two companies producing different y y y y</p> <p>goods or services for one Specific Finished Products. It refer to a situation where a product manufacturer merges with the supplier of Inputs or Raw Materials. Also Known as Vertical Foreclosure. Cost Reduction and Minimization Of Transportation cost. Three Types Of Vertical Mergersy Backward Vertical Mergers. y Forward Vertical Mergers. y Balanced Vertical Mergers.</p> <p>y A Merger Between Firms that are involved in totally y y y y</p> <p>unrelated business activities . Two Types of Conglomerate mergers; i.e. Pure and Mixed. The main reason behind this kind of Merger are increasing Market Share, Synergy and Cross Selling. They also Merged to diversify and reduce their risk Exposure. Exp: the Merger between Walt Disney company and the American Broadcasting Company.</p> <p>y A type of merger where the two companies coming</p> <p>together to share some common expertise that may posses mutually advantageous. The Common Expertise may be Managerial or Technological Know How that may not be Industry or Product Specific. y In short combining two or more businesses in order to pool expertise. y A Merger between a Motorcycle Manufacturer and an Automobile Manufacturer would be an Example. y Example: Citi Group buying Salomon Smith Barney.</p> <p>y Definition: y A method used by companies with outstanding debt</p> <p>obligations to alter the terms of the debt agreements in order to achieve some advantage. y Debt Restructuring is court ordered or mutual agreement. y Debt restructuring may involve debt forgiveness, debt rescheduling, and/or conversion of a portion of debt into equity. y Debt restructuring is a process that allows a private and public company or a sovereign entity facing cash flow problems and financial distress, to reduce debts.</p> <p>y A company will often issue callable bonds to allow them</p> <p>to readily restructure debt in the future.y For example, IDBI issued Flexi-bonds in 1996 with a</p> <p>coupon rate of about 16%. Later, the interest rates fallen considerably to be able to borrow at about 11.5%. So, IDBI exercised a call option in 2001 and raised the funds at 11.5%. This move has helped IDBI to save substantial amount in interest cost over the rest of the life of bonds.</p> <p>y Debt restructuring is usually less expensive and a preferable y</p> <p>y y y</p> <p>alternative to bankruptcy. Debt-for-Equity Swaps: In a debt-for-equity swap, a company's creditors generally agree to cancel some or all of the debt in exchange for equity in the company. Debt-for-equity swap may also be called a bondholder haircut. Converting debt to equity via bondholder haircuts presents an elegant solution to the problem . For example, in case of a large US bank, a 20% haircut would reduce its debt, creating an equal amount of equity, thereby recapitalizing the bank.</p> <p>y Expansion: Growth in Size, Balance Sheet, Total Assets y Merger y Amalgamation or Consolidation y Absorption y Acquisition</p> <p>(A + B = A) (A + B = C) A, B Separate</p> <p>y Takeover y Tender offer y Asset Acquisition y Joint Venture</p> <p>Hostile</p> <p>(A + B)</p> <p>y Tender offer is a public, open offer or invitation, usually</p> <p>announced in a newspaper by a prospective acquirer (bidder) to all stockholders of a publicly traded company (target company) to offer their stocks for sale at a specified price during a specified time, subject to the tendering of a minimum and maximum number of shares. In a tender offer, the bidder contacts shareholders of target company directly. For example, Mittal Steel announced a tender offer to the shareholders of Arcelor steel</p> <p>y To attract the shareholders of the target company to sell, the</p> <p>acquirer's offer price usually includes a premium over the current market price of the target company's shares. Cash or other securities may be offered to the target company's shareholders. When securities are offered in a tender offer it is called as an exchange offer.y Tender offers may be friendly or unfriendly. SEBI laws</p> <p>require any company or individual acquiring 5% of a company to disclose information to the SEBI, the target company and the exchange.</p> <p>y A tender offer may be made by a firm to its own shareholders</p> <p>to reduce the number of outstanding shares, or it may be made by an outsider wishing to obtain control of the firm. y A tender offer may be made by the company's management in a bid to prevent a hostile takeover. Alternatively, it may be a made by an outside company as part of a hostile takeover. y Current stockholders, individually or as a group, can accept or reject the offer. The shareholders who accept the tender offer make a significant profit on their holdings and the acquirer gains control of the company</p> <p>y Sell offs are the form of contraction or downsizing activities</p> <p>undertaken by the companies as a part of corporate restructuring. These activities allow the firm to maximize shareholders value by redeploying assets through contraction and downsizing of the parent company.y Sell offs is a generic term and under it, various forms exist such as</p> <p>spin offs, split offs, split ups, divestitures, equity carve outs etc. y There are various considerations to sell offs such as economic, operational, profits, tax, labor, capital redeployment, synergy etc.</p> <p>Rationale for Gains to Sell offs y Efficiency gains and refocus: A particular business may be more valuable to someone that will be paying higher price. y Information effects: Announcement of sell offs can be seen as change in investment strategy or in operating efficiency. This may be taken in a positive sense and boost share price. y Wealth Transfers: Sell offs may transfer the wealth from debt holders to the shareholders. y Tax Reasons: When company is making loss and is unable to use tax-loss carry forward, it is better to sell off wholly or in part.</p> <p>y Typically parent corporation distributes on pro rata basis,</p> <p>all the shares it owns in subsidiary to its own shareholders. y No money generally changes hands y Non taxable eventy as long as it jumps through substantial hoops</p> <p>Company A without Subsidiary B</p> <p>Subsidiary B</p> <p>Shareholders own shares of combined company. Own the equity in subsidiary implicitly.</p> <p>Company A after spinoff</p> <p>New company B Shareholders receive Shares of company B</p> <p>Old shareholders still own shares of company A, which now only represent ownership of A without B.</p> <p>y Spin offs are a distribution of subsidiary shares to parent</p> <p>company shareholdersy As such, no money (necessarily) comes into the parent company</p> <p>as a result y No shares (or assets) of the subsidiary are sold to the market (IPO) or to acquirer (divestiture)</p> <p>y Distribution in most instances is tax free</p> <p>RCVL</p> <p>RCoVL</p> <p>REVL</p> <p>GFML</p> <p>y Selling assets, divisions, subsidiaries to another</p> <p>corporation or combination of corporations or individuals</p> <p>Company A without Subsidiary B</p> <p>Subsidiary B</p> <p>Company C</p> <p>Company A w/o subsidiary B</p> <p>Cash, securities or assets as consideration</p> <p>Old Sub B Company C</p> <p>y Selling corporation typically receives consideration for the</p> <p>assets soldy cash y securities y other assets</p> <p>y Divestitures are typically taxable events for selling</p> <p>corporation (new basis for purchaser)y Example of Divestiture: JLR</p> <p>M&amp;A Legal aspects and Accounting aspectsLegal Aspectsy Company Act, 1956 y SEBI, Substantial Acquisition of Shares and Takeovers,</p> <p>Regulation 1997 Accounting Aspectsy Pooling Method y Purchase Method</p> <p>M&amp;A: Legal Aspectsy Mergers lead to reduction in the number of players in the</p> <p>market. This has an adverse impact on customers and public interest by increasing price and reducing customer service. Mergers can lead to big firms, which may discourage new entrants. y Merger regulation needs to evaluate the trade-off between reduction in competition and potential gains in economic efficiencies. y With globalization, foreign firms pose a competition to domestic firms. Regulatory system must take into account these things.</p> <p>M&amp;A: Legal Aspectsy Economic reforms initiated in year 1991. Since then number</p> <p>of M&amp;As are increased. y The Supreme Court of India in the judgment of HLLTOMCO merger has said that: In this era of hypercompetitive capitalism and technological change, industrialists have realized that mergers/acquisitions are perhaps the best route to reach a size comparable to global companies so as to effectively compete with them. The harsh reality of globalization has dawned that companies which cannot compete globally must sell out as an inevitable alternative.</p> <p>Companies ActCompliance under the Companies Act, 1956:y Prepared by the companies which have arrived at a</p> <p>consensus to merge.y Respective Board of Directors of companies are required to</p> <p>approve the scheme of amalgamation/merger.y As per the Companies (Amendment) Act, 2002, the powers</p> <p>of the high court relating to reduction of capital, amalgamation and disputes will be transferred to National Companies Law Tribunal (NCLT).</p> <p>Companies Acty Approval of the scheme by financial institutions,</p> <p>banks/trustees for debenture holders.y Intimation to stock exchange about proposed</p> <p>amalgamation/mergery Application to NCLT for directions y NCLT directions for members meeting y Companies shall submit for approval of</p> <p>amalgamation/merger to the Registrar of the respective NCLTs.</p> <p>Companies Acty Notice to the members/shareholders. y Shareholders general meeting and passing the resolution y Dissolution of transferor company y Transfer of assets and liabilitiesy Allotment of shares to shareholders of transferor company</p> <p>y Listing of shares at stock exchange y Post-merger secretarial obligations</p> <p>SEBI, Substantial Acquisition of Shares and Takeovers Regulationy In 1994, Takeover Code was introduced. y It was amended and in 1997, Substantial acquisition of</p> <p>shares and takeover Regulation was created. This regulation has undergone several amendments, latest 2006.y SEBI guidelines relating to ESOPs do not permit grant of</p> <p>ESOPs to the promoters. (In foreign countries, in many cases, the management increases its holding by granting stocks at a low cost or no cost).</p> <p>SEBI, Substantial Acquisition of Shares and Takeovers RegulationSalient features of Takeover Code of India as When holding crosses 5% and 15% of voting capital,</p> <p>intimate the target company and the stock exchange </p> <p>Public offer for minimum 20% of voting capital Public offer price: Higher of the average price (average of daily high and low) for last 6 months or last two weeks</p> <p>Public offer to be managed by SEBI registered merchant banker</p> <p>Accounting for Mergers and Acquisitionsy Amalgamation in the nature of merger (combining):</p> <p>Combining of assets, liabilities, shareholders interests and business of companiesy Amalgamation in the nature of purchase: when one company</p> <p>is acquired by other company, shareholders do not have a proportionate share in the equity, business not continued.</p> <p>Method of Accounting for Amalgamationy The Pooling of Interest Method: Combines assets,</p> <p>liabilities, reserves at their existing carrying amounts. No goodwill, nor capital reserves arise in this case.y The Purchase Method: Combines assets and liabilities at</p> <p>their existing carrying amounts or by allocating the purchase consideration on the basis of their fare value</p>