corporate restructuring
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Corporate Restructuring
MeaningCorporate restructuring refers to the changes in ownership,
business mix, assets mix and alliances with a view to enhance the
shareholder value.
Hence, corporate restructuring may involve ownership
restructuring, business restructuring and assets restructuring.
Forms of Corporate Restructuring 1) Merger or Amalgamation
Merger or amalgamation may take two forms:
• Absorption
• Consolidation
In merger, there is complete amalgamation of the assets and liabilities as
well as shareholders’ interests and businesses of the merging companies.
There is yet another mode of merger. Here one company may purchase
another company without giving proportionate ownership to the
shareholders’ of the acquired company or without continuing the business
of the acquired company.
Forms of Merger
Forms of Corporate Restructuring (cont..)
(1) Horizontal Merger Acquisition of a company in the same industry in which the acquiring
firm competes increases a firm’s market power by exploiting
(2) Vertical Merger
Acquisition of a supplier or distributor of one or more of the
firm’s goods or services
(3) Conglomerate Merger Acquisition by any company of unrelated industry
Forms of Corporate Restructuring (cont..)
Acquisition may be defined as an act of acquiring effective
control over assets or management of a company by another
company without any combination of businesses or
companies.
A substantial acquisition occurs when an acquiring firm
acquires substantial quantity of shares or voting rights of the
target company.
Takeover – The term takeover is understood to connote hostility. When
an acquisition is a ‘forced’ or ‘unwilling’ acquisition, it is called a
takeover.
A holding company is a company that holds more than half of the
nominal value of the equity capital of another company, called a
subsidiary company, or controls the composition of its Board of
Directors. Both holding and subsidiary companies retain their separate
legal entities and maintain their separate books of accounts.
Forms of Corporate Restructuring (cont..)
Limit competition.
Utilise under-utilised market power.
Overcome the problem of slow growth and
profitability in one’s own industry.
Achieve diversification.
Gain economies of scale and increase income
with proportionately less investment.
Establish a transnational bridgehead without
excessive start-up costs to gain access to a
foreign market
Motives of Corporate Restructuring
Utilise under-utilised resources–human and
physical and managerial skills.
Displace existing management.
Circumvent government regulations.
Reap speculative gains attendant upon new
security issue or change in P/E ratio.
Create an image of aggressiveness and strategic
opportunism, empire building and to amass vast
economic powers of the company.
Motives of Corporate Restructuring (Cont..)
Legal Procedures for merger and acquisition
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Legal Process of Merger & Acquisition
Process (Cont…)Approval of Merger Information to stock
Exchange
Approval of Board of Directors
Application in High Court Shareholders & Creditors meeting
Sanction by High Court
Process (Cont…)Filing of Court Order Transfer of Assets &
LiabilitiesPayment By cash or
Securities
Methods of Valuation
In order to apply DCF technique, the following information is required:
• Estimating Free Cash FlowsRevenues and expensesCor.tax and depreciation:Working capital changes
• Estimating the Cost of Capital• Terminal Value
Discounted Cash flow Method
Calculation of financial synergy(1) Pooling of Interests Method:
In the pooling of interests method of
accounting, the balance sheet items and the profit
and loss items of the merged firms are combined
without recording the effects of merger. This
implies that asset, liabilities and other items of the
acquiring and the acquired firms are simply added
at the book values without making any
adjustments.
Calculation of financial synergy (cont..)
Particulars
Share Capital
Fixed Assets
Liabilities
Current Assets
Company X
200
150
250
250
Company y
240
170
200
120
After Merger
= 440
= 320
= 450
= 370
After merger both balance sheet will be combined is
called pooling of interest method
(2) Purchase Method
Under the purchase method, the assets
and liabilities of the acquiring firm after
the acquisition of the target firm may be
stated at their exiting carrying amounts or
at the amounts adjusted for the purchase
price paid to the target company.
Calculation of financial synergy (cont..)
Particulars
Share Capital
Fixed Assets
Liabilities
Current Assets
Company X
200
150
250
250
Company X
240
170
200
120
If you paid for the company X Rs. 100 than the value of firm is equal to
Firm value = Total Assets – total liabilities
150 = 400-250
So share capital is shown at Rs.100. and Rs.50 is shown as capital premium
A divestment involves the sale of a company’s assets, or product lines, or divisions or brand to the outsiders.
It is reverse of acquisition.
Motives: Strategic changeSelling cash cowsDisposal of unprofitable businessesConsolidationUnlocking value
Divestiture
Strategic Alliance “A strategic alliance is a voluntary, formal arrangement
between two or more parties to pool resources to achieve a
common set of objectives that meet critical needs while
remaining independent entities.”
Example -
Joint VenturesA joint venture (JV) is a business agreement in which
parties agree to develop, for a finite time, a new entity
and new assets by contributing equity. They exercise
control over the enterprise and consequently share
revenues, expenses and assetsICICI GROUP
INDIAPRUDENTIAL
GROUP
Sell-offWhen a company sells a part of its business to a third party, it is
called sell-off.
It is a usual practice of a large number of companies to sell-off
to divest unprofitable or less profitable businesses to avoid
further drain on its resources.
Sometimes the company might sell its profitable but non-core
businesses to ease its liquidity problems.
Spin-offWhen a company creates a new company
from the existing single entity, it is called a spin-off.
The spin-off company would usually be created as a subsidiary.
Hence, there is no change in ownership. After the spin-off, shareholders hold shares in
two different companies.
An employee stock ownership plan (ESOP) is an employee-
owner scheme that provides a company's workforce with an
ownership interest in the company. In an ESOP, companies
provide their employees with stock ownership, often at no cost
to the employees. Shares are given to employees and may be
held in an ESOP trust until the employee retires or leaves the
company. The shares are then sold.
E.g. First company introduce ESOP is Inforsys.
Employee Stock Ownership
Leverage Buy-out (LBO)A leveraged buy-out (LBO) is an acquisition of a company in which
the acquisition is substantially financed through debt. When the
managers buy their company from its owners employing debt, the
leveraged buy-out is called management buy-out (MBO).
The following firms are generally the targets for LBOs:
High growth, high market share firms
High profit potential firms
High liquidity and high debt capacity firms
Low operating risk firms
The evaluation of LBO transactions involves the same analysis as for
mergers and acquisitions. The DCF approach is used to value an
LBO.