Corporate Restructuring: MeaningIt is a process by which an organisation drastically alters its capital structure, asset mix and organisation for increasing the firms value and performance

Reasons for Capital RestructuringGlobalisationLiberalisationPrivatisationDevelopment in ITCore CompetenceRationalisationEconomy of ScaleDiversification

Takeover of Sick CompaniesStrategic Tax PlanningReduction of Cost of CapitalCompetitionSupply Chain Management

Methods of RestructuringMerger/AmalgamationConsolidationAcquisitionTake-overJoint VentureDivestitureLeveraged Buy-outManagement Buy-out

Master Limited PartnershipEmployee Stock Ownership PlansStrategic AllianceHolding CompanyReverse MergerPyramiding

I Merger/AmalgamationIt is a process by which one firm acquires assets and liabilities of another firm in such a way that the latter firm ceases to exist e.g. HDFC Bank & Centurion Bank of Punjab in 2008It is cheaper and less time consuming and procedure ridden than than buying individual assetsIt must be approved by either 2/3 majority or majority

II ConsolidationIt is a business combination by which both the acquiring firm and acquired firm lose their identities and create a new firmE.g. Centurion Bank and Bank of Punjab creating Centurion Bank of Punjab in 2007

III AcquisitionIt is a process by which one firm purchases substantial percentage of shares of another firm from the open market or directly from the shareholders through a tender offerThe target company or its promoters or its managers do not come into the pictureNo formalities need be fulfilled by the target companyIt is between the Acquiring Firm and the shareholders of the Target Company

IV Take-overIt is a process by which control of a corporate is transferred from one group of promoters to another groupCash or securities may be paid for the transferA newly elected Board of DirectorsE.g. ADAG (Anil Dhirubhai Ambani Group) taking over Adlabs in 2007 from the promoter Manmohan Shetty

V Joint VentureIt is a form of business combination in which two different firms contribute financial, production, organisation/marketing skills to form a new company or to carry out a particular economic activityE.g: Bharti Televenture has a JV with Nokia for its network maintenance, another JV with Nokia for marketing the handsets of Nokia, and another JV with RIM for marketing Blue Berry Mobiles

Rationale/ Motive for JVEntry into New MarketsSharing TechnologyComplementary Products or ServicesDistribution NetworkMeeting CompetitionCarrying Out a Specific taskReaching Global MarketsOrganising SkillsBrand EquitySharing Research FacilitiesSharing a License

Joint Ventures in IndiaPre-2000Post-2000-Success Story A few JVs like Godrej-Proctor & gamble failed in IndiaAttempt to kill the brands of the partnerFamily Politics and the JVs interferenceEach partner had an ultimate objective contrary to that of the JVAutomobilesConsumer ElectronicsTelecommunicationInsurancePharmaceuticalsHospitalitySpace TechnologyInformation Technology

VI DivestitureDivestiture is the sale of a segment of a company to a third party.The segment may be assets, product lines, subsidiaries or divisionsThe sale may be for cash or securities

Motives/Objectives/RationalePrejudice of Investment AnalystsManagerial EfficiencyManagerial RemunerationStrategic Tax planningChanging Economic EnvironmentIncreased Market SpanningMore Focussed Merger

Methods of DivestitureSell-offSpin-offSplit-UpEquity Carve-Out

A. Sell-OffIt is a sale of part of the firm to a third partyThe shareholders of the selling firm do not get either cash or securitiesThe selling company receives cash usually for the saleE.g. L&T selling its cement division to Grasim Industries of AV Birla Group which was named as Ultratech Cement later

Advantages of Sell-offBetter LiquidityConcentrating on Core Business (Tata Steel selling its cement division to La Farge)Improving ProfitabilityIncreasing EfficiencyReducing Business Risks

B. Spin-OffIt is a process by which a division or department is converted into a separate companyShareholders get the equity shares in the new company createdIt is done for better accountability and also profitability accountingIndiabulls Financials spinning of Indiabulls Real Estate in 2007, and again Indiabulls Securities in 2008

Rationale/Reasons for Spin-OffCore CompetenceEnhancing ResponsibilityProfit CenterProtection of Crown Jewels in case of a Hostile Take-overGovernment RegulationDividing Family BusinessShedding Unwanted Activities

Disadvantages of Spin-offLoss of Economy of ScaleHigher OverheadsReduced Ability to Raise fundsNo Benefit of DiversificationNo Benefit of SynergyLower Turnover and Profitability

C. Split-UpIt is a process by which a single company is divided into two or more companies without any company being a subsidiaryShareholders get the shares in all the companies createdAdvanced Micro Devices(AMD) split into two companies in October 2008 for Designing and Manufacturing

D. Equity Carve-outEquity Carve-out is the sale of shares of a subsidiary company by the Holding company for getting additional cashCash is available only to the Holding Company and not to the shareholdersVenture Capital and Private Equity have contributed to a major extent to the Equity Carve-out Deals

VII Leveraged BuyoutLBO is , the acquisition, financed largely by borrowing, of all the stock, or assets of a hitherto public company by a smll group of investors-Weston

Stages of LBO operation A. First Stage: Raising FundsB. Second Stage: Creating an Shell Company or an SPV and Transferring the Funds raisedC. Third Stage: Purchasing the Shares or Assets D. Fourth Stage: Putting the Taken-Over Company on TrackE. Fifth Stage: Taking the Company Public again-Second IPO

VIII Management Buy-OutMBO is a process by which the substantial part of the shares of the company are purchased by the Executives of the company from the promotersWhen the promoters are planning to sell a firm, the managerial personnel may buy the same from the promoters

Differences between LBO & MBOLBOMBOOutside Firm Purchases

SPV is CreatedShareholders lose the share

Another set of Promoters manage the companyExecutives of the same company purchasesNo SPV is createdOnly Promoters sell the sharesMangers and Promoters become one and the same

IX Master Limited PartnershipIt is a type of limited liability partnership where the limited liability portion of the partnership interests are divided into units and traded just like equity sharesIt enjoys the limited liability of a company and also unlimited existence and at the same time getting the tax treatment of a partnership

Categories of MLPRoll Up MLP: Combination of two or more partnership into one publicly traded partnershipAcquisition MLP: An MLP offering units to the public with a view to using the proceeds to buy assets for the MLPLiquidation MLP: MLP formed out of the liquidation of a corporateRoll-Out MLP: MLP formed by exchange of operating assets of a corporate for the units of an MLP

Advantages of MLPTax AdvantageConverting a Corporate into an MLP for easier decision makingThe benefits of a corporate like limited liability and Unlimited existenceBest Suited for ProfessionalsNo limitation of partnership like limited existence

X Employee Stock Ownership PlanESOP is a stock bonus plan investing primarily in the securities of the employer firmIn India, it is known as Employee Stock OptionsIt is in the form of options convertible into equity shares of the employing company in the futureThey are provided to attract talents at the top managerial positions and to get their loyalty

Benefits of ESOPsAttracting Managerial TalentGetting the LoyaltyGiving Ownership Interest to the ManagersHelping MBO in the futureExecutive Compensation PlanInducing the Mangers to perform well

XI Strategic AllianceIt is an agreement among two or more firms to co-operate in order to achieve a commercial objectiveIn the form of JV, Franchising, Supply Agreement, Purchase Agreement, Marketing Agreement, Technology Supply Agreement, Technical Support Agreement etc.Based on trust and preset priorities

XII Holding CompanyIt is a company that has controlling interest in another company. It owns majority of shares in another company, which is called the subsidiary company

Holding CompanyAdvantagesDisadvantagesIndependent OperationSeparate Profit CenterBetter AccountabilityQuick DecisionsIndependent Valuation in the Financial MarketsCore CompetenceNo economy of ScaleMore OverheadsLacking Synergy

XIII PyramidingEstablishing a large number of holding companies and subsidiaries with crossholdings for easier ownership of a large number of companies with a limited amount of fundsInvolves buying a company and using its cash reserves to take over a second company and using the cash reserves and borrowings of second and third companies to take over a third companyE.g. Manu Chabrias Jumbo Group taking over Dunlop, Shaw Wallace, Nihon Electronics etc with only a limited capitalFinancially Imprudent and Dangerous

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