By:Chandan Kumar Nayak: 09BS0000591

Chintan Shah: 09BS0000616Debashis Behera: 09BS0000640

Deepak Jha: 09BS0000664Payal Desai: 09BS0000682Nisha Rani: 09BS0001458

Corporate Restructuring

 Introduction Economic rationale of Corporate

Restructuring.Types of Mergers.Debt Restructuring.Expansions And Tender Offer.Sell Offs , Spin Offs and Divestiture.Legal aspects and accounting

aspects.Conclusion

Flow of Presentation

Corporate restructuring is the process of redesigning 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.

What is Corporate Restructuring??

Economic Rationale of Corporate Restructuring

Types of Corporate

Restructuring

Restructuring of Existing Companies with or without

split-up of Balance Sheet

Integration of

Existing Companies

Through Transfer of Equity

•Acquisition•Takeover

Through Transfer of Assets

• Mergers (Amalgamation) Absorption, Consolidation

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Expansion: Mergers, Acquisitions, Takeovers, Tender offer,

Joint Venture

Contraction: Sell offs, Spin offs, Split offs, Split ups,

Divestitures, Equity Carve outs

Corporate Control: Takeover Defenses, Share Repurchases,

Exchange Offers, Proxy Contests

Changes in Ownership Structures: Leveraged Buyout,

Going Private, ESOPs, MLPs (Master Limited Partnerships)

Economic Rationale of Corporate Restructuring

Strategic benefit: competition, entry, risk and cost reduction

Complementary resources: e.g. Technology and Marketing

Tax benefits: accumulated losses, unabsorbed depreciation,

government incentives, sales and excise duty benefits

Utilization of surplus funds

Managerial effectiveness

Diversification

Lower financing costs

Earnings growth etc.

Reasons for Mergers

Horizontal Mergers.

Vertical Mergers.

Conglomerate Mergers.

Concentric Mergers.

Types of Mergers

A Type of Merger occurred when two companies competing in the same line of Business Activities.

The Effect on the Market Would be Either Large or a little to No Effects.

Number of firms in an industry will be reduced due to Horizontal Mergers and this may lead firms to Earn huge monopoly profits.

Horizontal mergers are regulated by government for their negative effect on competition.

Horizontal Mergers

A Merger between two companies producing different 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 Mergers

Backward Vertical Mergers.Forward Vertical Mergers.Balanced Vertical Mergers.

Vertical Mergers

A Merger Between Firms that are involved in totally 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.

Conglomerate Mergers

A type of merger where the two companies coming 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.

In short combining two or more businesses in order to pool expertise.

A Merger between a Motorcycle Manufacturer and an Automobile Manufacturer would be an Example.

Example: Citi Group buying Salomon Smith Barney.

Concentric Mergers

Definition: A method used by companies with outstanding debt

obligations to alter the terms of the debt agreements in order to achieve some advantage.

Debt Restructuring is court ordered or mutual agreement.Debt restructuring may involve debt forgiveness, debt

rescheduling, and/or conversion of a portion of debt into equity.

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.

Debt Restructuring

A company will often issue callable bonds to allow them

to readily restructure debt in the future.

For example, IDBI issued Flexi-bonds in 1996 with a

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.

Debt Restructuring

Debt restructuring is usually less expensive and a preferable 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.

Debt Restructuring

Expansion: Growth in Size, Balance Sheet, Total Assets

Merger

Amalgamation or Consolidation (A + B = A)

Absorption(A + B = C)

Acquisition A, B

Separate

Takeover Hostile

Tender offer

Asset Acquisition

Joint Venture(A’ + B’)

Expansion

Tender offer is a public, open offer or invitation, usually

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

Tender Offer

To attract the shareholders of the target company to sell, the

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. Tender offers may be friendly or unfriendly. SEBI laws

require any company or individual acquiring 5% of a company to

disclose information to the SEBI, the target company and the

exchange.

Tender Offer

A tender offer may be made by a firm to its own shareholders to reduce the number of outstanding shares, or it may be made by an outsider wishing to obtain control of the firm.

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.

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

Tender Offer

Sell offs are the form of contraction or downsizing activities undertaken by the companies as a part of corporate restructuring. These activities allow the firm to maximize shareholder’s value by redeploying assets through contraction and downsizing of the parent company.

Sell offs is a generic term and under it, various forms exist such as spin offs, split offs, split ups, divestitures, equity carve outs etc.

There are various considerations to sell offs such as economic, operational, profits, tax, labor, capital redeployment, synergy etc.

Sell offs

Rationale for Gains to Sell offs Efficiency gains and refocus: A particular business may be more

valuable to someone that will be paying higher price. 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.

Wealth Transfers: Sell offs may transfer the wealth from debt holders to the shareholders.

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.

Sell offs

Spin offsTypically parent corporation distributes on pro rata basis,

all the shares it owns in subsidiary to its own shareholders.

No money generally changes handsNon taxable event

as long as it jumps through substantial hoops

Company A without Subsidiary B

Subsidiary B

Shareholders own shares of combined company. Own the equity in subsidiary implicitly.

Company A after spinoff

New company BShareholders

receive Shares of

company B

Old shareholders still own shares of company A, which now only represent ownership of A without B.

Central Features of Spin offsSpin offs are a distribution of subsidiary shares to parent

company shareholdersAs such, no money (necessarily) comes into the parent company

as a resultNo shares (or assets) of the subsidiary are sold to the market

(IPO) or to acquirer (divestiture)Distribution in most instances is tax free

Example of Spin offs

RCoVL REVL

RCVL GFML

Defining Divestitures

Selling assets, divisions, subsidiaries to another corporation or combination of corporations or individuals

Subsidiary B

Company A without Subsidiary B

Company C

Company A w/o subsidiary B

Old Sub B

Company C

Cash, securities or assets as consideration

Features of divestituresSelling corporation typically receives consideration for the

assets soldcash securitiesother assets

Divestitures are typically taxable events for selling corporation (new basis for purchaser)

Example of Divestiture: JLR

LEGAL AND ACCOUNTING ASPECTS OF MERGER AND ACQUISITION

M&A – Legal aspects and Accounting aspects

Legal Aspects

Company Act, 1956

SEBI, Substantial Acquisition of Shares and Takeovers,

Regulation 1997

Accounting Aspects

Pooling Method

Purchase Method

M&A: Legal Aspects

Mergers lead to reduction in the number of players in the 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.

Merger regulation needs to evaluate the trade-off between reduction in competition and potential gains in economic efficiencies.

With globalization, foreign firms pose a competition to domestic firms. Regulatory system must take into account these things.

M&A: Legal Aspects

Economic reforms initiated in year 1991. Since then number of M&As are increased.

The Supreme Court of India in the judgment of HLL-TOMCO 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.”

Companies Act

Compliance under the Companies Act, 1956:Prepared by the companies which have arrived at a

consensus to merge.Respective Board of Directors of companies are required to

approve the scheme of amalgamation/merger.As per the Companies (Amendment) Act, 2002, the powers

of the high court relating to reduction of capital,

amalgamation and disputes will be transferred to ‘National

Companies Law Tribunal (NCLT).’

Companies Act

Approval of the scheme by financial institutions,

banks/trustees for debenture holders.Intimation to stock exchange about proposed

amalgamation/mergerApplication to NCLT for directionsNCLT directions for members’ meetingCompanies shall submit for approval of

amalgamation/merger to the Registrar of the respective

NCLTs.

Companies Act

Notice to the members/shareholders.

Shareholders’ general meeting and passing the resolution

Dissolution of transferor company

Transfer of assets and liabilities

Allotment of shares to shareholders of transferor company

Listing of shares at stock exchange

Post-merger secretarial obligations

SEBI, Substantial Acquisition of Shares and Takeovers Regulation

In 1994, Takeover Code was introduced.It was amended and in 1997, Substantial acquisition of

shares and takeover Regulation was created. This regulation

has undergone several amendments, latest 2006. SEBI guidelines relating to ESOPs do not permit grant of

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).

SEBI, Substantial Acquisition of Shares and Takeovers Regulation

Salient features of Takeover Code of India as

• When holding crosses 5% and 15% of voting capital,

intimate the target company and the stock exchange

• 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

• Public offer to be managed by SEBI registered merchant

banker

Accounting for Mergers and Acquisitions

Amalgamation in the nature of merger (combining):

Combining of assets, liabilities, shareholders’ interests and

business of companies

Amalgamation in the nature of purchase: when one company

is acquired by other company, shareholders do not have a

proportionate share in the equity, business not continued.

Method of Accounting for Amalgamation

The Pooling of Interest Method: Combines assets,

liabilities, reserves at their existing carrying amounts. No

goodwill, nor capital reserves arise in this case.

The Purchase Method: Combines assets and liabilities at

their existing carrying amounts or by allocating the purchase

consideration on the basis of their fare value

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