Presentation on

Presented to:

Prof. N.Venketesan

Presented by:

Mohit Tripathi

09BS0001306

Introduction• Firm response to changes in internal and external

environment. Because of which companies invest in areas of core competence and divest other businesses.

• Activities related to expansion or contraction of a firm.• Reasons for restructuring may include a change of

ownership or ownership structure, demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning, or buyout.

Restructuring Forms

Expansion

• Mergers• Acquisitions• Tender offers • Asset acquisition• Joint Ventures• Strategic alliances

Contraction

• Spin off• Split off• Split up• Divesture• Equity carve out• Assets sale

Restructuring Forms

Corporte Control

• Anti takeover defenses• Share repurchase• Exchange offers• Proxy contests

Ownership Structure

• LBO• Going Private• ESOP

EXPANSION

Mergers: A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage.

MERGERS

HORIZONTALMERGER

VERTICAL MERGERS

CONGLOMERATEMERGERS

Product extension Geographic market extension

Pure conglomerate

Horizontal Mergers

• HORIZONTAL MERGER – SIMILAR LINES OF ACTIVITY

• HDFC Bank's merger with Centurion Bank of Punjab • Walt Disney Company's acquisition of 17.2per cent stake in

UTV Software Communication to increase its stake to 32.10 per cent in the company.

• In the year 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created.

Vertical Merger

FIRMS SUPPLYING RAW MATERIALS MERGE WITH FIRM THAT SELLS

e.g. Time Warner Incorporated, a major cable operation, and the Turner Corporation, which produces CNN, TBS, and other programming. In this merger, the Federal Trade Commission (FTC) was alarmed by the fact that such a merger would allow Time Warner to monopolize much of the programming on television.

ADVANTAGE• LOWER BUYING COST OF MATERIAL• LOWER DISTRIBUITION COST• ASSURED SUPPLIES AND MARKET• COST ADVANTAGE

Conglomerate Merger

UNRELATED INDUSTRIES MERGE

PURPOSE• DIVERSIFICATION OF RISK• General Electric also moved into financing and

financial services, which in 2005 accounted for about 45% of the company's net earnings.

• Warren Buffett's Berkshire Hathaway, a holding company which used surplus capital from its insurance subsidiaries to invest in a variety of manufacturing and service businesses.

Acquisition• A transaction where one

firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses.

• Google buying YouTube may be the most well-known example of an acquisition in the e-commerce business.

Reasons for Acquisitions

• Increased• market power

• Overcome• entry barriers

• Lower risk• compared to developing

new products

• Cost of new• product development

• Increased speed• to market

• Increased• diversification

• Avoid excessive• competition

Difference between Merger and Acquisition

• In the pure sense of the term, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place.

• When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

Amalgamation

• Merger is restricted to a case where the assets and liabilities of the companies get vested in another company, the company which is merged losing its identity and its shareholders becoming shareholders of the other company.

• On the other hand, amalgamation is an arrangement, whereby the assets and liabilities of two or more companies become vested in another company (which may or may not be one of the original companies) and which would have as its shareholders substantially, all the shareholders of the amalgamating companies."

Joint Ventures

• When two or more persons come together to form a temporary partnership for the purpose of carrying out a particular work, object, it is termed as joint venture. The persons come together are called "co-ventures.

• In a joint venture, two or more "parent" companies agree to share capital, technology, human resources, risks and rewards in a formation of a new entity under shared control.

Forming a Joint Venture

• Screening of prospective partners• Joint development of a

detailed business plan and short listing a set of prospective partners based on their contribution to developing a business plan

• Due diligence - checking the credentials of the other party ("trust and verify" - trust the information you receive from the prospective partner, but it's good business practice to verify the facts through interviews with third parties)

Case on Toshiba• Toshiba firmly believes that a single company cannot dominate any

technology or business by itself. • Toshiba’s approach is to develop relationships with different partners for

different technologies.• Strategic alliances form a key element of Toshiba’s  corporate strategy.

They helped the company to become one of the leading players in the global electronics industry.

• In flash memory, Toshiba formed alliances with IBM and National Semi Conductor.

• Toshiba’s alliance with Motorola has helped it become a world leader in the production of memory chips.

• The tie-up with IBM has enabled Toshiba to become a world’s largest supplier of color flat panel displays for notebooks.

• Toshiba believes in a flexible approach because some tension is natural in business partnerships, some of which may also sour over time. Toshiba executives believe that the relationship between the company and its partner should be like friends, not like that of a married couple.

Tender Offer• A takeover bid in the form of a public invitation to shareholders to sell their

stock, generally at a price above the market price.• Tender offer is a corporate finance term denoting a type of takeover bid. The

tender offer is a public, open offer or invitation (usually announced in a newspaper advertisement) by a prospective acquirer to all stockholders of a publicly traded corporation (the target corporation) to tender their stock for sale at a specified price during a specified time, subject to the tendering of a minimum and maximum number of shares.

• Tender offers are attempts to secure outstanding shares of stock associated with a given company by means other than purchasing the shares on the open market.

• The tender offer usually involves approaching a current shareholder and making an offer for all or part of the held shares. In order to make the tender offer attractive, the purchase price is usually above current market value.

• For example, if a target corporation's stock were trading at a value of $10 per share, an acquirer might offer $11.50 per share to shareholders on the condition that 51% of shareholders agree.

Strategic Alliances• A Strategic Alliance is a formal relationship between two or more parties to

pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations.

• The goal of alliances is to minimize risk while maximizing your leverage and profit. Alliances are often confused with mergers, acquisitions, and outsourcing.

• Mergers and acquisitions are permanent, structural changes in how the company exists. Outsourcing is simply a way of purchasing a functional service for the company.

• An alliance is simply a business-to-business collaboration.• Alliances are formed for joint marketing, joint sales or distribution, joint

production, design collaboration, technology licensing, and research and development. 

• E.g. individuals from a civil engineering, project management, construction,

landscaping and interior design firms all have different areas of expertise, yet

together can deliver a complete building solution. None of the firms could bid on a job of this magnitude independently, but as a team they can combine their

expertise for as long as necessary.

Businesses use strategic alliances to:

• achieve advantages of scale, scope and speed• increase market penetration• enhance competitiveness in domestic and/or global markets• enhance product development• develop new business opportunities through new products

and services• expand market development• increase exports• diversify• create new businesses• reduce costs.

CONTRACTION

Spin Off• A spin-out refers to a type of corporate action where a company

"splits off" sections of itself as a separate business.• The common definition of spin-out is when a division of a

company or organization becomes an independent business. The "spin-out" company takes assets, intellectual property, technology, and/or existing products from the parent organization.

• Agilent Technologies spun out of Hewlett-Packard in 1999, formed from HP's former test-and-measurement equipment division.

• Oxford NanoLabs and Oxford RF Sensors were set up to commercialize technology based on University of Oxford research, and have been "spun out" by Isis Innovation, the technology transfer arm of the University.

• Shugart Associates was a spin-out of IBM.• AOL was a spin-out of Time Warner.

Split Off

• A type of corporate reorganization whereby the stock of a subsidiary is exchanged for shares in a parent company.

• Viacom(video and audio communications) announced a split off of its interest in Blockbuster in 2004 whereby Viacom offered its shareholders stock in Blockbuster in exchange for an appropriate amount of Viacom stock.

• A split-off differs from a spin-off in that the shareholders in a split-off must relinquish their shares of stock in the parent corporation in order to receive shares of the subsidiary corporation whereas the shareholders in a spin-off need not do so.

Split UP• A corporate action in which a single company splits into two or more

separately run companies. Shares of the original company are exchanged for shares in the new companies, with the exact distribution of shares depending on each situation.

• Some companies have a broad range of business lines, often completely unrelated. This can make it difficult for a single management team to maximize the profitability of each line. It can be much more beneficial to shareholders to split up the company into several independent companies, so that each line can be managed individually to maximize profits.

• The government can also force the splitting up of a company, usually due to concerns over monopolistic practices. In this situation, it is mandatory that each segment of a company that is split up be completely independent from the others, effectively ending the monopoly.

Divesture• The partial or full disposal of an investment or asset through

sale, exchange, closure or bankruptcy. Divestiture can be done slowly and systematically over a long period of time, or in large lots over a short time period.

• For a business, divestiture is the removal of assets from the books. Businesses divest by the selling of ownership stakes, the closure of subsidiaries, the bankruptcy of divisions etc.

• For example, a railroad line might purchase a coal mining company to provide a direct source of fuel for its fleet of locomotives. But with development of more efficient diesel engines, the value of that mine becomes seriously eroded. As the railroad replaces its steam engines with diesels, it has no use for its coal, except to sell it to someone else. Thus, it faces a crucial decision of whether to sell the mine or hold on to it and enter the coal supply business.

 

Equity-Carve Out• Equity carve-out (ECO or a partial spin-off) is a sort of corporate

reorganization, in which a company creates a new subsidiary and IPOs it later, while retaining control.

• Usually, up to 20% of subsidiary shares is offered to the public. The transaction creates two separate legal entities—parent company and daughter company—with their own boards, management teams, financials, and CEOs.

• Equity carve-outs increase the access to capital markets, enabling carved-out subsidiary strong growth opportunities, while avoiding the negative signaling associated with a seasoned offering (SEO) of the parent equity.

• An initial public offering (IPO), referred to simply as an "offering" or "flotation", is when a company (called the issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.

Cont…

• A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt).

• A Seasoned equity offering or secondary equity offering (SEO) is a new equity issue by an already publicly-traded company. Secondary offerings may involve shares sold by existing shareholders (non-dilutive), new shares (dilutive) or both.

Numerator and Denominator Management

Numerator Management

• To grow the numerator (net income), top management must have:– a point of view about where new opportunities lie– must be able to anticipate changing customer

needs– must have invested preemptively in building new

core competencies– must provide clear and consistent leadership

Denominator Management

• Many managers realize that it is a lot harder to raise net income, than to cut assets and headcount.

• Under pressure for a quick ROI improvement, executives reach for the lever that will bring the quickest, surest improvement in ROI - the denominator.

• Easy and quick, a red pencil is all that is required.• The US and Britain have produced an entire generation of

denominator managers.• These managers can downsize, declutter, delayer, and divest

better than any managers in the world!• Even before the current wave of downsizing, US and British

companies had the highest asset productivity ratios of any companies in the world.