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Corporate Restructuring


Meaning ďƒźCorporate restructuring refers to the changes in ownership, business mix, assets mix and alliances with a view to enhance the shareholder value.

ďƒźHence, 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 Corporate Restructuring (cont..) Forms of Merger (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..) ď‚— 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. ď‚— A substantial acquisition occurs when an acquiring firm

acquires substantial quantity of shares or voting rights of the target company.


Forms of Corporate Restructuring (cont..) 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.


Motives of Corporate Restructuring 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 (Cont..) 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.


Legal Procedures for merger and acquisition

10


Legal Process of Merger & Acquisition


Process (Cont‌) Approval of Merger

Sanction by High Court

Information to stock Exchange

Shareholders & Creditors meeting

Approval of Board of Directors

Application in High Court


Process (Cont…) Filing of Court Order

Transfer of Assets & Liabilities

Payment By cash or Securities


Methods of Valuation Discounted Cash flow Method

 In order to apply DCF technique, the following

information is required: • Estimating Free Cash Flows   

• •

Revenues and expenses Cor.tax and depreciation: Working capital changes

Estimating the Cost of Capital Terminal Value


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..) Company X

Company y

After Merger

Share Capital

200

240

= 440

Fixed Assets

150

170

= 320

Liabilities

250

200

= 450

Current Assets

250

120

= 370

Particulars

After merger both balance sheet will be combined is called pooling of interest method


Calculation of financial synergy (cont..) (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.


Company X

Company X

Share Capital

200

240

Fixed Assets

150

170

Liabilities

250

200

Current Assets

250

120

Particulars

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


Divestiture 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 change  Selling cash cows  Disposal of unprofitable businesses  Consolidation  Unlocking value


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 Ventures ď‚— A 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 assets ICICI GROUP INDIA

PRUDENTIAL GROUP


Sell-off ď‚— When a company sells a part of its business to a third party, it is

called sell-of. ď‚— 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. ď‚— Sometimes the company might sell its profitable but non-core

businesses to ease its liquidity problems.


Spin-off  When a company creates a new company from the

existing single entity, it is called a spin-of.  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.


Employee Stock Ownership ď‚— 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. ď‚— E.g. First company introduce ESOP is Inforsys.


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.

Corporate restructuring  

Restructuring is the common management term for the act of change the legal, ownership, operational, or other structures of a company for t...

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