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LBSIM-PGDM(General)-Term-IV (Batch 2012-14) 01-Jul-20
Dr. Pankaj Varshney
1
Corporate Restructuring,
Mergers & Acquisitions
An Overview
Pankaj Varshney
What is Corporate Restructuring?
Mathieu (1996) : articulated actions undertaken by
firms to restore competitiveness that has eroded
substantially. These measures are taken in response to
majorchanges in the firms environment, esp. final
demand, competition , and technology
Rock and Rock (1990): corporate restructuring can
encompass a broad range of transactions but generally
alludes to substantial changes in the business portfolio
and /orfinancial structure. Restructuring radicallyalters afirms structure, asset-mixand/ororganization
so as to enhance firms value
CRMA-An Overview 2
Mathieu,N. (1996). Industrial Restructuring, World Bank Experience, Future Challenges, The World Bank, Washington.
Rock, M., & Rock,R.H. (eds) (1990). Corporate Restructuring: A Guide to creating the Premium Value Company,
McGraw-Hill, New York, pp.1-6.
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What is Corporate Restructuring?
CRMA-An Overview 3
Corporate Restructuring is a broad term, which refers
to significant re-orientation or realignment of
investments (Assets), and /or financing (Liabilities)
structure of a company, through a conscious
management action with as view to drastically alter
the quality and quantity of its future cash flows.
Corporate Restructuring
Corporate Restructuring involves:
Tata Motors acquisition of Jaguar Land Rover from Ford,
through Jaguar Land Rover Limited
Launch of Tata Sumo & Indica by Tata Motors - leading to an
expansion of business portfolio through an organic route would
not be considered as corporate restructuring
Grasims acquisition of Larsen & Toubros (L&T) cement division
through UltraTech Cement Limited
Demerger of L&Ts cement business into UltraTech Cement
Limited - reduction of its business portfolio.CRMA-An Overview 4
any change in business capacity or portfolio which is
carried out in an inorganic way
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Corporate Restructuring
Corporate Restructuring involves:
Within a targeted or planned range if the debt/equity ratiofluctuates, such changes in the capital structure do not amount
to capital restructuring.
Borrowing of a significant amount of term loan or an issue of3/5 year NCDs do not qualify to be called corporate
restructuring .
An initial public issue, or a follow-on public issue or buy-back of
equity shares would permanently alter the capital structure ofa company, and thus, would amount to corporate
restructuring.
CRMA-An Overview 5
any change in the capital structure that is not part of
its ordinary course of business
Corporate Restructuring
Corporate Restructuring involves:
Merger of two or more companies belonging to different
promoters
Demerger of a company into two or more with control of the
resulting company passing on to other promoters
Acquisition of a company
Sell-off of a company or its substantial assets Delisting of a company
All these would qualify to be called exercises in corporate
restructuring.
CRMA-An Overview 6
any change in the ownership of the company or
control over its management
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Corporate Restructuring
CRMA-An Overview
1. Asset based Restructuring Acquisitions (of Divisions /Co.)
Mergers (or Amalgamations)
Divestures (of Divisions /Co.)
Demergers (Spin-offs/Spilt-ups/
Equity Carve-outs)
Joint Venture/ Strategic Alliances
2. Financial Restructuring Leveraged Buyouts
Share Buybacks
Debt-Equity Swap
3. Change in Ownership Structure
Privatisation / Disinvestments
Targeted Share Issues (Preferential
Allotments)
Delisting of Shares
External Restructuring Internal Restructuring
1. Portfolio Restructuring Cost Reduction
by way of: Closure of units
Redundancy Programme
2. Organisational Restructuring Decentralisation
Divisionalisation
Delayering
Matrix Structures
7
Mergers
Merger is combination of 2 or more companies into 1
company.
Most frequently used form of corporate restructuring.
Primarily a strategy of inorganic growth.
May take the following forms:
Absorption
Consolidation
CRMA-An Overview 8
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Absorption
Combination of all the assets and liabilities (and
businesses, on a going concern basis) of two (or more)
companies such that one of them survives.
Combination of 2 or more companies into an existing
company.
All except one company lose their identity.
Absorption of Tata Fertilisers by Tata Chemicals
Indias largest private sector corporate entity RelianceIndustries Limited (RIL) is a result of many mega mergers of
group companies into RIL.
CRMA-An Overview 9
A B AC
Consolidation
Creation of an altogether new company owning assets,liabilities, and businesses (on going concern basis) of
two or more companies, both/all of which cease to
exist.
Combination of 2 or more companies into a new
company.
All companies are dissolved and a new company isformed.
Hindustan Computers, Hindustan Instruments, Indian Software
Co., Indian Reprographics consolidated to form HCL.
CRMA-An Overview 10
A B ZC
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Types of Mergers
Horizontal Merger: Involves firms operating and
competing in the same line of business activity.
Forming a large firm may have the benefit of
economies of scale.
Possible negative effect Monopoly power.Merger of New Bank of India with Punjab National Bank.
Vertical Merger: Involves firms operating in different
stages of the production process.
Merger of Reliance Industries with Reliance Petroleum.
Conglomerate Merger: Involves firms engaged in
unrelated types of business activities.
CRMA-An Overview 11
Amalgamation
Amalgamating company or transferor company: In the process
of absorption or consolidation, the company whose assets and
liabilities are transferred to another company and which ceases
to exist through the process of dissolution without winding up is
called amalgamating or transferor company.
Amalgamated company or transferee company: In the process
of absorption or consolidation, the company which receives the
assets and liabilities of other company or companies and
continues to survive/exist is called an amalgamated company ortransferee company.
CRMA-An Overview 12
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Motives for Mergers
Economies of Scale: Central to horizontal merger;
Economies are generated from sharing of central
services Corporate Office, Accounting, Top Mgt.
Economies of Vertical Integration: Some companies try
to gain control over the production process by
expanding back toward the output of the raw material
and forward to the ultimate consumer through merger
with the supplier or customer.
Complementary Resources: Many small firms are
acquired by large firms that can provide the missing
ingredients to the small firm.
CRMA-An Overview 13
Motives for Mergers (Contd.)
Unused Tax Shield: Sometimes a firm may have
potential tax shields but not have the profits to take
advantage, hence merger with a profitable unit.
Surplus Funds: Firms with surplus cash and shortage of
good investment opportunities often turn to mergers
financed by cash as a way to redeploy their capital.
Eliminating Inefficiencies: Firms with unexploited
opportunities to cut cost and increase sales and
earnings. Such firms are natural candidates foracquisition by other firms with better management.
CRMA-An Overview 14
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Acquisitions (Takeovers)
CRMA-An Overview
Acquisitions (Takeover): Act ofacquiring effective
control over the assets or management of another
company called target company, without the
combination of companies.
Acquiring effective control means right to control its
management & policy decisions
As companies are managed by BoD, it also means the
right to appoint (and remove) majority of directors.
Separate legal identities of the companies remain but
there is a change in control or management.
Hostile acquisition is called Takeover. Tatas acquiring VSNL
Sterlite acquiring BALCO
Daiichi Sankyo acquiring Ranbaxy 15
Ways to acquire a control
By acquiring a substantial percentage of the voting capital ofthe target company.
By acquiring voting rights of the target company throughpower of attorney or through a proxy voting arrangement.
By acquiring control over an investment or holding company,that in turn holds controlling interest in the target company.
By simply acquiring management control through a formal orinformal understanding or agreement with the existing person(s) in control of the target company.
CRMA-An Overview 16
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1. Acquisition of a target company through acquisition of its
shares
Most common method is to acquire i.e. purchase substantial
voting capital (i.e. equity capital) of the target company.
What percentage would be considered as adequate to qualify ascontrolling interest?
Absolute control: an unfettered right to take any decision.
However, in such a case, the company cannot become a listedcompany or continue to be listed company, if it was listed earlier.
Practically Absolute Control: ability to get any and all resolutions
passed in the general body meeting of the shareholders
Most of the important decisions, such as further issue of capital
other than a rights issue, buy-back of shares, reduction of capital,delisting of the company, etc., can be taken, only by passing a
special resolution, (at least 75 per cent of the shareholders by
value votes in favour of a special resolution)CRMA-An Overview 17
Acquisition
General control over a company
Some decisions (approval of annual accounts, declaration ofdividend, issue of bonus shares, appointment of directors, etc)
require only a ordinary resolution (a simple majority of the
members present and voting, either in person or through
proxies at the general meeting).
In this case, one does not need to acquire 51% of the votingcapital to have a control over a company.
Shareholding pattern needs to be evaluated.
CRMA-An Overview 18
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2. Acquisition of a target company through power of attorney
This is not a commonly used way of effecting
acquisition of a company.
It could be used only as a short-term tactic, probably
as a precursor to the substantial acquisition of shares
from existing promoters or a faction of the existing
promoters, who, pending the conclusion of
Memorandum of Understanding (MOU) to sell their
shares to the acquirer, may allow him to vote on their
behalf on certain key resolutions.
CRMA-An Overview 19
3. Through acquisition of holding company controlling the
target company
Mr. X
100%
X Investment
Pvt. limited
XYZ Limited
40%
10%
ABC Limited
Mr X sells X Investment Pvt
Ltd to ABC Ltd.
CRMA-An Overview 20
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4. Acquisition of a target company through formal or informal
agreement
Mr. X
XYZ Limited
46%
Mr. A
Mr X enters into an MoU with Mr. A.
CRMA-An Overview 21
Some acquisitions
Acquisition of Corus by Tata Steel
Acquisition of Spice Communication by Idea Cellular
Acquisition of Ranbaxy by Daiichi Sankyo
Acquisition of Hutchison Essar by Vodafone
Acquisition of Sahara Airlines by Jet Airways
Acquisition of Deccan Airways by Kingfisher Airlines
Acquisition of Copper Tires (US) by Apollo Tyres (India)
CRMA-An Overview 22
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Divestiture
Sale of all or substantially all the assets of a company or
any of its divisions for cash but not against equity.
All assets or majority of assets (fixed assets, CWIP, CA,
Investments) are sold offas one lump, hence also called
slump sale under Income Tax Act.
Selling co. pays off the related liabilities from the sale
proceeds.
However, specific liabilities like Current liabilities may
be bought by the transferee company
Divestiture is usually adopted to mobilize resources forthe core business by selling-off non-core businesses.
CRMA-An Overview 23
Divestiture
DivisionB
Division C
DivisionA
DivisionC
DivisionA Division B
Company X has three
divisions A, B & C
Assets of division B are sold for
cash, while Company X retains
division A & C.
Company X
Company X
CRMA-An Overview 24
Pre-Divestiture
Post-Divestiture
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Demerger
Assets & liabilities of a division (s) are detached from the parent
company, housed in a new independent company against which
shares are issued by the new company.
Consideration is by issue of shares and not in cash.
Demerged company
Demerged company means the company whose assets,liabilities, and business(es) are being transferred in the process
of demerger to another company in case of either spin-off or
split-up. It is also called transferor company.
Resulting company
Resulting company(ies) means the company or companies to
which assets, liabilities, loans and business(es) are beingtransferred in the process of demerger.
CRMA-An Overview 25
Demerger of Non-IT business from IT business of Wipro
Limited:
Wipro Consumer Care & Lighting (including Furniture
business), Wipro Infrastructure Engineering (Hydraulics &
Water businesses), and Medical Diagnostic Product &
Services business demerged into a separate company
Wipro Enterprises Ltd
Modes:
Spin-off
Split-up
Demerger
CRMA-An Overview 26
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Demerger - Spin-offs
A spin-off is a new, independent company created by detaching
part of a parent companys assets and operations.
Shares in the new company are distributed on a pro-rata basis,
to the parent companys shareholders.
No cash changes hands, and the shareholders of the original
parent company also become the shareholders of the newly
spun company.
Existing shareholders have the same proportion of ownership in
the new entity as in the original company.
Spin-off of Wipro Enterprises Limited from Wipro limited
Spin-off of Ultra-tech Cements from L&T
Spin-off of Dabur Pharma from Dabur India
DCM Ltd. Spunoff into three separate companies DCM
Shriram Consolidated, SIEL, DCM Shriram Industries.
CRMA-An Overview 27
Demerger - Spin-offs
DivisionB
Division C
DivisionA
DivisionC
DivisionA
DivisionB
Company X has three
divisions A, B & C
Division B is spun-off into a
separate company, while
Company X retains division A & C.
Company X
Company X
Company Z
Shares of Company Z
are issued to
shareholders of
Company Y onpro-
rata basis.
CRMA-An Overview 28
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Rationale for Spin-off
Unlocking hidden value Establish a market valuation for undervalued
assets and create a pure-play entity that is transparent and easier tovalue
Undiversification Divest non-core businesses and sharpen strategicfocus when direct sale to a strategic or financial buyer is either notcompelling or not possible
Motivating management Improve performance by better aligningmanagement incentives with Spun-off Co's performance, creatingdirect accountability to public shareholders, and increasingtransparency into management performance
Eliminating dissynergies Reduce bureaucracy and give Spun-off Comanagement complete autonomy
Anti-trust Break up a business in response to anti-trust concerns
Corporate defense Divest "crown jewel" assets to make a hostiletakeover of Parent Company less attractive
CRMA-An Overview 29
Demerger - Split-up
Split-up involves transfer of all or substantially all
assets, liabilities, and businesses (on a going concern
basis) of the company to two or more companies in
which, again like spin-off, the shares in each of the new
companies are allotted to the original shareholders of
the company on a proportionate basis but unlike spin-
off, the transferor company ceases to exist.
CRMA-An Overview 30
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Spilt-up
DivisionB
Division C
DivisionA
DivisionC
Company X has three
divisions A, B & C
Company X
Company A Company C
Shares of spun-off
companies areissued to
shareholders of
erstwhile Company
X onpro-rata basis.
DivisionB
DivisionA
Company B
Each of Company Xs
divisions are spun-off
as separate companies
CRMA-An Overview 31
Company X does
not exists after the
Spilt-up.
Equity Carve-outs
Equity carve-out is a hybrid of divestiture and spin-off.
Shares in the new company are not given to existing
shareholders but are sold in a public offering, hence also
called IPO carve-out or subsidiary IPO.
o In a carve-out, a company transfers all the assets & liabilities
of one of its divisions to its 100 per cent subsidiary .
o At the time of transfer, the shares are issued to the
transferor company itself and not to its shareholders.
o Later on, the parent company sells the shares in parts to
outsiders - whether institutional investors by privateplacement or to retail investors by offer for sale.
o In case of carve-out, the consideration for transfer of
business to a new company eventually comes in the coffers
of the transferor company.CRMA-An Overview 32
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Equity Carve-outs
E.g.: Reliance Communications hived-off tower
business to Reliance InfraTel and sold 5% stake in RITL
to international investors.
Typically, the parent continues to have an equity stake
in the subsidiary and does not relinquish immediate
control.
Minority interest, usually less than 20 percent, is sold in
an IPO.
Sale of a minority stake, (15 or 20%), leaves the parent
in control and may not reassure investors who worry
about lack of focus or poor fit.
Allows more incentive to perform, in the reduced sizeof operations, managers efforts will not go unnoticed.
CRMA-An Overview 33
Equity Carve-outs
DivisionB
Division C
DivisionA
DivisionC
DivisionA
DivisionB
Company X has three
divisions A, B & C
Divisions B is spun-off into a
separate company, while
Company X retains division A & C.
Company X
Company X
Company Z
Shares of Company Z
are issued to the
public
CRMA-An Overview 34
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Privatization (Disinvestment)
Privatization (or disinvestment) is sale of shares by the
government (the principal shareholder) in a
government-owned company to private investors.
Sale of equity stake by GoI in Oil India, NHPC,
ONGC,MMTC etc.
Motives for privatization:
Increased efficiency: exposed to the discipline of
competition
Share ownership: Special terms for employees/
small investors (Maruti)
Revenue for the government.
CRMA-An Overview 35
Share Buyback
A company buys its own shares from its shareholders
using its own resources.
Buy-back of securities has been allowed since 1998 by
incorporating sections 77A, 77AA and 77B
Governed by SEBI (Buyback of Shares) Regulations
Mode of rewarding the shareholders, besides being a
method of capital restructuring.
Modes of Share Repurchase:
Open Market Repurchase Tender Offer
Dutch Auction
CRMA-An Overview 36
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Share Buyback
CRMA-An Overview 37
Year Amount (Rs. crore) No. of Issues
1998-99 1 1
1999-00 300 12
2000-01 1,297 142001-02 2,154 27
2002-03 1,011 31
2003-04 52 8
2004-05 3,600 11
2005-06 363 10
2006-07 295 7
2007-08 2,004 10
2008-09 4,218 46
2009-10 824 20
2010-11 4,295 20
2011-12 13,765 31
2012-13 1,694 21
2013-14
(as on 31/05/13)159 4
Total 36,032 273
Source:
Prime Database,(as of 24/06/13)
Reduction of Capital
Company is allowed to extinguish or reduce liability onany of its shares in respect of share capital not paid up
or is allowed to cancel any paid-up share capital which
is lost or is allowed to pay off any paid-up capital which
is in excess of its requirements u/s 100 to 104 of the
Companies Act, 1956
By extinguishing or reducing the liability in respect of sharecapital not paid-up
By writing off or cancelling the capital which is lost By paying off or returning excess capital that is not required by
the company
CRMA-An Overview 38
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Delisting
Delisting of a company refers to delisting of its equity
shares from all stock exchanges where its equity shares
are listed.
Also referred to as Going Private
Governed by SEBI (Delisting of Equity Shares)Regulations, 2009.
Compulsory
Voluntarily
CRMA-An Overview 39
Examples of Delisting
Alfa Laval (India) Limited
Atlas Copco (India) Ltd
Astra Zeneca Pharma India Ltd
BOC India Limited
Binani Cement Ltd
Blue Dart Express Limited
Controls & Switchgear Contactors Ltd
DSP Merrill Lynch Limited
Flextronics Software Systems Ltd.
Goodyear India Ltd
GE Capital Transportation Financial
CRMA-An Overview 40
India Gypsum Ltd
iGATE Global Solutions Limited
Jindal Photo Ltd
Nirma Limited
Rayban Sun Optics India Ltd
Saint-Gobain Sekurit India Limited
Spencer & Company Ltd.
SKF India Ltd
UTV Software Communications Ltd
Wimco ltd
Wartsila India Ltd
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Why do companies Delist?
To reduce costs of maintaining large number of
reports and having an expensive work force.
To avoid sharing a lot of information in public
domain.
Promoters delist to make use of the level of
freedom that unlisted companies enjoy.
CRMA-An Overview 41
Joint Venture
Two or more companies (called joint venture partners)
contribute to the equity capital of a new company
(called joint venture) in pre-decided proportions.
Normally, joint ventures are formed to pool the
resources of the partners and carry out a business or a
specific project beneficial to both the partners but
which none of the partners wants to carry out under
its own corporate entity .
Joint venture partners may otherwise be competitors but may bewanting to collaborate only for a specific project or business.
Neither of the partners may be willing to dilute control on theirbusiness by accepting funding, especially equity funding, in their
own balance sheet.CRMA-An Overview 42
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Joint Venture
The joint venture entity is manned by a separate
management team.
The joint venture may own its assets independently
from its parent firms.
Partner firms play an active role in the joint venturesstrategic decisions.
To ensure that management control of the commonbusiness or project is shared in the agreed proportion
through charter of the joint venture company.
To ensure that rewards of the common business or theproject are shared in the predetermined ratio without
the possibility of manipulation in favour of either side.CRMA-An Overview 43
Some Joint Ventures
44
SBI Life : JV between State Bank of India (76%)and BNP
Paribas Cardif(24%).
Bharati-Walmart Private Limited: JV between Bharati
Enterprises (India) and Walmart (USA).
Maruti Suzuki (Before disinvestment) JV Between GoI &
Suzuki Motors (Japan).
Sony-Ericsson : JV between the Japanese consumer
electronics company Sony Corporation and the Swedishtelecommunications company Ericsson to make mobile
phones.
Tata AIG, ICICI Lombard, etc.
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45
Why Joint Ventures?
For foreign partner Government restrictions
Access to local distribution channels
For local partner
Access to new technology and processes
Opportunity for larger chunk of revenue
Pre-empt creation of JV with a rival
Strategic Alliance
CRMA-An Overview 46
A strategic alliance is when two or more businesses
join together for a set period of time.
A strategic alliance is a partnership between firms
whereby resources, capabilities, and core
competences are combined to pursue mutual
interests.
The businesses, usually, are not in direct competition,
but have similar products of services that are directedtowards the same target audience.
Strategic alliance is a primary form ofco-operative
strategy.
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Generally, strategic alliances are arrangements betweentwo or more entities that are created achieve mutual
goals through collaboration.
The two or more firms (partner) that unite to pursue
upon a set of agreed goals.
Each partner retains its business independence.
The partner firms share the benefits of the alliance and
control over the performance of assigned tasks.
Usually non-equity, loosely structured relationship.
47
Features of Strategic Alliance
Gain a Means of Distribution in International Market:
It may be beneficial for an exporter to ally with
international partner, to understand the functioning
and the international market network.
Overcome Legal or Regulatory Barriers: In some
countries it is mandatory to have local partners in order
to conduct business. Thus, alliances offer suitable
options.
Diversification: It may be advantageous to enter into
an alliance, as a business guide to minimize pitfalls in a
new business territory.
48
Why form Strategic Alliances?
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Microsoft & Nokia : to develop Windows-based mobile
handset.
GSK & Dr Reddys Labs : to manufacture drugs under
GSK brand name for emerging markets.
Pfizer & Biocon: To market Biocons insulin biosimilar
products in world markets.
Starbucks & Barnes and Nobles : to provide in-house
coffee shops, benefiting both retailers.
Starbucks & United Airlines alliance has resulted in
their coffee being offered on flights with the Starbuckslogo on the cups.
Some Strategic Alliances