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
5 / 37
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 offs
Typically 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 divestitures
Selling 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/merger
Application to NCLT for directions
NCLT directions for members’ meeting
Companies 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
Thank
You…