Corporate Restructuring

B.V.RaghunandanSVS College,

BantwalKarnataka, India

Corporate Restructuring: Meaning•It is a process by which an organisation drastically alters its capital structure, asset mix and organisation for increasing the firm’s value and performance

Reasons for Capital Restructuring• Globalisation• Liberalisation• Privatisation• Development in IT• Core Competence• Rationalisation• Economy of Scale• Diversification

• Takeover of Sick Companies

• Strategic Tax Planning• Reduction of Cost of

Capital• Competition• Supply Chain

Management

Methods of Restructuring• Merger/Amalgamation• Consolidation• Acquisition• Take-over• Joint Venture• Divestiture• Leveraged Buy-out• Management Buy-out

• Master Limited Partnership

• Employee Stock Ownership Plans

• Strategic Alliance• Holding Company• Reverse Merger• Pyramiding

I Merger/Amalgamation

•It is a process by which one firm acquires assets and liabilities of another firm in such a way that the latter firm ceases to exist e.g. HDFC Bank & Centurion Bank of Punjab in 2008

•It is cheaper and less time consuming and procedure ridden than than buying individual assets

•It must be approved by either 2/3 majority or ¾ majority

II Consolidation

•It is a business combination by which both the acquiring firm and acquired firm lose their identities and create a new firm

•E.g. Centurion Bank and Bank of Punjab creating Centurion Bank of Punjab in 2007

III Acquisition

•It is a process by which one firm purchases substantial percentage of shares of another firm from the open market or directly from the shareholders through a tender offer

•The target company or its promoters or its managers do not come into the picture

•No formalities need be fulfilled by the target company

•It is between the Acquiring Firm and the shareholders of the Target Company

IV Take-over

•It is a process by which control of a corporate is transferred from one group of promoters to another group

•Cash or securities may be paid for the transfer

•A newly elected Board of Directors•E.g. ADAG (Anil Dhirubhai Ambani Group)

taking over Adlabs in 2007 from the promoter Manmohan Shetty

V Joint Venture• It is a form of business combination in

which two different firms contribute financial, production, organisation/marketing skills to form a new company or to carry out a particular economic activity

•E.g: Bharti Televenture has a JV with Nokia for its network maintenance, another JV with Nokia for marketing the handsets of Nokia, and another JV with RIM for marketing Blue Berry Mobiles

Rationale/ Motive for JV• Entry into New Markets• Sharing Technology• Complementary Products

or Services• Distribution Network• Meeting Competition• Carrying Out a Specific

task

• Reaching Global Markets• Organising Skills• Brand Equity• Sharing Research

Facilities• Sharing a License

Joint Ventures in IndiaPre-2000 Post-2000-Success Story

• A few JVs like Godrej-Proctor & gamble failed in India

• Attempt to kill the brands of the partner

• Family Politics and the JVs interference

• Each partner had an ultimate objective contrary to that of the JV

• Automobiles• Consumer Electronics• Telecommunication• Insurance• Pharmaceuticals• Hospitality• Space Technology• Information Technology

VI Divestiture•Divestiture is the sale of a segment of a

company to a third party.•The segment may be assets, product lines,

subsidiaries or divisions•The sale may be for cash or securities

Motives/Objectives/Rationale

•Prejudice of Investment Analysts•Managerial Efficiency•Managerial Remuneration•Strategic Tax planning•Changing Economic Environment•Increased Market Spanning•More Focussed Merger

Methods of Divestiture

A. Sell-offB. Spin-offC. Split-UpD. Equity Carve-Out

A. Sell-Off

•It is a sale of part of the firm to a third party

•The shareholders of the selling firm do not get either cash or securities

•The selling company receives cash usually for the sale

•E.g. L&T selling its cement division to Grasim Industries of AV Birla Group which was named as Ultratech Cement later

Advantages of Sell-off

•Better Liquidity•Concentrating on Core Business (Tata

Steel selling its cement division to La Farge)

•Improving Profitability•Increasing Efficiency•Reducing Business Risks

B. Spin-Off

•It is a process by which a division or department is converted into a separate company

•Shareholders get the equity shares in the new company created

•It is done for better accountability and also profitability accounting

•Indiabulls Financials spinning of Indiabulls Real Estate in 2007, and again Indiabulls Securities in 2008

Rationale/Reasons for Spin-Off

•Core Competence•Enhancing Responsibility•Profit Center•Protection of Crown Jewels in case of a

Hostile Take-over•Government Regulation•Dividing Family Business•Shedding Unwanted Activities

Disadvantages of Spin-off

•Loss of Economy of Scale•Higher Overheads•Reduced Ability to Raise funds•No Benefit of Diversification•No Benefit of Synergy•Lower Turnover and Profitability

C. Split-Up

•It is a process by which a single company is divided into two or more companies without any company being a subsidiary

•Shareholders get the shares in all the companies created

•Advanced Micro Devices(AMD) split into two companies in October 2008 for Designing and Manufacturing

D. Equity Carve-out

•Equity Carve-out is the sale of shares of a subsidiary company by the Holding company for getting additional cash

•Cash is available only to the Holding Company and not to the shareholders

•Venture Capital and Private Equity have contributed to a major extent to the Equity Carve-out Deals

VII Leveraged Buyout

•LBO is ,” the acquisition, financed largely by borrowing, of all the stock, or assets of a hitherto public company by a smll group of investors”-Weston

Stages of LBO operation

A. First Stage: Raising FundsB. Second Stage: Creating an Shell

Company or an SPV and Transferring the Funds raised

C. Third Stage: Purchasing the Shares or Assets

D. Fourth Stage: Putting the Taken-Over Company on Track

E. Fifth Stage: Taking the Company Public again-Second IPO

VIII Management Buy-Out

•MBO is a process by which the substantial part of the shares of the company are purchased by the Executives of the company from the promoters

•When the promoters are planning to sell a firm, the managerial personnel may buy the same from the promoters

Differences between LBO & MBOLBO MBO

• Outside Firm Purchases

• SPV is Created• Shareholders lose the

share

• Another set of Promoters manage the company

• Executives of the same company purchases

• No SPV is created• Only Promoters sell the

shares• Mangers and Promoters

become one and the same

IX Master Limited Partnership

•It is a type of limited liability partnership where the limited liability portion of the partnership interests are divided into units and traded just like equity shares

•It enjoys the limited liability of a company and also unlimited existence and at the same time getting the tax treatment of a partnership

Categories of MLP

•Roll Up MLP: Combination of two or more partnership into one publicly traded partnership

•Acquisition MLP: An MLP offering units to the public with a view to using the proceeds to buy assets for the MLP

•Liquidation MLP: MLP formed out of the liquidation of a corporate

•Roll-Out MLP: MLP formed by exchange of operating assets of a corporate for the units of an MLP

Advantages of MLP

•Tax Advantage•Converting a Corporate into an MLP for

easier decision making•The benefits of a corporate like limited

liability and Unlimited existence•Best Suited for Professionals•No limitation of partnership like limited

existence

X Employee Stock Ownership Plan•ESOP is a stock bonus plan investing primarily

in the securities of the employer firm•In India, it is known as Employee Stock

Options•It is in the form of options convertible into

equity shares of the employing company in the future

•They are provided to attract talents at the top managerial positions and to get their loyalty

Benefits of ESOPs

•Attracting Managerial Talent•Getting the Loyalty•Giving Ownership Interest to the

Managers•Helping MBO in the future•Executive Compensation Plan•Inducing the Mangers to perform well

XI Strategic Alliance

•It is an agreement among two or more firms to co-operate in order to achieve a commercial objective

•In the form of JV, Franchising, Supply Agreement, Purchase Agreement, Marketing Agreement, Technology Supply Agreement, Technical Support Agreement etc.

•Based on trust and preset priorities

XII Holding Company

•It is a company that has controlling interest in another company. It owns majority of shares in another company, which is called the subsidiary company

Holding CompanyAdvantages Disadvantages

• Independent Operation• Separate Profit Center• Better Accountability• Quick Decisions• Independent Valuation in

the Financial Markets• Core Competence

• No economy of Scale• More Overheads• Lacking Synergy

XIII Pyramiding• Establishing a large number of holding

companies and subsidiaries with crossholdings for easier ownership of a large number of companies with a limited amount of funds

• Involves buying a company and using its cash reserves to take over a second company and using the cash reserves and borrowings of second and third companies to take over a third company

• E.g. Manu Chabria’s Jumbo Group taking over Dunlop, Shaw Wallace, Nihon Electronics etc with only a limited capital

• Financially Imprudent and Dangerous

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