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8/3/2019 Corporate Resturcturing and Merger and Acquisition
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A
PRESENTATION
ON
CORPORATE RESTURCTURING
&
MERGER AND ACQUISITION
Submitted By: - Submitted To:-
Jitendra Virahyas Dr.
H.O.D.
MBA Part II (Sem III )
Deepshikha College of Technical Education, Jaipur2009-2011
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CONTENT
1. Corporate Restructuring
1.1. Definition And Meaning
1.2. Concept Of Corporate Restructuring
1.3. Factors Affecting Corporate Restructuring
1.4. Areas Of Corporate Restructuring
1.5. Why Corporate Restructuring
2. Merger Or Amalgamation
2.1. Meaning And Definition:
2.2. Types Of Merger
3. Takeovers Or Acquisition
3.1. Meaning And Definition:
4. Financial Problems Of Mergers And Acquisition
5. Managing The Mergers And Acquisitions Process To Create Value
6. Formulas Of Merger/ Acquition
7. Benefits Of Mergers And Acquisitions
8. Disadvantage Of Merger And Acquisition
9. Procedure For Merger And Acquisition
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CORPORATE
RESTRUCTURING
Definition and meaning
Corporate restructuring has become a major force in the financial and economic
environment due to opening up of the economy to international financial markets and
availability of different kinds of instruments.
It is being viewed as a necessary process for corporate survival and growth in
the present economic environment of liberalisation and globalisation leading to global
competition.
Many Indian corporate have difficulties in restructuring due to internal or external
constraints including those which have been created by the inaction of the central/state
governments. Restructuring in India started in 1998, wherein, many large companies
went ahead with mergers, acquisitions, self-offs and spin-offs to increase their
profitability and competitiveness.
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Concept of Corporate restructuring
Corporate restructuring is generally understood as a technique to restructure the
assets and liabilities of a corporate entity including its debt-equity structure to promote
its overall efficiency and growth. But the phase corporate restructuring has a much
deeper meaning.
The restructuring can be for facing domestic and\or global competition,
identification and exploitation of core competencies, technological competitiveness
leading to quality improvement and cost effectiveness, innovative financial strategies
and capital restructuring, transformation of the people involved in restructuring and
achieving an overall turn round.
Restructuring would radically alter a firm capital structure, assets mix and
organisation so as to increase the firm value. Thus, corporate restructuring is a process
by which a company can consolidate its business operations and strengthen its position
for achieving the desired objectives of staying synergetic, competitive and successful.
Restructuring and re-organisation
The basic difference between restructuring and re-organisation is that
restructuring is resorted to keep the business going on and re-organisation is done to
achieve balanced operational results.
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Factors affecting corporate restructuring
Corporate become sick because of unfavourable external environment and/or
due to internal and managerial deficiencies. Hence, the factors affecting the corporate
for resorting restructuring can be classified into external and internal factors:
Unfavourable External Environment which mainly includes the following
Shortage of main raw materials and utilities,
Severe competition,
Shifts in consumer attitudes and preferences,
War and natural calamities,
Adverse domestic as well as global economic and political changes,
Shortage of medium and long-term funds in the financial markets.
The Internal and managerial deficiencies which are responsible for restructuring
can be grouped in four categories as noted bellow-
Production:
a) Obsolete technologies;
B) Imbalance in plant and machinery;
c) Poor location;
d) Lack of research and development;
e) Low quality product;
f) Uneconomical product-mix.
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Marketing:
a) Unrealistic demand and supply estimates;
b) Unreasonable price structure;
c) Poor sales promotion;
d) Improver marketing and distribution choice leading to high costs;
e) Poor after sales and customer service.
Finance:
a) Poor financial planning;
b) Weak budgetary and cost control system;
c) Improper accounting policies;
D) Inadequate management information system;
e) Poor inventory, receivables and cash management;
f) Inadequate tax planning.
Personal Issues:
a) Ineffective human resource;
b) Poor labour relations;
c) Bad human resource policies;
d) Under or over staffing & Irrational compensation structure.
e) Inadequate motivation and training facilities;
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Areas of corporate restructuring
Corporate restructuring has become a major force in the financial and economic
environment. It can take place in a number of fields.
The followings are the broad areas of restructuring-
Financial:
This involves decisions relating to mergers and acquisitions (M & As);
takeovers, joint ventures, and strategic alliances. It also deals with restructuring
the capital base and raise finance for new prefects. The M&A activity is a very
important from of corporate restructuring.
Technological:
This involves investment in research and development, renovation and
modernisation of plant and machinery, divestment of unprofitable plants and
operations, and up gradation of technology. This also deals with alliances with
multinational companies to exploit technological strength.
Marketing:
This involves decisions regarding the product-market segments where the
company plans to operate. This also deals with reformulation of product-market
strategy.
Manpower:
This involves reduction in manpower, improvement in managerial system,
workers participation in management, change of management, and so on. This
can be achieved by establishing internal structure and processes for improving
the capability of the people in the organisation to respond to changes.
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Why corporate restructuring
The basic objective of corporate restructuring is to have efficient and competitive
business operations by increasing the market share.
Beside it, to fulfil this objective, companies resort to restructuring on account of
the following reasons-
Globalisation of business:
Global market concept has forced many companies to restructure,
because producers having lowest cost of their products can only survive in the
competitive global market. Moreover, convertibility of rupee has also attractedmedium-sized industries to operate in the global market.
Revolution in Information technology:
In recent years, India has emerged as information technology huts. This
has made it necessary for companies to adopt new changes for improving
corporate performance.
Competitive business:
Competitiveness in business has necessitated to have sharp focus on
core business activities to minimise the operating costs, to maximise efficiency
in operation and to top managerial skill to the best advantages of the firm.
Changes in fiscal and Government policies:
the government under the economic reform programme since 1992, had
introduced many changes like de-regulation, decontrol, tax simplification etc.
These changes have led many companies to go far newer markets and
customer segments.
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Division into smaller business:
Fierce competition and lack of competitive costing is forcing thecompanies to restructure themselves. Hence, product divisions which do not fit
into the companys main line of business are being divested, thereby divisional
sing into smaller businesses.
Benefits of corporate restructuring:
Many companies have resorted to restructuring on account of the
following benefits-
Economies of scale can be achieved by consolidating the
capacities and by expansion of activities.
Diversification of business activities minimises the business risks.
This enables the firm to achieve the target rate of return.
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Merger or Amalgamation
Meaning and definition:
A merger is a combination of two or more companies into one company. It may
be in the form of one or more companies being merged into an existing company or a
new company may be formed to merge two or more existing companies. The income
tax act, 1961 of india uses the term amalgamation for merger.
According to section 2 (1A) of the income tax act, 1961, the term amalgamation
means the merge of one or more companies with another company or merger of two or
more companies to form one company in such a manner that:
1) All the property of the amalgamating company or companies immediately before
the amalgamation because the property of the amalgamated company by virtue
of the amalgamation.
2) All the liabilities of the amalgamating company or companies immediately before
the amalgamation because the liabilities of the amalgamated company by virtue
of the amalgamation.
3) Shareholder holding not less than nine-tenth in value of the shares in the
amalgamation company or companies (other than shares already held therein
immediately) before the amalgamation by or by a nominee for, the amalgamated
company by virtue of the amalgamation.
Thus, merger may takes any of two forms:
1) Merger through absorption
2) Merger through consolidation
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1) Merger through absorption: a combination of two or more companies into an
existing company is known as absorption. In a merger through absorption all
companies except one go into liquation and lose their separate identities.
Suppose, there are two companies, A Ltd. and B Ltd. Company B Ltd. Are
merged into A Ltd. Leaving its assets and liabilities to the acquiring company A Ltd. and
company B Ltd. is liquidated. It is a case of absorption.
2) Consolidation: a consolidation is a combination of two or more companies into a
new company. In the form of merger, all the existing companies, which combine, go
into liquidation and form a new company with a different entity. The entity of
consolidating corporation is lost and their assets and liabilities are taken over the new
corporation or company. The assets of old concern are sold to new concern and their
management and control also passes into the hand of the new concern.
Suppose, there are two companies called A Ltd. and B Ltd.; and they merge
together to form a new company called AB Ltd. or C Ltd.; it is a case of consolidation.
Types of merger
1) Horizontal merger: when two or more concern dealing in a same product or
services join together, it is known as a horizontal merger. The idea behind this
type of merger is to avoid competition between the units. For example, two
manufacturers of same type of cloth, two transport two book seller companies
operating on the same rout-the merger in all these cases will be horizontal
merger.Besides avoiding competition, there are economies of scale, marketing
economics, elimination of duplication of facilities, etc.
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2) Vertical merger: a vertical merger represents a merger of firms engaged at
different stage of production or distribution of the same product or service. In this
case two or more companies dealing in the same product but at different stage
may join to carry out the whole process itself.
A petroleum producing company may set up its own petrol pump for its
selling. A railway company may join with coal mining company for carrying coal
different industrial centres. The idea behind this type of merger is to take up two
different stages of work to ensure speedy production or quick service.
3) Conglomerate merger:when two concerns dealing in totally different activities
join hands it will be a case of conglomerate merger. The merging concern
neither horizontally nor vertically related to each other.
For example, a manufacturing company may merge with an insurance
company; a textile company may merge with a vegetable oil mill. There may be
some common feature in merging companies, such as distribution channels,
technology, etc. This type of merger is undertaken to diversify the activities.
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Takeovers Or AcquisitionMeaning and definition:
An essential feature of merger through absorption as well as consolidation is the
combination of the companies. The acquiring company take over the ownership of one
or more other companies and combines their operations. However, an acquisition does
not involve combination of companies.
It is simply an act of acquiring control over management of other companies.
The control over management of other company can be acquired through either a
friendly take-over or through forced or unwilling acquisition. When a company take-
over the control of another company through mutual agreement, it is called acquisition
or friendly take-over. On the other hand, if the control acquired through unwilling
acquisition, i.e., when the take-over is opposed by the target company it is known as
take-over.
Financial problems of mergers and acquisition
1) Cash management
2) Credit policy
3) Financial planning4) Dividend policy
5) Depreciation policy
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Managing the mergers and acquisitions process to create value
1) Understanding the needs
2) Merger and acquisition team
3) Candidate size
4) Frequency of merger and acquisition activity
5) Assessing and establishing whether the candidate possesses the requisite
capabilities and skills
6) Synergies
7) Review of culture fit between entities8) Valuation, merger/purchase consideration and source thereof
9) Ongoing pre and post merger and acquisition integration process
Formulas of merger/ acquition
Steps involves in the calculation of the value of the merger :-
1) Determination of the exchange ratio or swap ratio :-
Target company
Exchange ratio = --------------------------------
Acquiring company
2) Determination of earning per share of the merge company:
EATa+ EATt
EPSm = -------------------------
Na+NT
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Where , EPSm = EARNING PER SHARE OF MERGED COMPANY.
EATa =EARNING AFTER TAX OF THE ACQUIRING COMPANY
EATt = EARNING AFTER TAX OF THE TARGET COMPANY
Na = NUMBER OF OUTING SHARE IN ACQUIRING COMPANY
Nt = NUMBER OF EQUITY SHARE ISSUESBY ACQUIRING
COMPANY
TO THE SHARE HOLDER OF THE TARGET COMPANY
3) determination of market price per share(mpsm):-
MPSm = EPSm * P/E RATIOa
MPS = MARKET PRICE PER SHARE OF THE MERGED COMPANY.
P/E RATIO = PRICE EARING RATIO OF ACQURING COMPANY
4) MARKET VALUE OF THE COMPANY = MPSm* Num OF EQUITY SHARES
OUTSTADING.
5) GAIN AND LOSS FOR THE ACQUIRING COMPANY =
GAIN AND LOSSES OF THE ACQUIRING COMPANY =
POST MERGER VALUE OF THE ACQUIRING COMPANY PRE MERGER
MARKET VALUE OF THE ACQUIRING COMPANY.
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6) DIFFERENT PAYMENT PLAN :-
Num OF EQUITY SHARE ISSES TO TARGET COMPONY IN EVERY
YEAR = EXCESS EARNING * P/E RATIOa / MPSa
7) EQUIVALENT EARNING PER SHARE = EPSm * EXCHANGE RATIO / X
This steps have to follow for getting the value of the merger.
Benefits of mergers and acquisitions
The following are the main region of mergers and acquisitions of the companies:
1) Operating economies: Amalgamation of two or more companies results in a
number of operating economics . Duplicate facilities can be eliminate .
Marketing , accounting purchasing and other operation can be can be
consolidate. Thus as a result of amalgamation the amalgamated company would
have more strength and capacity to operate better than the two or more
amalgamating companies individual.
2) Economies of scale: he amalgamated company can have larger volume of
operations as compares to the combined individual operations of the
amalgamation companies . it can thus have economic scale by having intensive
utilisation of production plants, distribution net work, engineering services ,
research and development facilities etc.
3) Tax implication: in several amalgamation schemes tax place a crucial role. A
companies with heavy cumulative losses may have little prospects of taking
advantage of carrying forward the losses and the meeting them out of future
profits and thus taking advantage of the tax benefits .
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However in case this company is merged with another profit making
company ,its losses can be set off against the profit making company resulting in
substantial tax benefits to the amalgamated company.
4) Elimination of competition: the merger of two or more companies into one
would result in elimination of competitors between them they would also save in
terms of advertising cost and thus make available goods to the consumers at
lower price.
5) Better financial planning: merger results in better financial planning and
control.
For Example a company having a long gestation period may merge itself
with another company having short gestation period. As a result of this merger
the profit coming from company with short gestation period can be used to
improve the financial requirement of the company with long gestation period.
Latter company with long gestation period starts giving profits, it will benefit for
the amalgamated company as a whole.
6) Growth: amalgamation helps faster to balanced growth of the amalgamated
company. Growth by acquisition is generally cheaper than the internal growth
since numerous cost and risks involved in developing and embarking upon a
new product line or a new facilities and almost avoiding by acquisition of a going
concern . thus the company can achieve and maintain the desired growth rate
by acquiring other companies.
7) Stabilisation by diversification: amalgamation helps company in achieve
stability in its earning by diversifying its operations. a company
EXPERINCECING wide economic fluctuations and cyclical phase in earning
due to nature of its products or may merge with another company which have
totally different line of product or business .
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thus the merge would act as safeguard against business cycle
fluctuation and bring stability in the earning of the company.
8) Dilution of FEMA: a foreign company investing in India may merge with Indian
company in order to meet the requirements of foreign exchange management
act (FEMA) for diluting its foreign shareholding.
9) Personal reasons: the share holder of a closely held company be desire that
their company be acquired by another company that has an established for its
share. This will also facilitate the valuation of their shareholders for wealth taxpurpose. Moreover shareholder of a company can also improve their liquidity
position by selling some of their shares and diversifying their investment.
10)Economic necessity: the government may also the merger of two or more sick
units into a single unit to make them financial viable. Similarly it may also
requires the merger of a sick units with the healthy unit to ensure better
utilisation of resources improving results and better management.
The above is not an exclusive list of mergers and amalgamation. their may be some
other factors. The changes in socio economic condition, economic, fiscal, trade and
industrial policy of govt, status, governing the company may also the region these.
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Disadvantage of merger and acquisition
In spite of the above benefit mergers and acquisitions has some dangers are as
following:
1) Elimination of healthy competition: merger may involve absorption of small,
efficient and growing unit into a large unit. Thus it eliminate individual
competition necessary for healthy growth of the industrial units.
2) Concentration of economic power: it has been already been stated above
that all type of mergers have the inherent tendency of concentration of
economic power. Monopolistic condition may be created which are ultimately
disadvantage for the consumers.
3) Adverse effects on national economy: Concentration of economic power,
Elimination of healthy competition, etc may ultimately results in deterioration in
the performance of the merged undertakings. It is going to affect adversely to
the national economy.
However merger are essential for the growth of the organizations. Merger lead to
economies of scale, maximum utilisation of the capacity, operating economies ,
mobilisation of financial resources, rehabilitation of sick units.
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Procedure for merger and acquisition
The implementation of merger and acquisition schemes involves the following step:
1) Analysis of the proposal: having concern the idea of merger and
amalgamation between two or more companies the management of respective
companies have to look into the pros and cons of the merger and
amalgamation schemes.
2) Determination of exchange ratio: the merger and amalgamation requires
exchanges of shares. The shareholder of the amalgamated companies are
offers shares in the amalgamated company for their shareholder.
3) Approval by shareholders: a scheme of amalgamation as provide by the
respective boards, before the shareholder of the respective companies for their
approval. Section 390to 396A of the companies act 1956 contain provisions
regarding amalgamation of two or more company.
4) Consideration of the interest of the creditors: the schemesshould also be
discussed with the creditor of the amalgamated company and their views as
certain.
5) Approval of the court: the schemes of amalgamation has to be submitted to
court for its approval .the court is satisfied only when that the schemes is just
and reasonable for all concerns .
6) Approval of the BOARD OF DIRECTOR: THE SCHEMES Of amalgamation,
involve as a result of negotiations , is put finally before the board of directors of
the respective companies for their approval.
7) Transfer of assets and liabilities: from the transferring date all liability and
assets are transfer to the acquiring companies.
8) Payment in cash or securities: As per schemes of amalgamation theacquiring companies will issue the share and debenture or debenture in
exchange of share or debentures of acquired companies or make payment in
cash.
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JitendraVirahyas