A Project Report

On

Corporate and financial restructuring

Submitted to

Global Institute of Management In partial fulfilment of the Requirement of the award for the degree of Master of Business Administration
In

Gujarat Technological University

Under The Guidance Of
SUBMITTED TO :

Pratik Patel Nikunj Mangukiya Madhuri Joshi

SUBMITTED BY (Enrollment No: 117940592009) (Enrollment No: 117940592008) (Enrollment No:

MBA SEMESTER-3 (Batch 2011-2013) --------------------------------------------------------------------------------

Global Institute of Management

Uwarsad Road-Gandhinagar
MBA PROGRAMME
Affiliated to Gujarat Technological University-Ahmadabad

WHAT IS CORPORATE RESTRUCTURING?

Corporate restructuring implies activities related to expansion/ contraction of a firms operations or changes in its assets or financial or ownership structure.

The restructuring may include the;-

Organizational restructuring:Like merger, amalgamation, takeover, divestment, expansion, joint venture etc.

Financial reorganization Like buyback of share, issue of sweat equity share, redemption of shares, issue of convertible debentures/preference shares, split-up of share value, issue of bonus share, issue of deep discount bonds etc.

Why Corporate Restructuring?

The corporate restructuring is designed to accomplish specific goals and strategies such as

Profitability and ROI improvement Higher economies of scale Optimum break-even point Reducing financial and operational risks Continuous improvement in shareholder value

Corporate Restructuring Techniques:-

Expansion techniques Divestment techniques Other techniques

(1) (1)

Expansion techniques:-

Merger :-

Merger is used for the fusion of two companies to achieve expansion and diversification. Example: Sony Ericsson is a good example of a merger. Toronto Dominion bank and Canada Trust bank merged Acquisition-Google acquires YouTube Lipton India and Brooke bond Bank of Mathura with ICICI bank

(2)

Amalgamation
It is an arrangement for bringing the assets of two companies under the control of one company, which may or may not be one of the original two companies

Example: Tata aig and Maruti Suzuki

(3)

Takeover :-

Takeover is a business strategy whereby a person acquires control over the other company- either directly by acquiring assets or directly by controlling management. Example: One good example of a business takeover is that of Cadbury by Kraft foods in 2010. There was uproar by the British public when it was announced and rumours of staff reductions and operations closures spread and produced a negative effect for Kraft. Kraft had to borrow over $7billion to fund the takeover and this increased its already unstable debt
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problems. A major reason for the takeover was for Kraft to increase its brand range and acquire the Cadbury chocolate brand. Another example is that of AOL the Internet service provider acquiring Time Warner. This was the highest valued takeover in the world during the 21st Century and is also a textbook case as to how not to do a takeover. Cultural problems as well as management and organisational clashes made it difficult for AOL to achieve the benefits it was hoping for from the takeover and made it one of the most costly mistakes AOL had made.

(4)

Joint venture :-

Joint venture is a form of business combination in which two unaffiliated business firms contribute financial and\or physical assets, as well as personnel, to a new company formed to engage in some economic activity such as production etc. Example: Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. The stated reason for this venture is to combine Sony's consumer electronics expertise with Ericsson's technological leadership in the communications sector. Both companies have stopped making their own mobile phones. GM-Toyota JV: GM hoped to gain new experience in the management techniques of the Japanese in building high-quality, low-cost compact & subcompact cars. Whereas, Toyota was seeking to learn from the management traditions that had made GE the no. 1 auto producer in the world and In addition to learn how to operate an auto company in the environment under the conditions in the US, dealing with contractors, suppliers, and workers.

Reasons for Forming a Joint Venture

Build on companys strengths Spreading costs and risks

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Improving access to financial resources Economies of scale and advantages of size Access to new technologies and customers Access to innovative managerial practices Rational For Joint Ventures

(5)

Franchising:-

Franchising provides an immediate access to business operation and technology in profitable fields of operation. Example McDonald for Indian company

(6)

Strategic alliances:-

Strategic alliances are an arrangement or agreement under which two or more firms cooperate in order to achieve certain commercial objective.

Example Microsoft and nokia

(7)

Intellectual property rights:-

The worth of a company lies more in its intangible assets (patents, trademark, brands, copyright etc.) than tangible assets. IPR gives real value to the company.

(8)

Takeover by reverse bid:-

When a small company acquires a big company, in a takeover mode, such situation , is called Takeover by reverse bid. This would be possible when the substantial shares are in the control of small company.

Example The game company Atari was acquired by JT Storage, as marriage of convenience US Airways was acquired by America West Airlines, with the goal of removing the former from Chapter 11 bankruptcy. The New York Stock Exchange was acquired by Archipelago Holdings to form NYSE Group, with the goal of taking the former, a mutual company, public. ABC Radio was acquired by Citadel Broadcasting Corporation, with the goal of spinning the former off from its parent, Disney.

(2)
(1) Sell off :-

Divestment techniques

Selling a part or all of the firm by any one of means: sale, liquidation, spin-off & so on. or General term for divestiture of part/all of a firm by any one of a no. of means: sale, liquidation, spin-off and so on. . (2) Slump sale:When a company sells or disposes the whole or substantially the whole of the undertaking for a predetermined lump sum amount as sales consideration is called slump sale Example: One of the best example of slump sale is,piramal healthcare. Piramal healthcare sold to abbott via slump sale. Abbott paid $3.72 billion or more than 10 times sales. (3) Demerger :Demerger is adapted as a business strategy to separate business which dont comfortably merge with each other. Example: Bajaj Auto Ltd (BAL) has been demerged. Consequently, shareholders of the erstwhile BAL will receive shares of the demerged new companies as per the provisions of the demerger.

(4) Management buyout :MBO is the repurchase of a business by its management when the existing owners are trying to sell business to third party due to its slow growth or lack of managerial skills in running business. Example: Springfield remanufacturing corporation
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(5) Leverage buyout

The acquisition of an operating company with the funds derived primarily from debt financing, by a small group of investors. Features of Leveraged Buyout

Low existing debt loads; A multi-year history of stable and recurring cash flows; Hard assets (property, plant and equipment, inventory, receivables) that may be used as collateral for lower cost secured debt; The potential for new management to make operational or other improvements to the firm to boost cash flows; Market conditions and perceptions that depress the valuation or stock price.

Examples: Acquisition of Corus by Tata. Kohlberg Kravis Roberts, the New York private equity firm, has agreed to pay about $900 million to acquire 85 percent of the Indian software maker Flextronics Software Systems is the largest leveraged buyout in India.

(6)Liquidation:A business may go into decline when losses are made over several years. Examples: Relaince

(3)
(1) Going private :-

Other techniques

The management of the widely held company may decide to go private by purchase of stocks from outside public and delisting the shares in the stock exchange. Examples: Ford motors co. Purchase the share of optical cable corporation (2) Equity carve out :It is a situation where a parent company sells portion of its equity in a wholly owned subsidiary to the general public or to a strategic investor. Examples: Seimens company sell out its share to general public. (3) Reverse merger :In case of reverse merger it is a smaller company acquires the larger company. Example: Godrej soaps Ltd. (GSL) with pre merger turnover of 436.77 crores entered into scheme of reverse merger with loss making Gujarat Godrej innovative Chemicals Ltd. (GGICL) (with pre merger turnover of Rs. 60 crores) in 1994.The scheme involved reduction of share capital of GGICL from Rs. 10 per share to Re. 1 per share and later GSL would be merged with 1 share of GGICL to be allotted to every shareholder of GSL. The post merger company, Godrej Soaps Ltd. (with post-merger turnover of Rs. 611.12 crores) restructured its gross profit of 49.08 crores, higher turnover GSCs pre-merger profits of Rs. 30 crores.

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(4) Management buy in :The management team who have got special skills will research out and purchase business, to their interested area, which has considerable potential but that has not been run to its full advantage due to lack of managerial and technical skills. In MBI, the management of other concern, not the management of the same company, acquires the majority shareholding. Example: A classic example of an MBO involved Springfield Remanufacturing Corporation, a former plant in Springfield, Missouri owned by Navistar (at that time, International Harvester) which was in danger of being closed or sold to outside parties until its managers purchased the company.

The Virgin Group has undergone several management buyouts in recent years. On September 17, 2007, Richard Branson announced that the UK arm of Virgin Megastores was to be sold off as part of a management buyout, and from November 2007, will be known by a new name, Zavvi. On September 24, 2008, another part of the Virgin group, Virgin Comics underwent a management buyout and changed its name to Liquid Comics. In the UK, Virgin Radio also underwent a similar process and became Absolute Radio.

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(2) FINANCIAL RESTRUCTURING

Financial restructuring is also referred to as financial reorganization of a company by affecting change in the capital structure. To improve the overall financial strength. FINANCIAL RESTRUCTURING is a process geared at avoiding the liquidation of the Company. Usually it involves agreement by third parties to satisfy creditors claims under certain terms and conditions. Financial restructuring may also be carried out by concluding an agreement with all creditors of the Company under which creditors will be paid on somewhat different terms than those initially accepted by the Company when credit and loans were extended. Steps: Valuation of business Formulation of new capital structure Exchange of old securities for new securities EXAMPLE OF FINANCIAL RESTRUCTURING We have chosen to illustrate the process of financial restructuring using as an example. Eurotunnel, the company that owns and operates the Channel tunnel between France and the UK, and the financial distress it experienced in 2006 and 2007. The case and figures have been intentionally simplified and could therefore appear to have altered. Back in 1986, Eurotunnel decided to take on debt rather than equity: it raised 4.7 times more debt (BC7.6bn) than equity (BC1.6bn) to finance the construction of the tunnel. The construction cost 80% more than expected (BC16.7bn) and opened 1 year behind schedule. As a consequence, even after several equity issues, Eurotunnel had to bear a monumental debt (around BC10bn) resulting in an unbearable amount of interest, which always exceeded its free cash flows. A new CEO, appointed in 2005, started to improve the operating structure, reducing the number of employees, optimising the tunnels capacity and changing the marketing strategy. He then started negotiations with creditors knowing that Eurotunnel would be unable to meet its financial commitments by early 2007. The CEO stated repeatedly that he would not hesitate to declare Eurotunnel bankrupt, highlighting the fact that creditors, generally the most junior, would lose their entire investment in the process.

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