Corporate restructuring

Corporate restructuring refers to a

collection of actions taken by a
firm/company, usually changes in
its assets portfolio,
portfolio, its capital
structure and its dividend policy,
policy, in
conjunction with changes in the
ownership structure and
management compensation
schemes.

Corporate restructuring

It has been found that generally

Companies increase the financial leverage
Sale of nonnon-core assets/division
Purchase of new assets having high
profitability
Increase/decrease the dividends.

Corporate restructuring

It has been seen that restructuring is being

done to increase the value of firm/company,
Value of the firm can be increased if return
on Assets is increased or growth rate is
increased
If a firm takes on new investment with high
profit percentage it normally improves return on
asset (ROA).
If a firm sales of unprofitable business then also
it improves the firms ROA.

Corporate restructuring
If debt equity ratio is changed then the
growth rate is effected leading to change
in the value of assets.
G=b [ROA+ D/E {ROA{ROA- i(1
i(1--T)}]
As we have seen that in many restructuring the
leverage is increased. Increasing leverage
means higher debt/equity ratio.
If debt equity ratio is higher then growth rate is
higher leading to higher value of the firm.

Corporate restructuring

Mckinsey & company has proposed the fivefivestage approach to analyzing the value for
restructuring to a firm.

In this pentagon model

First is current market price

Second is company value
Third is potential value with internal restructuring
Fourth is potential value with external restructuring
Fifth is optimal restructures value.

Corporate restructuring

Difference of market price & company value

is due to the perception gap
Strategic & other internal operating
efficiency can fetch the internal
restructuring value
Acquisition/disposal of assets can fetch the
external restructuring value
Combining all three the company will get to
the optimum value from current value.

Corporate restructuring
Pentagon model

Current market value

perception
gap

maximum
raider opportunity

Company
Value is

optimal
restructured value

strategic

total company

operating
opportunities

opportunity

Potential value
with internal
improvement

disposal

acquisition
opportunity

Potential value
with external
improvement

Corporate restructuring

Some restructuring is aimed at

reducing cost & increasing profitability
This is being done by analysing the cash
flows of different activities.
Adopt measure to reduce cost in different
activities.
Care also been taken before
acquiring/selling of new project so the
net cost should reduce.

Merger & Acquisition

Nearly 65% of the acquisition or takeover happens

for the purpose of restructuring.
Merger is a tool used by companies for the purpose
of expanding their operations often aiming at an
increase of their long term profitability.
Usually mergers occur in a consensual (occurring by
mutual consent) setting to ensure that the deal is
beneficial to both parties but acquisitions can also
happen through a hostile takeover by purchasing
the majority of outstanding shares of a company in
the open market against the wishes of the target
company.

Merger & Acquisition

Corporate mergers may be aimed at

competition,,
Eliminating/reducing competition
Economies of scale,
Synergy,
Technological efficiency,
taxation,,
Benefits of taxation
Change in management
management,,
Empire building,
Diversification,
Cross selling.

Merger & Acquisition

Economies of scale: Combined firm

can often reduce duplicate department
or operations, bulk purchasing can
reduce the cost, common costs like
storage cost, managerial charges,
selling & distribution charges,
advertisement charges can be
lowered.

Merger & Acquisition

Synergy: Synergy refers to a situation

where combined benefit is more than
sum of the individual benefits. This
may be result of better utilisation of
resources, economies of scale,
utilisation of efficiency of each other,
eliminating competition can result
higher benefit.

Merger & Acquisition

Benefit of taxation: a loss making firm

is not liable to tax and the losses are
allowed to carry forward for set off. A
profit making firm can purchase the
loss making firm and set off of losses
of loss making firm and save taxes on
its income.

Merger & Acquisition

Cross selling: it refers to a situation

where two firm in different line of
business but having same type of
customer can merge and sell their
products to others customer. Like a
banking business merges with broking
firm and can use each other customers
for their products.

Case study: Jet airwaysairways-Air sahara

The case is about acquisition of the third

largest airline company in India, Air Sahara
by its rival airline company, Jet Airways. It
describes why Jet Airways, a leader in the
Indian airline company agreed to pay $500
million to acquire Air Sahara. The case
further talks about the benefits that Jet
Airways expected to have from the
acquisition.

Case study: Jet airwaysairways-Air sahara

Background of case:
In the year 1990 Indian aviation sector has been
opened for private players. Many private airlines
entered into indian market but two private airlines
air sahara & jet airways marked its presence and
started to threaten the indian airlines. Within 10
years jet airways & air sahara proved its mettle and
Jet airways became number one airlines in india &
air sahara was third largest after indian airlines. So
indian aviation market started to face the heat of
competition between these three players.

Case study: Jet airwaysairways-Air sahara

By 2005 the competition became stiff after

Low cost carriers like air deccan, go air,
spice jets entered into the indian market
and started gaining strength by offering low
cost air fares without extra frills. Kingfishers
also added pressure by adding valued
services. The competition put pressure on
the bottom line of the airlines. Air sahara
was running in loss so they searching for
the opportunity for private placement of its
equity.

Case study: Jet airwaysairways-Air sahara

Mode of proposed merger: private

placement of equity
Benefits after merger:
increased parking slot,
synergy as air sahara was doing very
good business for the last 15 years
Control of aviation industry
Elimination of competion

Case study: Jet airwaysairways-Air sahara

Go air, Kingfisher shown interest in the Air

sahara. Kingfisher wanted to grow in indian
indsutry so immediately they will become
the dominant player after acquiring air
sahara and they will get the parking lot of
air sahara also (in india there is very dearth
of infrastructure in aviation industry). But
kingfisher could not finished the deal as
$500 million was too heavy price.

Case study: Jet airwaysairways-Air sahara

Jet airways gone ahead with the deal.

It will ease some competition as 1st & 3rd largest will
merge.
It will give synergy as combined share will be 50% of
indian industry
New route charting will be done
Expertise & infrastructure of air sahara will be utilised by
jet airways.
Economies of scale will be there.
Accumulated loss of air sahara can be adjusted from profit
of jet airways.
So price paid by jet airways will be justified when the
benefit will start coming after some years

Merger & Acquisition

Acquisition

Acquisition, also known as a takeover, is the
buying of one company (the target) by
another. An acquisition may be friendly or
hostile.. Acquisition usually refers to a
hostile
purchase of a smaller firm by a larger one.
Sometimes, however, a smaller firm will
acquire management control of a larger or
longer established company and keep its
name for the combined entity. This is known
as a reverse takeover.
takeover.

Merger & Acquisition

Types of acquisition
1. company is acquired intact as a going
business, this form of transaction carries with
it all of the assets & liabilities. Here shares of
company are being purchased, thereby taking
the control of the company.
2. Buying of assets of the target company. A
buyer often "cherry"cherry-pick" the assets that it
wants and leave out the assets and liabilities
that it does not. In this type of transaction
assets are valued individually by the buyers.

Merger & Acquisition

Merger

A merger is a combination of two companies into
one larger company. Such actions are voluntary
and involve stock swap generally. Stock swap is
often used as it allows the shareholders of the two
companies to share the risk involved in the deal. A
merger can resemble a takeover but result in a new
company name and in new branding
branding..

For the merger not to be considered a failure, it
must increase shareholder value faster than if the
companies were separate, or prevent the
deterioration of shareholder value more than if the
companies were separate.

Merger & Acquisition

Classifications of mergers

Horizontal mergers take place where the two merging
companies produce similar product in the same industry e.g.
acquisition of Chorus Steel by Tata Steel.

Vertical mergers occur when two firms, each working at
different stages in the production of the same good, combine.

Conglomerate mergers take place when the two firms operate
in different industries.

Accretive mergers are those in which an acquiring
company's earnings per share (EPS
(EPS)) increase. An alternative
way of calculating this is if a company with a high price to
earnings ratio (P/E
(P/E)) acquires one with a low P/E
P/E..

Dilutive mergers are the opposite of above, whereby a
company's EPS decreases. The company will be one with a
low P/E acquiring one with a high P/E
P/E..

Merger & Acquisition

The rise of globalization has exponentially increased the market for

cross border M&A. In 1996 alone there were over 2000 cross border
transactions worth a total of approximately $256 billion. In the past,
the market's lack of significance and a more strictly national mindset
prevented the vast majority of small and midmid-sized companies from
considering cross border intermediation as an option which left M&A
firms inexperienced in this field.

Due to the complicated nature of cross border M&A, the vast

majority of cross border actions have unsuccessful results. Cross
border intermediation has many more levels of complexity to it then
regular intermediation seeing as corporate governance, the power of
the average employee, company regulations, political factors
customer expectations, and countries' culture are all crucial factors
that could spoil the transaction. Due to these complications, many
business brokers are finding the International Corporate Finance
Group and organizations like it to be a necessity in M&A today.

Case study:Daimler chrysler merger

The case 'Daimler'Daimler-Chrysler Merger - A

Cultural Mismatch' gives an overview of the
merger between DaimlerDaimler-Benz of Germany
and Chrysler Corp. of the US. The case
focuses on the various problems faced by
the merged entity. It also explores the
reasons for failure to realize the synergies
identified prior to the merger. It examines
the different culture and management styles
of the companies that were primarily
responsible for this failure.

Case study: Daimler -Chrysler

merger

The success depended on integrating two starkly

different corporate cultures.
DaimlerDaimler-Benz was characterized by methodical decision
decision-making while Chrysler encouraged creativity.
Chrysler was the very symbol of American adaptability and
resilience.
Chrysler valued efficiency, empowerment, and fairly
egalitarian relations among staff; whereas DaimlerDaimler-Benz
seemed to value respect for authority, bureaucratic
precision, and centralized decisiondecision-making.
These cultural differences soon became manifest in the
daily activities of the company. For example, Chrysler
executives quickly became frustrated with the attention
Daimler--Benz executives gave to trivial matters, such as
Daimler
the shape of a pamphlet sent to employees.

Case study: Daimler -Chrysler

merger
Chrysler was one of the leanest and nimblest car
companies in the world; while DaimlerDaimler-Benz had
long represented the epitome of German
industrial might (its Mercedes cars were
arguably the best example of German quality
and engineering).
Another key issue was the differences in pay
structures between the two prepre-merger entities.
Germans disliked huge pay disparities and were
unlikely to accept any steep revision of top
management salaries. But American CEOs were
rewarded handsomely.

Case study: Daimler -Chrysler

merger

Attempts to Bridge the Gap

DCX took several initiatives to bring the two
cultures closer. Formal Germans were
experimenting with casual dress. The Germans
were also taking classes on cultural awareness.
The Americans at DCX were encouraged to make
more specific plans, while the Germans were
urged to experiment more freely. Americans
were taking lessons in German.

Case study: Daimler -Chrysler

merger
German Hegemony

In 2000, there was a management exodus at
Chrysler : two successive Chrysler presidents,
James Holden (Holden) and Thomas Stallkamp
(Stallkamp), both American, were fired.

Two highly regarded Chrysler executives were fired
from their CEO positions in the space of 19 months.
Zatsche, the newly appointed CEO of Chrysler USA,
was a Daimler executive and a close confidant of
Schrempp. This turn of events demoralized
Chrysler's workers. According to an employee, most
of the workers were disgusted and frustrated
because they felt they were being punished...

Case study: Daimler -Chrysler

merger
DCX in Trouble

It was opined that DCX should eliminate 20,00020,000-40,000 jobs
at its North American Chrysler division and permanently close
at least one of its 13 plants in the US and Canada because of
huge financial losses in 2000.

After third quarter losses of more than half a billion dollars,
and projections of even higher losses in the fourth quarter
and into 2001, Schrempp told employees that Chrysler had
only 13.5% of the US market, but it was staffed as if it had a
20% share. In early 2001, DCX announced that it would slash
26,000 jobs at its ailing Chrysler division. Zetsche said a large
part of the job cutting would be through retirement programs,
layoffs, attrition and other programs. About threethree-quarters of
the job cuts would be made in 2001, he said...

Case study: Daimler -Chrysler

merger
Why the Merger Failed to Realize the Synergies

Analysts felt that strategically, the merger made good
business sense. But opposing cultures and management styles
proved to be a hindrance to the realization of the synergies.

Daimler
Daimler--Benz attempted to run Chrysler USA operations in the
same way as it would run its German operations. The merger
fallen disastrously short of the goal. Distrust between Auburn
Hills and Stuttgart has made cooperation on even the simplest
of matters difficult.
Coming to terms with issues like which parts MercedesMercedes-Benz
would share with Chrysler was almost impossible. The
Germans and the Americans had been out of sync from the
start. The two proud management teams resisted working
together, were wary of change and weren't willing to
compromise...

Merger & Acquisition

Business valuation

The ways to valuate a business are

Asset valuation,
Historical earnings valuation,
Future maintainable earnings valuation,
Earnings Before Interest Taxes Depreciation and
Amortization (EBITDA
(EBITDA)) valuation
Valuing synergy (operational, financial)

Merger & Acquisition

Financing M&A

Mergers are generally differentiated from
acquisitions partly by the way in which they are
financed and partly by the relative size of the
companies. Various methods of financing an M&A
deal exist:
Cash

Payment by cash. Such transactions are usually
termed acquisitions rather than mergers because
the shareholders of the target company are
removed from the picture and the target comes
under the (indirect) control of the bidder's
shareholders alone.

Merger & Acquisition

A cash deal would make more sense during a downward trend
in the interest rates. Another advantage of using cash for an
acquisition is that there tends to lesser chances of EPS
dilution for the acquiring company. But a caveat in using cash
is that it places constraints on the cash flow of the company.
Financing

Financing capital may be borrowed from a bank, or raised by
an issue of bonds.

Acquisitions financed through debt are known as leveraged
buyouts [LBO], and the debt will often be moved down onto
the balance sheet of the acquired company.

Generally smaller firm acquiring big firm resort to LBO.
Under this Collaborated Debt Obligations (CDOs) are
being issued by funds to raise money

Merger & Acquisition

Hybrids

An acquisition can involve a combination of
cash and debt, or a combination of cash and
stock of the purchasing entity. Under this
swap of share takes place. Valuations of
share of both purchasing company & target
company and then a deal is being struck to
issue shares of acquiring company in lieu of
share of target company.

Private placement of equity

A private placement is a direct private offering of securities

to a limited number of sophisticated investors
investors.. It is the
opposite of a public offering.
offering. Investors in privately placed
securities include insurance companies,
companies, pension funds,
funds, stock
funds and trusts
trusts.. Securities issued as private placements
include debt, equity, and hybrid securities. While the
procedure for conducting a private placement pursuant to the
exemption is less stringent than for that of a public offering.
Those requirements typically require the use of a private
placement memorandum, in lieu of a prospectus which is
required in public offerings. Under the terms of private
placement, company's business, risk factors, additional terms,
expenses of the transaction and summary financial
information are to be highlighted. The purpose of the
summary is to make the offering easy to read and
understand.

Private placement of equity

Private Placement Memorandum: The Private

Placement Memorandum, or "PPM", is the
document that discloses all pertinent information to
the investors about the company, proposed
company operations, the transaction structure
(whether you are selling equity ownership or raising
debt financing from the investors), the terms of the
investment (share price, note amounts, maturity
dates, etc.), risks the investors may face, etc.
An "equity" offering are preferred by early stage
companies because there is no set repayment
schedule or debt service payments - the investors
profit when the company profits.

Case study: Reliance PetroleumPetroleum-RIL

Background:

RIL, the flagship company of the group was largest

private sector industrial enterprise. It ranked among the
top 10 producers of all its products. RIL had one of the
largest marketing network in the Indian industry. All of
its products were market leader.
RIL was targeting leading market positions in two new
sectors; oil & gas exploration & infocomm. It also
wanted to consolidate in energy & petrochemical sector.
RPL was a reliance group company. RIL directly &
through its subsidiary controlled 64% shareholding of
RPL. RPL was Indias largest company in terms of sales.
RPL was first refinery set up by private sector in india. It
was world largest refinery in the world at one place.

Case study: Reliance PetroleumPetroleum-RIL

Rationale for merger:

The amalgamation will create one of the
largest of the world and most integrated
energy and petrochemicals company.

The amalgamated entity will have the ability
to leverage on its largest asset base, diverse
range of product & services and vast pool of
intellectual capital to enhance shareholders
wealth.

It will provide competitive advantage for
future growth opportunity.

Case study: Reliance PetroleumPetroleum-RIL

The indian energy and petrochemical industry was

undergoing a consolidation phase in light of govt.
opening up. So merged entity will have greater
strength financially or product wise to face global
competition in the wake of globalisation.
Considering the complementary nature of
businesses of RPL & RIL in terms of commercial
strength, geographic profile and site integration,
the amalgamated entity can run their operation in
cost efficient manner and it will also ensure
economies of scale to the merged entity.

Case study: Reliance PetroleumPetroleum-RIL

The amalgamated entity will benefit from improved

capability arising from combination of skills of RIL &
RPL.
RIL & RPL shared common fundamental
management philosophies. Both companies shared
common corporate values. Both had high rewarding
experience of working together.
The deregulation of marketing of controlled
petroleum products entailed setting of marketing
infrastructure across various parts of the country.
The merged entity will have the ability to
successfully achieve this objective.

Case study: Reliance PetroleumPetroleum-RIL

Share capital of the two companies
Authorised Share capital of RPL:
600 crore shares of Rs. 10
30 crore pref.share of Rs. 10
70 crore unclasified share
total
Issued & paid up
5201666900 shares of Rs. 10
less: calls in arrear

Rs. In crore
6000
300
700
7000
5201.67
2.41
5199.26

Case study: Reliance PetroleumPetroleum-RIL

Authorised Share capital of RIL:
120 crore shares of Rs. 10
100 crore pref.share of Rs. 10
total
Issued & paid up
1053757027 shares of Rs. 10
less: calls in arrear

Rs. In crore
1200
1000
2200
1053.76
0.20
1053.56

Case study: Reliance PetroleumPetroleum-RIL

Reorganisation of capital:
Share swap: one equity share of Rs. 10/10/- each
of transferee company credited as fully paid
for every 11 shares of Rs. 10/10/- each in the
transferor company.
Authorised share capital of the merged
company will be 250 crores equity shares of
Rs. 10 each totalling 2500 crore & 50 crore
pref share of Rs. 10 each totalling 500
crores.

Case study: VodafoneVodafone-Hutch

Vodafone acquired a controlling interest in

Hutch Essar for US$11.1 billion (Rs. 45000
crore). The acquisition of hutch gave
vodafone a controlling interest in fast
growing indian telecom market. To move
faster in the indian market vodafone also
signed MOU with Airtel on infrastructure
sharing.
Hutch had the highest revenue per user
(RPU) in india.



Thanks : Sanjay Singh

sanjaysingh74@yahoo.com