Corporate Restructuring-Merged

CORPORATE
RESTRUCTURING
Learning Objectives
• Explain Different Types of Corporate Restructuring

Tools/ Transactions.
• Distinguish among divestitures/divestment, equity
curve-outs, demerger, sell-off, spin-offs, split-offs,
split ups, liquidation, going private etc.
What is Corporate Restructuring?
Corporate restructuring is a broad array

of activities- that expand or contract a
firm’s operations or substantially
modify its financial structure or bring
about a significant change in its
ownership structure.
Corporate restructuring is aimed at –

o streamlining the business operation,
o restructuring the business divisions,
o restructuring the funding sources (capital
structure),
o consolidating by spin-off or demerger
o Ultimately, all restructuring exercises lead to
improving the wealth of the firm in the long
run.
Restructuring activities include diverse initiatives taken by firms,
such as acquiring a new business, recapitalising (either by
raising fresh equity capital and paying-off/reducing debt from
its capital structure: deleveraging or by raising new debt to
pay-off existing costlier debt/repurchase or buyback of shares
to increase ownership/management control or improve EPS),
selling off traditional business/non-core assets, or merging its
business units or dividing existing business unit into subsets,
etc.
What is Corporate
Restructuring?
Any change in a company’s:
1.Capital structure,
2.Operations, or
3.Ownership
that is outside its ordinary course of
business.
So where is the value coming from (why
restructure)?
All Rights Reserved. © May not be reproduced, copied, or otherwise used without the express, written permission of Dr. Patrick Gaughan
Reliance announces O2C biz spin-off
into 100% subsidiary
• Contraction & Refocusing: The Conglomerate RIL has announced
on Feb 23-2021 that it is carving out its Oil-to-Chemicals (O2C)
business into an independent subsidiary.
• This is a corporate restructuring exercise of demerger and spin-
off. According to the conglomerate, all of its refining, marketing
and petrochemical assets will be transferred to the O2C subsidiary.
• The move is expected to facilitate value creation through strategic
partnerships, including the deal with Saudi Aramco, and attracting
dedicated pools of investor capital.
• The world's largest crude oil exporter Saudi Aramco is in the
process of picking up a 20 percent stake in RIL's O2C business.
Why Spin off?
1. Separate identity to a division;
2. Increase Corporate Focus.
3. Unlocking Hidden Value.
4. To avoid takeover since a valuable division is spun

off; (Divest Corporate Jewel).
Case Study 1, 2, 3, 4, 5 & 6
Vodafone-Idea Demerges
Fibre into Separate Unit
• Contraction & Refocusing: On Nov. 29-2018, Vodafone-Idea has
demerged its fibre infrastructure business by transferring such
assets to a wholly owned unit, Vodafone Towers Ltd. (VTL).
• The move sets the stage for an early sale of Vodafone Idea’s fibre
assets as the telecom market leader urgently needs to bring in
cash to counter brutal competition from Reliance Jio and Bharati
Airtel.
• Vodafone Idea said “the rationale for the demerger” is to sharpen
focus on fibre infrastructure business to achieve greater
infrastructure sharing, operational efficiencies and cost
optimisation,” which would result in delivery of more "affordable
telecom services".
• This is a corporate restructuring exercise of demerger and spin-
off.
Split off
Shareholders of parent company get shares in the subsidiary

co. in exchange of their shares in parent company.
It is a kind of reorganization of controlling interest.
OYO Demerges Its India And
International Hotel Business
• Contraction & Refocusing: On July 08-2019, Indian hospitality
unicorn, OYO Rooms announced its plan of undergoing a structural
restructuring to streamline its operations and investor profiles. The
company segmented its business under two entities separately
handling Indian hotel business, and international and technology
business.
• The reason for this segmentation is said to be the company’s
segment specific capital requirements, nature of risk, competition,
human, and skill-set requirements among other needs.
• “The segmentation of business will enable different business
segments to grow independently with their focused vision,
strategies, and operations. Along with attracting focused investors
and strategic partners, and enable investors to separately hold
investments which best suit their investment strategies and risk
profiles,” the company filing added.
Going Private
A situation wherein a listed company is converted into a
private company by buying back all the outstanding shares
from the market.
http://fortune.com/going-private/
Case Study 1 & 2
Elon Musk says he wants
to take Tesla private
• On Aug. 08-2018, Billionaire entrepreneur Elon Musk shocked Wall
Street with a tweet in which he said he wants to take Tesla private
at a price of $420 per share. Such a deal would value the electric
car company at roughly $70 billion.
• Musk took Tesla public in a 2010 initial public offering, which
means its stock was sold to the public for the first time on an
exchange, in this case, on Nasdaq.
• This is a corporate restructuring exercise of a public company
going private.
What it means to go private?
• Typically, a publicly traded company goes back to being private
through a transaction like a leveraged buyout, where either the
company’s management or an outside party, like a private equity
firm or some other private company, borrows a large amount of
money in order to buy all of the company’s publicly traded shares
from its shareholders.
• Once all of the company’s public shareholders have sold their
stock (usually as a result of a majority shareholder vote), the
company is delisted from any public stock exchange and any
remaining stakeholders — which could include private equity
buyers, management, founders and even employees with stakes in
the company — will hold shares in the private company. Those
private shares cannot be traded on a public exchange and, in many
cases, they need to be offered back to the company itself, or to
other existing shareholders, in order to change hands.
Why public companies go private —
and why Tesla might
• Sometimes, a company’s management and shareholders see going
private as a prime opportunity to instantly cash out their holdings
in a company at a considerable premium instead of having to bet
that the company’s shares will eventually gain a comparable
amount of value on the stock market.
• In other cases, a company might want to avoid some of the
pressures of being public, such as having to regularly file public
documents showing the company’s latest finances, as well as the
pressure from public markets to hit short-term goals, which can
send stock prices swinging wildly from day to day, causing
shareholder distress.
• But finally Tesla has Not gone private.
Going Private
from the market.
Case Study 1 & 2
Ratings giant Nielsen wants to
sell itself, could fetch $10B
• On January 23, 2019, ratings giant Nielsen announced its intention
of selling itself amid an offer from a partnership between
Blackstone Group LP and Hellman & Friedman LLC to buy the
company.
• The pair of buyout firms is planning to buy Nielsen under a deal
that could value the global measurement and data analytics
company at approximately $10 billion.
• In 2018, Nielsen commenced a strategic review wherein it
considered various options such as continuing to operate as a
public, independent company; a separation of either Nielsen's
Watch or Buy segments; or a sale of the entire company.
• This is an example of a corporate restructuring exercise in the
form of Sell-off.
Forms of Corporate Restructuring
• Contraction & Refocusing: Just as mergers and acquisitions are a
means by which companies get bigger, another corporate
restructuring is usually used in reference to ways that companies
get smaller—by selling, splitting off, or otherwise shedding
operating assets.
• Divestment or Divestiture: When a company decides to sell,
liquidate, or spin off a division or a subsidiary, it is referred to as a
divestiture or divestment.
• Demerger: Many companies have great difficulty actually
achieving the planned synergies of a business combination, it is
not surprising that many companies seek to undo previous
mergers. Indeed, periods of intense merger activity are often
followed by periods of heightened restructuring activity.
• Major Reasons for Divestitures of Assets/Divisions/Subsidiary:
• Previous mergers that did not work out as planned:
• Change in strategic focus: Either through acquisitions or other
investments over time, companies often become engaged in
multiple markets. Management may hope to improve
performance by eliminating divisions or subsidiaries that are
outside the company’s core strategic focus.
• Poor fit: Sometimes a company will decide that a particular
division is a poor fit within the overall company. For example, the
company many not have the expertise or resources to fully exploit
opportunities pursued by the division and may decide to sell the
segment to another company that does have the necessary
resources. Or, the division might simply not be profitable enough
to justify continued investment based on the company’s cost of
capital.
• Major Reasons for Divestitures (Continued…..):
• Reverse Synergy: Managers may feel that a segment of the
company is undervalued by the market, sometimes because of
poor performance of the overall company or because the division
is not a good strategic fit. In these cases, it is possible that the
division and the company will be worth more separately than
combined.
• Financial or Cash Flow Needs: If times are tough, managers may
decide to sell off portions of the company as a means by which to
raise cash or cut expenses. [Recent example of Sale Off of Future
Group’s Retail & Wholesale Business by Kishore Biyani to
Reliance Industries Ltd.]
• Contraction & Refocusing: Restructuring can take many forms, but
the five basic ways that a company divests assets are a sale to
another company (sell off), a spin-off or split-off to shareholders,
an equity carve-out or liquidation.
• Sell Offs: A sell off is the sale of an asset, factory, division,
product line or subsidiary by one entity to another for a purchase
consideration, payable either in cash or in the form of securities.
This is part of a sale to another company.
• Equity Carve-outs: An equity carve-out involves the creation of a
new legal entity out of the parent company and sales of equity in
it to outsiders. This is also part of a sale to another company.
• Contraction & Refocusing (Continued ….):
• Spin Offs: In a spin-off, shareholders of the parent company
receive a proportional number of shares in a new, separate entity.
Whereas the sale of a division results in an inflow of cash to the
parent company, a spin-off does not. A spin-off simply results in
shareholders owning stock in two different companies where
there used to be one.
• Split Offs: In a split-off, some of the parent company’s
shareholders are given shares in a newly created entity in
exchange for their shares of the parent company.
• Split Ups: Entire company is broken up in a series of spin-offs and
the parent company is liquidated.
• Liquidation: Liquidation involves breaking up a company, division,
or subsidiary and selling off its assets piecemeal. For a company,
liquidation is typically associated with bankruptcy.
• Changes in Ownership Structure:
• Leveraged Buyouts/Management Buyouts (LBOs/MBOs): The
purchase of a company by a small group of investors/management
personnel, financed largely by debt .
• Employee Stock Ownership Plans (ESOPs): A defined contribution
pension plan designed to invest primarily in the stock of the
employer firm.
• Going Private: A situation wherein a listed company is converted
into a private company by buying back all the outstanding
shares from the market.
• Delisting of Shares: Delisting of shares of a company from the
stock exchanges.
Financial/Capital Restructuring
• Financial restructuring caters to changes in the capital structure of
the firm, resulting in value enhancement for the firm. Capital
structure is broadly a mix of debt and equity the firm has.
• Any change in debt–equity mix results in change in the overall
cost of capital for the firm impacting its value.
• Financial activities, such as refinancing high-cost debt with low-
cost debt, debt recapitalisation to fund share repurchase, equity
recapitalisation to deleverage the capital structure, making a
leveraged buyout (buyout through loan), equity swap, etc., affect
the capital structure of the firm, and hence the overall cost of
capital.
Financial/Capital Restructuring
• In M&A activity, deals are financed by Debt, Equity or both.
• When deals are financed largely by debt they are termed as
leveraged buyouts- LBO. LBO deals create a change in debt equity
mix as well as the risk profile of the company.
• Equity financed deals also change the debt equity mix of the
acquirer post deal.
Demerge
Demerger is a
r
corporate restructuring which results in
formation of two entities. A business strategy wherein a large
company transfers one or more of its business undertakings
to another company.
The entity which undertakes demerger is termed as

Demerged company and the new entity which is formed is
called Resulting Company.
A Ltd.
A Ltd. (Demerged Co.) B Ltd. (Resulting Co.)

Why Demerger?
1. To pay attention on core areas of business;
2. Division/Business may not be sufficiently contributing to

top lines and bottom lines;
3. To get rid of non profit making company;
4. Size of the firm is too big to handle;
5. Division of Family managed business
6. Making the hived-off business attractive for Strategic

Spin-Off
• A part of the business is separated & created as a separate firm.
• Existing shareholders get proportionate shares.
• Ownership does not change.
• For ex. Air India formedAir India Engineering Services

Limited by spinning off its engineering department.
• RIL proposed spin-off of O2C (oil-to-chemicals) Business as a

100% (wholly owned) Subsidiary on Feb 22-2021
Why Spin off?

Case Study 1, 2, 3, 4, 5 & 6
Sell off / Divestiture
A sell off is the sale of an asset, factory, division, product line

or subsidiary by one entity to another for a purchase
consideration, payable either in cash or in the form of
securities.
Seller Buyer Asset
Reliance Infrastructure Birla Corporation Cement Unit for Rs.

4800 Sell off / Divestiture
crore
Jaypee Group Ultra Tech Cement Plant for Rs.

16,000 crore
Sajjan Jindal’s JSW Energy Naveen Jindal’s Jindal Steel Chhattisgarh power
plant
and Power
GVK Power Fairfax Holdings Bengaluru Airport stake
Gammon Infrastructure Entity set up by Canadian Nine (9) road assets

fund manager Brookfield and Kotak
Case study 7 & 8
http://economictimes.indiatimes.com/news/company/corporate-trends/the-great-indian-
corporate-asset-sale-is-on-but-why-are-buyers-not-queuing-up/articleshow/52706191.cms
Split up
This involves breaking up of the entire firm into series off
spin off (by creating separate legal entities).
Theparent company no longer legally exists and

only the newly created entity survive.
http://articles.economictimes.indiatimes.com/2011-01-
05/news/28425905_1_independent-directors-independent-companies-
minerals- and-electrical-businesses
Case study 9
Split off

Why Spin off?

Case Study 1, 2, 3, 4, 5 & 6
Why Spin off?
4. To avoid takeover since a valuable division is spun off;

(Divest Corporate Jewel).
Sell off / Divestiture
A sell off is the sale of an asset, factory, division, product line
or subsidiary by one entity to another for a purchase
consideration, payable either in cash or in the form of
securities.
Seller Buyer Asset
Reliance Infrastructure Birla Corporation Cement Unit for Rs. 4800

Sell off / Divestiturecrore
Jaypee Group Ultra Tech Cement Plant for Rs. 16,000
crore
Sajjan Jindal’s JSW Energy Naveen Jindal’s Jindal Steel Chhattisgarh power plant
and Power
GVK Power Fairfax Holdings Bengaluru Airport stake
Gammon Infrastructure Entity set up by Canadian Nine (9) road assets

fund manager Brookfield and
Kotak
http://economictimes.indiatimes.com/news/company/corporate-trends/the-great-indian-
corporate-asset-sale-is-on-but-why-are-buyers-not-queuing-up/articleshow/52706191.cms
Split up
This involves breaking up of the entire firm into series off
spin off (by creating separate legal entities).
The parent company no longer legally exists and

only the newly created entity survive.
Split off
A shareholder has two choices:

(a)continue holding shares in the parent company or
(b)exchange some or all of the shares held
in the parent company for shares in the
subsidiary.
Split off
Eg. : If A Ltd. split off into 3 cos. : A Ltd., B Ltd. & C Ltd.
A Ltd.
A Ltd. C Ltd.
B Ltd.
If the shareholders wishes to obtain shares in

B Ltd. or C Ltd., they will have to surrender
the shares in A Ltd.
Equity Carve out
In Equity carve out, some part (minority) of shareholding of
subsidiary company is sold out to public by an offer for sale
and parent company continues to enjoy control over the
subsidiary company by holding controlling interest.
Example :
TCS was a division of Tata Sons Ltd.
It was decided to carve out the TCS Division into a separate

corporate entity, acquire and merge other related
organizations into it and go for an IPO.
Going Private
from the market.
Going Private
from the market.
Case Study 1 & 2
THE INSOLVENCY AND BANKRUPTCY CODE, 2016
Basic Terminologies
• Let us imagine you have been recruited by a new
generation Bank or a PSU Bank or a dynamic NBFC
into one of the following positions/roles :
• Manager – Trade Finance
• Manager – Bill Finance
 Then what are your role expectation
Insolvency, Bankruptcy and Liquidation
 Insolvency precedes bankruptcy and liquidation
follows bankruptcy.
 Insolvency warnings:
• drop in sales
• delay in payments
• Increasing reliance on credit
 Cash flow test: when cash flow in is less than cash
flow out.
Insolvency, Bankruptcy and Liquidation
 Insolvency: Insolvency is the inability of a person or
business firm to pay their bills or debts as and when
they becomes due and payable. If insolvency cannot be
resolved, assets of the debtor may be sold to raise
money, and repay the outstanding debt.
 Bankruptcy: Bankruptcy is when a person or company
is legally declared incapable of paying their due and
payable bills.
 Liquidation: Liquidation is the process of winding up a
corporation or incorporated entity.
Object:
The Object of the present Insolvency and Bankruptcy Code (IBC), 2016 is to
consolidate the existing framework by creating a single law for Insolvency and
Bankruptcy.
It has replaced the long Tedious and Complex Legal Process by a speedy, expeditious and
effective mechanism for recovery of dues from corporate and non-corporate sector.
Earlier Mechanisms
• Companies Act,2013
• Companies Act,1956
• The recovery of debts due to banks and financial institutions act,1993 (DRT Act)
• SARFAESI Act,2002
• The Sick Industrial Companies (Special Provisions) Act, 1985
• The Presidency Towns Insolvency Act,1909
• The Provincial Insolvency Act,1920
• CDR/SDR/S4A
• ARC
New Mechanisms
The Insolvency and Bankruptcy Code,2016
The Insolvency and Bankruptcy Code, 2016
will replace the existing laws pertaining to
Insolvency and Bankruptcy
APPLICABILITY OF THE CODE
• Applies to whole of India except J&K.
• Persons covered:-
• Company.
• Limit Liability Partnership.
• An individual.
• A Hindu Undivided Family.
• A Partnership.
• A Trust.
• Any other entity established under a statute and
includes a person resident outside India.
OBJECTIVE of the IBC Code
• The Insolvency and Bankruptcy Code, 2016 has been
formed with the following objectives:
• To promote entrepreneurship;
• To make credit available;
• To balance the interest of all stakeholders
• Doing away with a fragmented loan recovery
framework.
• By consolidating and amending the existing laws relating
to insolvency and bankruptcy;
• Address the stressed assets over Rs 10 lakh
crores (~15% of gross advances)
• Long time for resolution and recovery as per old
laws. The average life of cases recommended for
restructuring in 2002 was 7 years and the
average life of cases recommended for winding
up to the court was 6.5 years.
• To reduce the time of resolution of problem or
NPA loans for maximizing the value of assets.
• Improve ‘Ease of Doing Business’ ranking for
India.
• There is a dire need of capital today – not just
for stressed companies but for growth in general.
• Improve the confidence of the International
investor in the debt market.
Dirty Dozen of Big Loan Defaulters
First Tried Under IBC Code
• In June 2017, RBI instructed banks to launch insolvency proceedings
against 12 of the biggest corporate defaulters under IBC Code 2016,
who were quickly dubbed “The Dirty Dozen”.
• The defaulters’ list comprises Bhushan Steel Ltd, Bhushan Power &
Steel Ltd, Essar Steel Ltd, Jaypee Infratech Ltd, Lanco Infratech Ltd,
Monnet Ispat & Energy Ltd, Jyoti Structures Ltd, Electrosteel Steels
Ltd, Amtek Auto Ltd, Era Infra Engineering Ltd, Alok Industries Ltd and
ABG Shipyard Ltd. Total amount owed to banks that time was Rs.2.7
Trillion.
• Sector Wise: Steel (5 companies), Power (1 company), Textile (1
company), Integrated Infrastructure (1 company), Infrastructure (2
companies), Ship building (1 company) and Auto ancillary (1
company).
Dirty Dozen of Big Loan Defaulters
First Tried Under IBC Code
• The RBI had initiated the process under the powers given to it by a
May 05-2017 ordinance that amended the BR Act to resolve the Rs.10
trillion of stressed assets pile choking the banking system.
• Under the IBC Code, Once the IBC case is accepted by NCLT,
management must be removed immediately and management of
affairs of the company is taken over by the resolution professional.
• Under the IBC, once a case is admitted by the NCLT, a resolution plan
(i.e. a new owner/buyer) must be in place within 180 days of
admission. This is extendable by up to 90 days. In case there is no plan
or the committee does not agree on one, the company will go into
liquidation.
Dirty Dozen
Bhushan Steel is first big win for India’s new IBC Code
• Bhushan Steel represented one of the largest of the “Dirty Dozen”

distressed companies put into bankruptcy under India’s new IBC code in
2017 at the behest of RBI.
• Bhushan, a mid-sized Indian steelmaker with annual revenue of around
US$2 billion, was put into proceedings after proving unable to service its
debt of more than US$6.2 billion.
• Tata Steel had acquired Bhushan Steel (BSL) through its wholly-owned
subsidiary Bamnipal Steel Ltd (BNL) through a resolution under the
Insolvency and Bankruptcy Code (IBC). New company is named as Tata Steel
BSL Ltd. (TBSL).
• Tata Steel emerged as the winning bidder with an offer of Rs. 364 billion
and 12 per cent shareholding for the lenders, which was substantially above
the Rs 145 billion liquidation value of the company. Tata Steel had taken a
controlling stake of 72.65% in BSL and paid the admitted corporate
insolvency costs and employee dues, as required under IBC.
• The remaining 27.35% of TBSL’s share capital will be held by TBSL’s existing
shareholders and the financial creditors who received shares in exchange
for the debt owed to them.
• The acquisition is financed by combination of external bridge loan of Rs.
16,500 crore availed by BNL and balance through investment by Tata Steel
in BNL. The bridge loan availed by BNL is expected to be replaced by debt
raised at TBSL over time.
• Out of dirty dozen cases only one i.e. Bhushan steel is completed after lapse of 293
days on May 15-2018 from the date of the commencement i.e. July 26, 2017, this is
in spite of lot many hurdles and also last ditch effort by the present promotors to not
lose control.
• In a way it’s commendable because considering grace period of 90 days under the
law delay is only 23 days, further lenders got cash on the date of settlement and also
12% stake in the company.
• As the company goes into the strong hands it will promote entrepreneurship and
safeguard interests of all the stakeholders.
• No doubt lenders getting Rs 35,200 crores with about 37% haircut, it will increase
availability of credit and will benefit the economy on a larger scale.
Electrosteel Steels is first Case Resolved under IBC Code
• On April 17, 2018 The Kolkata Bench of the National

Company Law Tribunal (NCLT) has approved Vedanta's
resolution plan for Electrosteel Steels, paving the way for
the debt resolution of the first of 12 cases mandated by
the Reserve Bank of India (RBI) under the Insolvency and
Bankruptcy Code (IBC).
• This IBC case was initiated on July 21, 2017 and the NCLT
approved the resolution plan on April 17, 2018 in exactly
270 days as mandated under the IBC code with extension
(180 + 90 days). The resolution plan was approved by a
100 per cent vote by the committee of creditors (CoC).
Electrosteel Steels is first Case Resolved under IBC Code
• The value of the bid was Rs.5,320 crore, against

admitted claims of financial creditors worth
Rs.13,300 crore representing a haircut of 60% by the
lenders/financial creditors.
• Vedanta will hold 90% equity of Electrosteel and
balance 10% to be held by existing Electrosteel
shareholders and financial creditors.
• Tata Steels offer was 2nd highest at Rs.2,000 crore way
below of Vedanta’s offer.
Key Highlights
•The Code brings a paradigm shift from “Debtors in possession”
to “Creditors in Control”
•Insolvency test moved from “erosion of net worth” to
“payment on default”
•Single insolvency and bankruptcy framework. It
replaces/modifies/amends certain existing laws.
•Time bound resolution process at each stage
•Establishment of Insolvency and Bankruptcy Board of India
(IBBI) –a regulator as an independent body
Key Highlights
•A clearly defined distribution of recovery proceeds
•Insolvency Professional (IP) to take over management and
control of the Corporate Debtor (CD)
•Government dues would rank below the claims of other
creditors
•Have provisions to deal with concealment, fraud and/or
manipulation leading to fine and/or imprisonment
•Provide confidence to Lenders and Investors in the debt
market
IBC code – Definitions
•Corporate debtor: "corporate debtor" means a corporate person
who owes a debt to any person;
•Financial Creditor: Any person to whom Financial debt is owed
and includes a person to whom such debt is legally assigned or
transferred. Home allottees under a real estate project are
now "financial creditors“.
•Financial debt" means a debt along with interest, if any, which
is disbursed against the consideration for the time value of
money . It includes working capital loan, term loan, non-fund
based facilities like LC, LG etc., lease and hire-purchase
agreements, discounting of receivables etc.
•Operational Creditor: Any person to whom operational debt is
owed and includes a person to whom such debt is legally
assigned or transferred. Operational debt means a claim arising
out of provision of goods and services.
•Debt: means a liability or obligation in respect of a claim which is
due from any person and includes a financial debt and
operational debt;
•Default: "default" means non-payment of debt when whole or
any part or instalment of the amount of debt has become due
and payable and is not repaid by the debtor or the corporate
debtor, as the case may be;
•Corporate applicant" means—
•(a) corporate debtor; or (b) a member or partner of the
corporate debtor who is authorized to make
an application for the CIRP under the constitutional document of
the corporate debtor; or (c) an individual who is in charge of
managing the operations and resources of the corporate debtor;
or (d) a person who has the control and supervision over the
financial affairs of the corporate debtor;
Insolvency and Bankruptcy Ecosystem
Adjudicating Authority (AA)
Insolvency and Bankruptcy Board of India (IBBI)
Insolvency Professionals (IP) Information Utility (IU) NCLT DRT

Insolvency Professional Agency (IPA)
Insolvency and Bankruptcy Information Utilities (IUs)

Board of India (IBBI) Insolvency Professionals (IPs) • Information Utilities
• IBBI is an apex body governing •IPs are licensed professionals would collect, store and
Insolvency and Bankruptcy Code. registered with IBBI who act as distribute information
• It is setting up the necessary resolution professional/ liquidator/ related to the
infrastructure and accredit bankruptcy trustee in an insolvency indebtedness of
Insolvency Professionals (IPs) and resolution process. Companies
Information Utilities (IUs)
Insolvency Professional Agency (IPA) Adjudicating Authority (AA)
• Insolvency Professional Agencies (IPAs) are •Adjudicating Authorities (AA) have the
enrolling insolvency professionals as members. exclusive jurisdiction to deal with insolvency
• Currently there are three IPAs: related matters.
(i) ICSI Insolvency professional Agency •National Company Law Tribunal (NCLT) is the
(ii) Indian Institute of Insolvency Professionals of ICAI AA for Corporate and LLP insolvency
(iii) Insolvency professional Agency of Institute of cost •Debt Recovery Tribunal (DRT) would be AA
Accountants of India for individual or partnership Firms insolvency.
Salient features of the Insolvency and Bankruptcy Code
Exclusive Jurisdiction of Adjudicating Authority
Adjudicating Authority (NCLT and DRT) will have excusive jurisdiction in insolvency related matters. No
injunction can be granted by any Civil Court, Tribunal or Authority in respect to action taken by Adjudicating
Authority.
Appointment of Registered IPs

The board of directions are suspended and creditor approved resolution professional is appointed to manage
the Company as a going concern.
Committee of Creditors (CoC)

A committee of creditors is formed and it will work in tandem with Insolvency Professional.
Time-bound Resolution Process
The entire process should be completed in 180 days (270 days in case of extension by AA) excluding interim
litigation period. This is extended to 330 days vide amendment in July-2019 including interim litigation period.
Duties and Functions of Insolvency Professional (IP)
• To make a public announcement of Insolvency process in English and Local Language Newspaper.
•To manage the affairs of the company as a going concern;
•To collect information relating to the assets, finances and operations of corporate debtor for determining the
financial position.
•To collect all claims received from creditors and assess them.
•To constitute a committee of creditors (COC) etc.
•To appoint two registered valuers to evaluate the assets.
•To coordinate with NCLT and IBBI.
Corporate Insolvency Resolution Process (CIRP)
Default
Failure to pay whole or any part or Installment of the
amount of debt or interest due (min INR 1 Lakh) Default
Who Can File the Application Approve or Reject

•Financial creditors petition within 14 days
•Operational creditors (including government, File Application
employees or workmen)
•Corporate debtor, member, partner, person
in charge of operations or finance
Interim Resolution Professional / The Adjudication

Resolution Professional (IRP/RP) Authority
• Financial creditor and/or corporate applicant shall
propose the name of an IP in the application
•It is optional for the operational creditor to propose the
name of an interim IP
•All powers of the board and management shall vest with Appoint the Interim
the IRP/IP Resolution Appointment to be
• IP is responsible to run the company as a going concern Professional confirmed within 30
during CIRP. days.
Corporate Insolvency Resolution Process (CIRP)
Committee of Creditors Continue
•Usually consists of financial creditors
•Operational creditors to constitute committee when there
are no financial creditors (FCs) or all of them (FCs) are Formation of Committee of Creditors (CoC)
related to corporate debtor
•Will confirm or replace IRP as RP
•To approve several actions of RP Appointment of Interim Resolution
Professional confirmed by the CoC
Resolution Plan
The resolution plan must provide for operational creditors
Implement the
(including government, employees or workmen) Preparation of
resolution plan
•Payment of insolvency resolution process costs Resolution plan
•Repayment of the debts of operational creditors
•Management of the affairs of the borrower after plan is 66% of the
approved YES
creditors to
•Implementation and supervision of the approved plan. Approve plan Compulsory
Application for Liquidation if
Voting Power Resolution is
•Only financial creditors have voting power in the AA approval
Not agreed
committee in the ratio of debt owed. NO within 180
•All vital decisions of the committee shall be approved by 66 Implement the days/extended
% of financial creditors/ operational creditors, as resolution plan period
the case may be.
Corporate Insolvency Resolution Process (CIRP) under the
Code
Default Committee of creditors (CoC)
min INR 1 lakh; even a single day • Consists of financial creditors only, excluding
related parties
Who can file the application?
• To approve several actions of RP
• Financial & Operational creditors Resolution plan
(including Government & The resolution plan must provide for:
employees/workmen), and Corporate • payment of insolvency resolution process
debtor costs
Resolution Professional (IRP/ RP) • repayment of the debts of operational
• Financial creditor and/ or corporate creditors
applicant shall propose the name of • management of the affairs of the borrower
an IRP in the application after the plan is approved
• All powers of the board and • implementation and supervision of the
management shall vest with the IRP/ approved plan
RP Voting power
• Only financial creditors have voting power in
Moratorium the committee in the ratio of debt owed
Moratorium shall prohibit: • All decision of the committee shall be
• Institution of suits approved by 66% of financial creditors
• Transfer of assets
• Foreclosure, recovery or enforcement Fast track insolvency
under SARFAESI For debtors as may be notified by the central
• Recovery of assets government (completed in 90 days)
Corporate Resolution process timeline
Corporate Resolution process timeline
Appoint 2 registered 1st CoC
valuers to calculate meeting
CoC’s approval of
Admission of liquidation value Preparation of resolution plan
application Public Creditors to
submit claims IM Initiation of
announcement liquidation
No. of days
Day –ve 14 37
0 16 21 51 65 180
14 150 170
30 to 44
Filing of Application
Declare IRP to constitute CoC and Submission
application for NCLT
moratorium NCLT to appoint submit report. of plan
approval
to NCLT interim resolution
professional
Key points to focus for the financial creditors:

• Approval or replacement of IRP
• Approve certain actions of IRP/RP
• Submit resolution plan based on information memorandum prepared by the RP
• It is the duty of resolution applicant and not of RP to prepare the Resolution plan; therefore creditors may
have to take independent consultant’s help.
• It is advisable that banks constitute a panel of industry experts whose help can be sought during the
insolvency resolution process
Initiation of Liquidation
Failure to submit resolution plan within specified days will cause initiation of Liquidation of
Corporation Debtor.
Liquidator
• The IP shall act as the liquidator
•The liquidator shall appoint two registered valuers to evaluate the assets &
consolidate, verify, admit and determine value of creditors’ claims
Order of Priority for Distribution of Assets

• Insolvency resolution process and liquidation costs
•Workmen dues up to 24 months and Secured Creditors who have relinquished the
enforcement of their Security.
•Employees’ salaries/ dues up to 12 months
• Financial debts (unsecured creditors)
•Government dues ( up to 2 Years)/ amounts remaining unpaid following
enforcement of security interest by secured creditors.
• Any remaining debts and dues
• Preference Shareholders
• Equity Shareholders
Liquidation process under the Code
Liquidation order Reporting
Priority Waterfall of claims
Liquidation order will be passed if: • Preliminary report – within 30 days
• CIRP ends Insolvency resolution process from the date of the order;
• Plan not submitted to NCLT and liquidation costs • Progress report – within 15 days after
• Plan not approved end of every period of 3 months from
• Decided by CoC Secured creditor & workmen the date of order
• Plan not properly implemented dues (upto 24 months) Insolvency and liquidation cost
Liquidation steps • Insolvency cost include interim funding,
• Appointment of liquidator Other employee dues (upto 12 cost of running the debtor as going
months) concern (eg rent or salary of
• Formation of liquidation estate
• No legal proceeding by or against the employees), cost of IP etc
Financial debts of unsecured • Liquidation cost include any cost
debtor creditors
• Consolidation of claims incurred by liquidator during
• Distribution of assets liquidation period
Government dues (upto 2 years) Secured creditor in liquidation
• Dissolution of debtors (to be and unpaid secured creditors Secured creditor has the option to:
completed within 2 years) • enforce and realise the security outside
Liquidator Any remaining debts and dues the Code, or
Liquidator shall: • relinquish its security interest and
• Form liquidation estate receive proceeds as defined in the
• take custody & control of all assets Preference shareholders, if any
priority of claim
• consolidate, verify, admit and • Distinction between rights of different
determine value of creditors claims Equity shareholders or partners, class of secured creditors (first vs
• Carry on the business for its beneficial as the case may be second charge, fixed vs floating charge)
liquidation not clarified
Key Powers, Roles & Responsibilities as envisaged
under the Code
1. The appointed resolution professional IP shall exercise all the powers of the board of directors of the corporate debtor.
• The powers of the board of directors of the corporate debtor, shall stand suspended and be exercised by the IRP / IP
• The officers and managers of the corporate debtor shall report to the IRP / RP and provide access to such documents and
records of the corporate debtor as may be required
• The IRP / IP shall act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other
documents
1. Key powers and duties of Resolution professional

• form Committee of creditors
• Chain Committee of creditors
• prepare the information memorandum (IM) and invite resolution plans
• investigate the financial affairs of the company
2. Key powers and duties of Liquidator

• receive, verify and value claims of all the creditors, and settle such claims
• take into his custody or control all the assets, and sell the assets
• carry on the business of the corporate debtor for its beneficial liquidation
• form an estate of the assets which will be called the liquidation estate
• apply to the Adjudicating Authority for avoidance of transactions
IBC: Experience So Far
and Way Forward
• 4.5 plus years down the line since the promulgation of IBC in June 2016. How is the IBC
working?
• Twin objectives of IBC: Higher Realisation and Shorter Resolution Time. Whether IBC has
lived up to its avowed goals so far?
• Here is what the IBBI says about the IBC's performance as of Sept-2019.
• "The resolution plans have yielded about 188 per cent of liquidation value for financial
creditors FCs).
• They are realising on an average 43 per cent of their claims (57% haircut) through
resolutions plans under a process which takes on average 340 days and entails a cost on
average of 0.5 per cent, a far cry from the previous regime which yielded a recovery of 25
per cent (75% haircut) for creditors through a process which took about 5+ years and
entailed a cost of 9 per cent."
IBC: Experience So Far
and Way Forward
• Thus, the IBC has brought about (a) a marked improvement in credit realisation (b)
considerably shortened the resolution process and (c) also reduced the cost.
• Till September 2019, realisation by FCs under the CIRPs had yielded 41.5% of their
claims admitted in 38 cases. These resolutions included 8 large companies - Bhushan
Steel, Monnet Ispat, Essar Steel, Alok Industries, Jyoti Structures and Bhushan Power
and Steel - involving claims of Rs 2.1 lakh crore yielded a 42.7% of it.
• Five other large companies - Amtek Auto, Era Infra Engineering, Jaypee Infratech, Lanco
Infratech and ABG Shipyard - involving another Rs 1.32 lakh crore - are in the process of
liquidation. Taken together, these 12 (large accounts) had outstanding claims of Rs 3.45
lakh crore but a liquidation value of Rs 73,220 crore.
IBC: Experience So Far and Way
Forward
• An Alvarez & Marsal India report of January 28-2021 called upon all IBC stakeholders to
focus on improving efficiency to resolve cases in a time-bound manner because
wherever the resolution time increased, the recovery percentages also fell sharply to
15-25 per cent.
• Dewan Housing Finance Limited (DHFL) is the first finance company to be resolved
under IBC. The RBI had referred DHFL to NCLT for insolvency proceedings in November
2019. It was the first finance company to be referred to NCLT by the RBI using special
powers under Section 227 of the Insolvency and Bankruptcy Code (IBC).
• The Reserve Bank of India (RBI) has approved Piramal Capital and Housing Finance's
resolution plan for mortgage lender Dewan Housing Finance Ltd (DHFL) on February
18-2021. Now it will be referred to NCLT for its approval.
Challenges for effective working of IBC
• A major challenge to the resolution process under the IBC is clogging of the 27 NLCT
benches functioning around the country.
• The reasons for such clogging are obvious: (a) rising financial stress in the economy
leading to more cases being filed and (b) a low threshold for the IBC process to set in -
the default of Rs 1 lakh - attracting a greater number of cases.
• A few other challenges: (i) lack of adequate resolution professionals (ii) information
asymmetry as resolution applicants often don't have information which is complete,
robust and correct and (c) delays caused by multiple appeals and contradictory
verdicts at different levels.
Suggestions for Improving
the Efficacy of IBC Code
• More tribunals,
• More resolution professionals (RPs/IRPs),
• A higher threshold for the default process to set in from
the current level of Rs 1 lakh
• And streamlining of the appeal process to cut down delays
are needed to make the Insolvency and Bankruptcy Code
(IBC) more efficient
Introduction
M&A and Corporate Restructuring (MACR)
KKRay
Introductory Topics
1. M&A meaning and classifications
2. Motives of merger
3. Transaction characteristics
4. Regulations
5. Who benefits from the merger
6. Takeover and defense
7. Merger analysis
M&A Meaning and Classifications
An acquisition might refer to any of the following:
-The purchase of assets from another company

-The purchase of a segment of another company
-The purchase of an entire company (also called merger)
Merger is the absorption of one company by another:
-Statutory merger- one company ceases to exist

-Subsidiary merger- purchased company become a subsidiary
-Consolidation- two companies merge to form a new company
M&A Meaning and Classifications
• Parties to the acquisitions:

– The target company (or target) is the company being
acquired.
– The acquiring company (or acquirer) is the company
acquiring the target.
• Classified based on endorsement of parties’ management:
– A hostile takeover is when the target company board of
directors objects to a takeover offer.
– A friendly transaction is when the target company board
of directors endorses the merger or acquisition offer.
Mergers and Acquisitions classifications
Type Characteristic Example Purpose
Horizontal Companies are in the Walt Disney Company -Economies of scale
merger same line of business, buys Lucasfilm -Increased market
often competitors. (October 2012). power
Vertical Companies are in the Google acquired -Backward or forward

merger same line of Motorola Mobility integration
production (e.g., Holdings (June 2012). -Cost savings
supplier–customer). -Greater control
Conglomerate Companies are in Berkshire Hathaway Diversification
merger unrelated lines of acquires Lubrizol
business. (2011).
Genesis of M&A
1st Phase
• Merger & Acquisition Wave – 1897-1904 (Merging and Acquiring for
Monopoly)
• Originated in the first merger wave- DuPont, Standard Oil, General
Electric, Eastman Kodak, American Tobacco.
• Majority of mergers didn’t achieve increase in efficiency and failed
2nd Phase
• Merger & Acquisition Wave – 1916-1929 – ”Merging and acquiring for
Oligopoly” (vertical mergers)
• Originated in the wave- General Motors, IBM, John Deere, and Union
Carbide.
• Majority of mergers failed due to 1929 stock market crash, Great
depression
Genesis of M&A
3rd Phase
• Merger & Acquisition Wave – 1965-1969 – ”Conglomerate Mergers”
• Majority of mergers failed due to- Market financial manipulations and
conglomerates performed poorly
4th Phase
• Merger & Acquisition Wave – 1981-1992 – ”The Megamerger”
• Majority of mergers failed due to Initiation of policy of industrialization
5th Phase
• Merger & Acquisition Wave – 1992-till date –”Strategic restructuring”
• Uncommon before 1990s, especially hostile takeovers
• Takeovers increasing, despite antitakeover legislation
Motives for merger
• Synergy
• Growth
Creating Value • Increasing market power
• Acquiring unique capabilities or resources
• Unlocking hidden value
• Exploiting market imperfections

• Overcoming adverse government policy
Cross-Border
• Technology transfer
Mergers
• Product differentiation
• Following clients
• Diversification
• Bootstrapping earnings*
Dubious Motives
• Managers’ personal incentives
• Tax considerations
Example: Bootstrapping earnings
Bootstrapping earnings is the increase in earnings per share as a result of a merger,
combined with the market’s use of the pre-merger P/E to value post-merger EPS.
Assumptions:
• Exchange ratio: One share of Company A for two shares of Company B
• Market applies pre-merger P/E of Company A to post-merger earnings.
Company A Post-
Company -A Company-B Acquisition
Earnings $100 million $50 million $150 million
Number of shares 100 million 50 million 125 million
Earnings per share $1 $1 ?
P/E 20 10 ?
Price per share $20 $10 ?
Market value of stock $2,000 million $500 million ?
Company A Post-
Company -A Company-B Acquisition
Earnings per share $1 $1 $1.20
P/E 20 10 20
Price per share $20 $10 $24
Market value of stock $2,000 million $500 million $3,000 million
Bootstrapping earnings is the increase in earnings per share as a result of a

merger (rather than of resulting economic benefits of the combination). This
happens when the shares of the acquirer trade at a higher P/E than those of
the target firm. The acquirer’s P/E does not decline following the merger.
Company –A
Company A Company B Post-Acquisition
Earnings per share $1 $1 $1.20
P/E 20 10 16.67
Price per share $20 $10 $20
Market value of stock $2,000 million $500 million $2,500 million
Motives and the Industry’s Life Cycle
• The motives for a merger are influenced, in part, by

the industry’s stage in its life cycle.
• Factors include
– Need for capital.
– Need for resources.
– Degree of competition and the number of
competitors.
– Growth opportunities (organic vs. external).
– Opportunities for synergy.
Mergers and the Industry Life Cycle
Industry Life
Cycle Stage Industry Description Motives for Merger Types of Mergers
Pioneering  Industry exhibits  Younger, smaller companies may sell  Conglomerate
development substantial themselves to larger companies in  Horizontal
development costs mature or declining industries and look
and has low, but for ways to enter into a new growth
slowly increasing, industry.
sales growth.  Young companies may look to merge
with companies that allow them to
pool management and capital
resources.
Rapid  Industry exhibits  Explosive growth in sales may require  Conglomerate
accelerating high profit margins large capital requirements to expand  Horizontal
growth caused by few existing capacity.
participants in the
market.
Industry Life
Mature  Industry  Mergers may be undertaken to achieve  Horizontal
growth experiences a drop economies of scale, savings, and  Vertical
in the entry of new operational efficiencies.
competitors, but
growth potential
remains.
Stabilization  Industry faces  Mergers may be undertaken to achieve  Horizontal
and market increasing economies of scale in research,
maturity competition and production, and marketing to match
capacity the low cost and price performance of
constraints. other companies (domestic and
foreign).
 Large companies may acquire smaller
companies to improve management
and provide a broader financial base.
Industry Life
Deceleration  Industry faces  Horizontal mergers may be undertaken  Horizontal
of growth and overcapacity and to ensure survival.  Vertical
decline eroding profit  Vertical mergers may be carried out to  Conglomerate
margins. increase efficiency and profit margins.
 Companies in related industries may
merge to exploit synergy.
 Companies in this industry may acquire
companies in young industries.
Leveraged Buyout &
Management Buyout
Learning Objectives
• The meaning of Leveraged Buyout (LBO)
• Advantages and disadvantages of LBOs as a deal structure
• Alternative LBO models- MBO
• Classic LBO Models: Late 1970s and Early 1980s
• Break-Up LBO Model (Late 1980s)
• Strategic LBO Model (1990s)
• Role of Junk Bonds in Financing LBOs
2
Leverage Buyout
• Leverage buyout is a financial engineering product of the takeover
and corporate restructuring wave of 1980s in the USA.
• It means mobilizing borrowed funds based on the security of
assets and cash flows of the target company.
• The steps in mobilizing funds are
– Incorporation of a privately /wholly owned company to act as a special
purpose vehicle (SPV) for acquisition of a target company.
– Mobilizing of borrowed funds in the SPV based on the security of
assets and cash flows of the target company
– Acquisition of the entire or near entire share capital of the target
company
– Merger of the target company into SPV .
• It brings the assets of the target company and the loans taken by the SPV into
one balance sheet by which the lender security no more remains a third party
security.
• It makes the target company go private, i.e the target company gets unlisted
3
Leverage Buyout
• In India banks are not proactive in lending for
acquisitions even based on the acquirer company’s
asset, leveraging on the target’s assets is yet a far cry.
• For domestic acquisitions in India, LBOs are not
practiced.
• However, Indian companies have been successfully
resorting to the LBOs for the overseas acquisitions.
4
Leverage Buyout
• The first ever LBO by Indian company was acquisition of Tetley by Tata Tea
in early 2000. In this case the Tata tea set up SPV in the UK in form of Tata
Tea limited.
• This SPV had equity capital of GB 71 million contributed by
– TTL (GB 60 million),
– Tata Tea Inc (GBP 10 million)
– Tata Sons (GB 1 million).
• The SPV, in turn mobilised GBP 235 million by way of long term debt on
the security of the assets and cash flows of Tetley and acquired 100% of
Tetley at the cost of GBP 271 million , taking it private.
• The only missing step in this LBO was that Tata Tea did not immediately
merge Tetley with the SPV Tata Tea (GB) Ltd
5
Leverage Buyout
• The acquisition of Corus Plc by Tata Steel limited is also a
case of leveraged buyout .
• The differences between the Tetley acquisition and Corus
acquisition
– In case of Tetley , Tatas used only one SPV i.e. Tata Tea limited .
– In case of Corus they used a chain of SPVs-
• Tata Steel Asia Pte was set up as a wholly owned Singapore based
subsidiary of Tata Steel Limited and
• Tata steel UK Limited was set up as wholly owned subsidiary of Tata
steel Asia pte.
– Debt mobilisation was done by both the SPVs.
– Tata Steel UK mobilised US$ 6.14 billion on the security of the
assets and the cash flows of Corus Plc,
– Tata Steel Asia mobilised bridge loans of US$ 2.66 billion
6
Management Buyout
• When professional management or non-
promoter management of a company carries
out a leveraged buyout of the company from
its promoters, the same is called as
management buyout or MBO.
7
List of buyouts by Indian companies
Target Company Country Indian Acquirer Value

Tetley United Kingdom Tata Tea ₤271 million
Whyte & Mackay United Kingdom UB Group ₤550 million
Corus United Kingdom Tata Steel $11.3 billion
Hansen Netherlands Suzlon Energy €465 million
Transmissions
American Axle1 United States Tata Motors $2 billion
Lombardini2 Italy Zoom Auto $225 million
Ancillaries
1 Potential bid 2 Buyout attempt
8
List of buyouts of Indian companies
Company Financial investor Value Type
Flextronics Software Kohlberg Kravis Roberts & Co. (‘KKR’) $900 million LBO
Systems1
GE Capital International General Atlantic Partners, Oak Hill $600 million LBO
Services (‘GECIS’)
Nitrex Chemicals Actis Capital $13.8 million MBO2
Phoenix Lamps Actis Capital $28.9 million3 MBO
Punjab Tractors4 Actis Capital $60 million5 MBO
Nilgiris Dairy Farm Actis Capital $65 million6 MBO
WNS Global Services Warburg Pincus $40 million7 BO
RFCL ICICI Venture $25 million LBO
(businesses of Ranbaxy)
Infomedia India ICICI Venture $25 million LBO
VA Tech WABAG India ICICI Venture $25 million MBO
ACE Refractories ICICI Venture $60 million LBO
(refractories business of
ACC)
Nirula’s Navis Capital Partners $20 million MBO
9
Essential Characteristics of ideal LBO
• Efficient and experienced management team
• Assurance of sufficient and stable cash flow
• Lower degree of operating risk
• Limited amount of debt
• Other factors
10
Sources of LBO Financing
Senior Debt (High priority with low interest)
Sub-ordinated Debt (low priority with high interest)
Mezzanine Finance (hybrid-debt & equity financing – like warrants)
Loan Stock
Preference Shares
Ordinary Shares
11
Mezzanine Finance
• This is usually high risk sub-ordinated debt
(prepayable at premium)
• It is regarded as a type of intermediate
financing between debt and equity and an
alternative to high yield bonds
• A enhanced return is made available to
lenders by the grant of an equity kicker
– Warrants , options
12
Financial Buyers
In a leveraged buyout, all of the stock, or assets, of a public corporation are bought by
a small group of investors (“financial buyers”), usually including members of existing
management. Financial buyers:
Focus on ROE rather than ROA.
Use other people’s money.
Succeed through improved operational performance.
Focus on targets having stable cash flow to meet debt service requirements.
• Typical targets are in mature industries (e.g., retailing, textiles, food processing, apparel, and soft drinks)
14
LBO Deal Structure
Advantages Disadvantages
Management incentives High fixed costs of debt
Tax savings from interest expense and

depreciation from asset write-up Vulnerability to business cycle
fluctuations and competitor actions
More efficient decision processes under
private ownership
Not appropriate for firms with high
growth prospects or high business risk,
A potential improvement in operating and
performance
Serving as a takeover defense by Potential difficulties in raising capital.

eliminating public investors
15
Classic LBO Models: Late 1970s and Early 1980s
• Debt normally 4 to 5 times equity. Debt amortized over no

more than 10 years.
• Existing corporate management encouraged to participate.
• Complex capital structure: As percent of total funds raised
– Senior debt (60%)
– Subordinated debt (26%)
– Preferred stock (9%)
– Common equity (5%)
• Firm frequently taken public within seven years as tax benefits
diminish
16
Break-Up LBO Model (Late 1980s)
• Same as classic LBO but debt serviced from operating

cash flow and asset sales
• Changes in tax laws reduced popularity of this
approach
– Asset sales immediately upon closing of the
transaction no longer deemed tax-free
– Previously could buy stock in a company and sell
the assets. Any gain on asset sales was offset by a
mirrored reduction in the value of the stock.
17
Strategic LBO Model (1990s)
• Exit strategy is via IPO
• D/E ratios lower so as not to depress EPS
• Financial buyers provide the expertise to grow earnings
– Previously, their expertise focused on capital structure
• Deals structured so that debt repayment not required until 10
years after the transaction to reduce pressure on immediate
performance improvement
• Buyout firms often purchase a firm as a platform for leveraged
buyouts of other firms in the same industry
18
Role of Junk Bonds in Financing LBOs
• Junk bonds are non-rated debt.

– Bond quality varies widely
– Interest rates usually 3-5 percentage points above the prime rate
• Bridge or interim financing was obtained in LBO transactions to close the
transaction quickly because of the extended period of time required to
issue “junk” bonds.
– These high yielding bonds represented permanent financing for the
LBO
• Junk bond financing for LBOs dried up due to the following:
– A series of defaults of over-leveraged firms in the late 1980s
– Insider trading and fraud at such companies a Drexel Burnham, the
primary market maker for junk bonds
• Junk bond financing is highly cyclical, tapering off as the economy goes
into recession and fears of increasing default rates escalate
19
Factors Affecting Pre-Buyout Returns
• Premium paid to target firm shareholders consistently

exceeds 40%
• These returns reflect the following (in descending order of
importance):
– Anticipated improvement in efficiency and tax benefits
– Wealth transfer effects
– Superior Knowledge
– More efficient decision-making
20
Factors Determining Post-Buyout Returns
• Empirical studies show investors earn abnormal post-buyout

returns
• Full effect of increased operating efficiency not reflected in
the pre-LBO premium.
• Studies may be subject to “selection bias,” i.e., only LBOs that
are successful are able to undertake secondary public
offerings.
• Abnormal returns may also reflect the acquisition of many
LBOs 3 years after taken public.
21
Valuing LBOs
A LBO can be evaluated from the perspective of common equity investors

or of all investors and lenders
LBOs make sense from viewpoint of investors and lenders
• if present value of free cash flows to the firm is greater than or equal to the total investment
consisting of debt and common and preferred equity
However, a LBO can make sense to common equity investors but not to
other investors and lenders.
The market value of debt and preferred stock held before the transaction
may decline due to a perceived reduction in the firm’s ability to
• Repay such debt as the firm assumes substantial amounts of new debt and to pay interest
and dividends on a timely basis.
22
Valuing LBOs: Variable Risk Method
Adjusts for the varying level of risk as the firm’s total

debt is repaid.
• Step 1: Project annual cash flows until target D/E
achieved
• Step 2: Project debt-to-equity ratios
• Step 3: Calculate terminal value
• Step 4: Adjust discount rate to reflect
changing risk
• Step 5: Determine if deal makes sense
23
Variable Risk Method: Step 1
• Project annual cash flows until target D/E ratio
achieved
• Target D/E is the level of debt relative to equity at
which
– The firm will have to resume payment of taxes and
– The amount of leverage is likely to be acceptable
to IPO investors or strategic buyers (often the
prevailing industry average)
24
• Project annual debt-to-equity ratios
• The decline in D/E reflects
– the known debt repayment schedule and
– The projected growth in the market value of
the shareholders’ equity (assumed to grow
at the same rate as net income)
25
• Calculate terminal value of projected cash
flow to equity investors (TVE) at time t, i.e.,
the year in which the initial investors choose
to exit the business.
• TVE represents the PV of the dollar proceeds
available to the firm through an IPO or sale to
a strategic buyer at time t.
26
• Adjust the discount rate to reflect changing risk.
• The firm’s cost of equity will decline over time as debt is repaid and equity grows,
thereby reducing the leveraged ß. Estimate the firm’s ß as follows:
ßFL1 = ßIUL1(1 + (D/E)F1(1-tF))
where ßFL1 = Firm’s levered beta in period 1

ßIUL1 = Industry’s unlevered beta in period 1
= ßIL1/(1+(D/E)I1(1- tI))
ßIL1 = Industry’s levered beta in period 1
(D/E)I1 = Industry’s debt-to-equity ratio in period 1
tI = Industry’s marginal tax rate in period 1
(D/E)F1 = Firm’s debt-to-equity ratio in period 1
tF = Firm’s marginal tax rate in period 1
• Recalculate each successive period’s ß with the D/E ratio for that period, and using
that period’s ß, recalculate the firm’s cost of equity for that period.
27
• Determine if deal makes sense

– Does the PV of free cash flows to equity
investors (including the terminal value)
equal or exceed the equity investment
including transaction-related fees?
28
Evaluating the Variable Risk Method
• Advantages:
– Adjusts the discount rate to reflect diminishing
risk as the debt-to-total capital ratio declines
– Takes into account that the deal may make sense
for common equity investors but not for lenders
or preferred shareholders
• Disadvantage: Calculations more burdensome than
Adjusted Present Value Method
29
Valuing LBOs: Adjusted Present Value Method
(APV)
Separates value of the firm into (a) its value as if it were debt free and (b)
the value of tax savings due to interest expense.
• Step 1: Project annual free cash flows to equity investors and interest
tax savings
• Step 2: Value target without the effects of debt financing and discount
projected free cash flows at the firm’s estimated unlevered cost of
equity.
• Step 3: Estimate the present value of the firm’s tax savings discounted
at the firm’s estimated unlevered cost of equity.
• Step 4: Add the present value of the firm without debt and the
present value of tax savings to calculate the present value of the firm
including tax benefits.
• Step 5: Determine if the deal makes sense.
30
APV Method: Step 1
• Project annual free cash flows to equity investors and interest

tax savings for the period during which the firm’s capital
structure is changing.
– Interest tax savings = INT x t, where INT and t are the firm’s
annual interest expense on new debt and the marginal tax
rate, respectively
– During the terminal period, the cash flows are expected to
grow at a constant rate and the capital structure is
expected to remain unchanged
31
APV Method: Step 2
• Value target without the effects of debt financing and
discount projected cash flows at the firm’s unlevered cost of
equity.
– Apply the unlevered cost of equity for the period during
which the capital structure is changing.
– Apply the weighted average cost of capital for the terminal
period using the proportions of debt and equity that make
up the firm’s capital structure in the final year of the
period during which the structure is changing.
32
APV Method: Step 3
• Estimate the present value of the firm’s annual
interest tax savings.
– Discount the tax savings at the firm’s unlevered
cost of equity
– Calculate PV for annual forecast period only,
excluding a terminal value, since the firm is sold
and any subsequent tax savings accrue to the new
owners.
33
APV Method: Step 4
• Calculate the present value of the firm
including tax benefits
– Add the present value of the firm without
debt and the PV of tax savings
34
APV Method: Step 5
• Determine if deal makes sense:

– Does the PV of free cash flows to equity
investors plus tax benefits equal or exceed
the initial equity investment including
transaction-related fees?
35
Evaluating the Adjusted Present Value
Method
• Advantage: Simplicity.
• Disadvantages:
– Ignores the effect of changes in leverage on the
discount rate as debt is repaid,
– Implicitly ignores the potential for bankruptcy
of excessively leveraged firms, and
– Unclear whether true discount rate should be
the cost of debt, unlevered cost of equity, or
somewhere between the two.
36
Thank You
37
M&A deals, Bid Evaluation and regulations
K K Ray
Mindset of Managers
Friendly merger: Offer made through the Hostile merger: Offer made directly to
target’s board of directors the target shareholders
Approach target management. Bear hug (merger proposal directly to the board
(nottoCEO)
• Tender offer (proposal buy shares at a specific
price)
• Proxy fight (take control through shareholder
vote)
Enter into merger discussions.
Perform due diligence.
A friendly merger is one in which the board

negotiates and accepts an offer.
Enter into a definitive merger agreement. A hostile merger is one in which the board of
the target firm attempts to prevent the merger
offer from being successful.
Shareholders and regulators approve. (material
facts provided to the shareholders in a public
document called a proxy statement
Transaction characteristics
Form of the • Stock purchase

Transaction • Asset purchase
• Cash
Method of
• Securities
Payment
• Combination of cash and securities
Attitude of • Hostile
Management • Friendly
Forms of Acquisition
Basis Stock purchase Asset purchase

Payment Target shareholders receive Payment is made to the
compensation in exchange of selling company rather than
their shares directly to the shareholders
Approval Shareholders' approval Shareholder‘s’ approval
needed might not needed
Tax: corporate No corporate level tax Target company pays tax as
capital gain
Tax: Target company shareholders No direct tax consequence for
shareholders are taxed as capital gain target company shareholders
Liabilities Acquirer assumes the target Acquirer generally avoids the
liabilities assumed liabilities
Method of Payment
• Cash offering
• Factors influencing method
– Cash offering may be cash from
of payment:
existing acquirer balances or from a
debt issue. – Sharing of risk among
the acquirer and target
• Securities offering
shareholders.
– Target shareholders receive shares
– Signaling by the
of common stock, preferred stock,
acquiring firm.
or debt of the acquirer.
– Capital structure of the
– The exchange ratio determines the
acquiring firm.
number of securities received in
exchange for a share of target
stock.
– Cost = exchange ratio * no. of
target shares * value of per share
given to the target shareholders
• Mixed offer
- Combination of cash and securities
Example:
Company X a book publisher has announced its intended

acquisition of Company Y a small marketing company. As per the
press release, the Company Y shareholders will get 0.90 shares of
company X for each shares they hold. Company Y has 1 million
shares outstanding on the day of merger announcement. The
closing stock price of company x $20 and company Y $15.
Catherin a small investor who holds 500 shares of company Y,
whose current value of holding is $7500.
a) Based on the current share price, what is the cost of

acquisition
b) How many shares the small investor Cathrin will get and what
is his value. Whether he will be a gaining from the deal or not?
Answer-
Company X is the acquirer – per share price $20
Company Y is the target – per share price $15
Present value of company Y = 1 million shares * $15 = $15

million
Cost of the deal for Company X = 0.9*1 million * $20 = $18
million
Company Y shareholders will get premium = $3million
Catherin holds 500 of company Y

After merger he will get 450 shares of company X (500*.9)
Present value = 500*$15 = $7500
Post merger value = 450 *$20 = $9000
He will be getting a premium of $1500 from the merger deal
Bid Evaluation
Even if the acquirer and the target separately agree on the target company’s
underlying value, the acquirer will want to pay the lowest price possible while
the target will negotiate for the highest price possible. Generally the acquirer
will have to pay a premium which is a gain for the target.
Target shareholders’ gain = Premium = PT – VT

Where:
oPT = price or value of target share after the merger announcement. This
may be paid by the acquirer to the target
oVT = pre-merger price or value of the target company
Acquirer’s gain = Synergies – Premium = S – (PT – VT)
The post-merger value of a company is given by: VA* = VA + VT + S – C
Where:
VA* = post-merger value of the combined companies
VA = pre-merger value of the acquirer; VT = pre-merger value of the target company
C = cash paid to target shareholders
Example:
Adagio software and Tantalus software solutions are negotiating a friendly acquisition of Tantalus by
Adagio. The management teams at both companies have informally agreed upon a transaction
value of about $12 per share of Tantalus software stock but are presently negotiating alternative
forms of payment. Mr. Rakesh Agrawal works for Tantalus software solutions investment banking
team and is evaluating three alternative offers presented by Adagio.
a) Cash offer – Adagio will pay $12 per share of Tantalus software
b) Stock offer – Adagio will give Tantalus shareholders 0.80 shares of Adagio for each share of
Tantalus software.
c) Mixed offer- Adagio will pay $6.00 plus 0.40 shares of Adagio stock for each share of Tantalus.
Mr. Agrawal estimates that the merger is likely to reduce cost through economies of scale with this
merger of $9 million per year, forever. The appropriate discount rate for these gains is 10%. To aid
the analysis, Mr. Agrawal also compiled the following data.
Adagio Tantalus
Pre-merger stock price $15 $10
Shares outstanding (million) 75 30
Pre-merger market value (million) $1125 $300
Based on the information given, which of the 3 offers should Agrawal recommended to the Tantalus
management team.
Solution:
Synergistic gains =
$9 million per year  0.10 = $90 million
Alternative 1:
Adagio to pay $12 per share of Tantalus
Total value =
$12 * 30 million shares of Tantalus = $360 million
Pre-merger market value of Tantalus = $300 million
Premium of the deal (Alter-1) =
$360 million - $300 million = $60 million
Alternative 2:
The exchange ratio of 0.80 shares of Adagio for each share of Tantalus
The post-merger value = VA* = VA + VT + S – C
= 1125 + 300 + 90 – 0 (there is no cash paid here)
= 1515 million
Outstanding shares post-merger for Adagio =
75 million + 0.80 * 30 million = 99 million
Per share price post-merger =
1515 million /99 million = $15.30
Alternative 2 cont..:
Total value to be paid to Tantalus =

30 million * 0.80 * $15.30 = $367.27 million
Pre-merger market value of Tantalus = $300 million
Premium of the deal (Alter-2) =
$367.27 million - $300 million = $67.27million
Alternative 3: Mixed offer

Cash payment $6 per share of Tantalus
Total cash payment = $6 * 30million shares = $180 million
Post merger value of Adagio = 1125 + 300 + 90 – 180 = $1335 million
Total outstanding shares post-merger = 75 million + 0.4 * 30 million
= 87 million shares
Price per share post-merger = Alternative-2 is
$1335 million / 87 million = $15.34
Total value of payment = cash payment + stock payment better for
= $180 + 0.4 * 30 million * $15.34 = $364.10 million Tantalus with
Premium of the deal (Alter-3) = $67.27 million
$364.10 million - $300 million = $64.10million premium
Regulation of Merger
a) Antitrust Law- This prohibits the M&A that impede
competition among other things regulators look at the pre
and post merger Herfindahl-Hirschman Index (HHI).
b) Securities law: this is intended to maintain fairness in merger
activities and confidence in financial markets. Countries have
certain rules and regulations for M&A.
The HHI
HHI Concentration Level and Possible Government Action

Post-Merger HHI Concentration Change in HHI Government Action
Less than 1,000 Not concentrated Any amount No action
Between 1,000 and 1,800 Moderately concentrated 100 or more Possible challenge
More than 1,800 Highly concentrated 50 or more Challenge
Example: HHI
Consider an industry that has six companies. Their respective

market shares are as follows:
Company Market Share
A 25%
B 15%
C 15%
D 15%
E 15%
F 15%
100%
What is the likely government action, if Companies E and F

combined?
Example: HHI
Market Market HHI

Company Share HHI Before Company Share After
A 25% 625 A 25% 625
B 15% 225 B 15% 225
C 15% 225 C 15% 225
D 15% 225 D 15% 225
E 15% 225 E+F 30% 900
F 15% 225
Total 100% 1125 Total 100% 1575
• The industry would be considered moderately concentrated before and after the
combination of E and F, and
• The change in the HHI is 450, which may result in a government challenge.
M&A Accounting and Regulations
Who benefits from the Merger?
a) Studies have shown:
o Short term- on average, target shareholders reap 30%
premium over pre-announcement price and the acquirer’s
price falls between 1% to 3%.
o Long term- average return to acquiring companies
subsequent to the merger transaction are negative 4.3%
with about 61% of acquirers lagging their industry peers.
b) Characteristics of M&A deals that create value

o Buyer is strong
o Transaction premiums are low
o No. of bidders are less
o Initial market reaction is favourable
Reasons of Merger failures
Bellinger and Hillman (2000) provided an excellent summary of
reasons for merger and acquisition failures: M&A failure has
been attributed to many reasons:
o Imitation of other M&A strategies without proper

understanding (Haunschild, 1993),
o Lack of integration (Haspeslagh& Jemison, 1991; Nahavandi
& Malekzadeh,1988),
o Managerial hubris- manage the assets of a target firm more
efficiently (Haunschild,1993),
o Inadequate estimation of target, lack of commitment, lack of
leadership or strategic guidance after the negotiations of
M&As, and a reduction in slack resources (Haspeslagh&
Jemison, 1991).
Regulation of Merger
a) Antitrust Law- This prohibits the M&A that impede
competition. Among other things regulators look at the pre
and post merger Herfindahl-Hirschman Index (HHI).
b) Securities law: this is intended to maintain fairness in merger
activities and confidence in financial markets. Countries have
certain rules and regulations for M&A.
The HHI
HHI Concentration Level and Possible Government Action

Post-Merger HHI Concentration Change in HHI Government Action
Less than 1,000 Not concentrated Any amount No action
Between 1,000 and 1,800 Moderately concentrated 100 or more Possible challenge
More than 1,800 Highly concentrated 50 or more Challenge
Example: HHI
Consider an industry that has six companies. Their respective

market shares are as follows:
Company Market Share
A 25%
B 15%
C 15%
D 15%
E 15%
F 15%
100%
What is the likely government action, if Companies E and F

combined?
Example: HHI
Market Market HHI

Company Share HHI Before Company Share After
A 25% 625 A 25% 625
B 15% 225 B 15% 225
C 15% 225 C 15% 225
D 15% 225 D 15% 225
E 15% 225 E+F 30% 900
F 15% 225
Total 100% 1125 Total 100% 1575
• The industry would be considered moderately concentrated before and after the
combination of E and F, and
• The change in the HHI is 450, which may result in a government challenge.
Purchase Method Accounting
• Purchase accounting requires the acquirer to record in its

financial statements the fair market value of all assets
acquired.
– Both tangible and intangible, and liabilities assumed.
– The fair value of an asset is generally its market or
appraised value, and liabilities are generally valued on a
present value basis.
• Any excess or residual purchase price over the fair value of
the net identifiable assets is considered goodwill that must be
recorded as an asset and amortized over its useful life or a
maximum of 40 years.
Pooling Method Accounting
• The pooling method accounts for a combination of two firms
as a union of the ownership interests of the two previously
separated groups of stockholders.
• No sale or purchase is considered to have occurred.
• The assets and liabilities of the combining firms continue to
be carried at their book values, that is, on the basis of their
historical costs.
• Any goodwill carried on the target’s books prior to the merger
continues to be carried on the merged firm’s books at its
historical cost, but no new goodwill is recognized as a result of
the pooling.
• The stockholders’ equity of the merged firm is recorded at the
sum of the book values of the two firms.
Example: Purchase of Assets
Revalued
Target’s Balance Target’s
Sheet Prior to Balance Merged
Assets Acquirer Acquisition Sheet Firm
Cash $185,000 $6,000 $6,000 $191,000
Accounts Receivables $90,000 $8,000 $8,000 $98,000
Notes Receivable $55,000 $55,000
Inventory $140,000 $10,000 $9,000 $149,000
PPE (net) $250,000 $35,000 $50,000 $300,000
Goodwill $12,000 $113,000 $113,000
Trademark $15,000 $15,000
Patent $25,000 $25,000
Total Assets $720,000 $71,000 $226,000 $946,000
Liabilities and Equity
Accounts Payable $90,000 $14,000 $14,000 $104,000
LT Notes Payable $170,000 $15,000 $12,000 $182,000
Shareholders' Equity $460,000 $42,000 $200,000 $660,000
Total Liabilities & Equity $720,000 $71,000 $226,000 $946,000
Example: Pooling of Assets
Target’s
Balance Sheet Revalued
Prior to Target’s
Assets Acquirer Acquisition Balance Sheet Merged Firm
Cash $185,000 $6,000 $6,000 $191,000
Accounts Receivables $90,000 $8,000 $8,000 $98,000
Notes Receivable $55,000 $55,000
Inventory $140,000 $10,000 $9,000 $150,000
PPE (net) $250,000 $35,000 $50,000 $285,000
Goodwill $12,000 $113,000 $12,000
Trademark $15,000 $0
Patent $25,000 $0
Total Assets $720,000 $71,000 $226,000 $791,000
Liabilities and Equity
Accounts Payable $90,000 $14,000 $14,000 $104,000
LT Notes Payable $170,000 $15,000 $12,000 $185,000
Shareholders' Equity $460,000 $42,000 $200,000 $502,000
Total Liabilities & Equity $720,000 $71,000 $226,000 $791,000
The Market Reaction to Accounting Choice in Business Combinations
o Managers might prefer pooling because the less stringent reporting
requirements reduce their accountability for the price paid. Under the
pooling regime, acquired assets remain at their pre-acquisition book value
which is typically significantly understated.
o Under purchase accounting, these assets are recorded at their estimated
fair value (usually well above their pre-acquisition book value) and
significant goodwill is also typically recorded.
o Moreover, the increased depreciation and amortization charges
associated with purchase accounting set higher earnings benchmarks to
justify the premium paid. If managers overpay for acquisitions, this excess
payment impacts their performance in two ways:
o the excess is recorded in the asset base (the denominator) for return on
assets (ROA) calculations; and
o the excess decreases future earnings (the numerator) over the useful lives
of the acquired assets through depreciation and amortization charges.
o Overpayment in acquisitions thus negatively portrays managers’
performance under purchase but not under pooling of interests. (F.ASI´S
MARTI´NEZ-JEREZ, 2008)
Controversy Over Pooling Method
FASB formally decided in January 2001 to move solely to the Purchase method
of accounting for merger, as the pooling method-
1. Provides investors with less relevant information

2. Ignores values exchanged in business combination and
3. Yields artificial accounting differences rather than real economic
differences from the purchase method.
4. Under the Purchase method, goodwill had to be recognized as an asset
equal to the excess of the transaction’s purchase price over the fair value
of the identifiable assets of the acquired subsidiary at the date of
purchase. This intangible asset was then amortized to income over its
useful life, not to exceed 20 years (reduced from 40 years under prior
standards). Instead, recorded goodwill is now subjected to an elaborate
test for “impairment” of its value annually, or upon certain triggering
events. If the value of goodwill is deemed to have declined, the intangible
is written down and an impairment loss is recorded.
Accounting for M&A in India
It is guided by AS 14 and termed as Accounting for Amalgamations.
As per the standard amalgamations fall into two broad categories.
a) Those amalgamations, where there is genuine pooling not merely

of the assets and liabilities of the amalgamating companies, but
also the shareholders’ interests. Such amalgamations should
ensure that the resultant figures of assets, liabilities, capital and
reserves more or less represent the sum of relevant figures of the
amalgamating companies.
b) Those amalgamations, where one company acquires another
company and as a consequence, the shareholders of the acquired
company do not continue to have a proportionate share in the
equity of the combined company, or the business of the company
which is acquired is not intended to be continued. Such
amalgamations are in the nature of Purchase.
Methods of Accounting in India (AS14)
o When an amalgamation is considered to be an amalgamation in the
nature of merger, it should be accounted for under the Pooling of Interest
Method.
o When an amalgamation is considered to be an amalgamation in the
nature of purchase, it should be accounted for under the Purchase
Method.
o Any excess of the amount of the consideration over the value of the net
assets of the transferor company acquired by the transferee company
should be recognised in the transferee company’s financial statements as
goodwill arising on amalgamation. If the amount of the consideration is
lower than the value of the net assets acquired, the difference should be
treated as Capital Reserve.
o The goodwill arising on amalgamation should be amortised to income on a
systematic basis over its useful life. The amortisation period should not
exceed five years unless a somewhat longer period can be justified.
Calculate Goodwill and Allocate the Purchase Price
o Combining the balance sheets is also fairly simple, but there’s

one hitch: the buyer writes off the seller’s entire shareholders’
equity balance before adding the rest of the seller’s balance
sheet to its own.
o That creates a problem because the buyer usually pays more

than the shareholders’ equity of the seller to complete the
acquisition.
Let’s say that the buyer is paying $60 for the seller and that the
seller has $50 in assets, $20 in liabilities, and $30 in shareholders’
equity. For simplicity, let’s assume that it’s a 100% cash deal.
Consider what happens when we combine the balance sheets:
o The buyer adds $50 to its own assets and $20 to its own liabilities… but
the $30 in shareholders’ equity is written off, so the buyer’s balance sheet
is now out of balance by $30.
o The buyer has paid $60 of its own cash to acquire the seller, so we
subtract $60 from its assets.
o As a result, the buyer’s balance sheet is now out of balance once again –
it’s down by $10 on the assets side but up by $20 on the liabilities &
shareholders’ equity side.
If the buyer does not pay exactly the value of the seller’s
shareholders’ equity to acquire the seller, the combined balance
sheet will go out of balance. And that happens in 99.9999% of
merger models. Due to this, we need the Goodwill and Other
Intangible Assets to adjust the combined company’s balance sheet.
Goodwill and Other Intangible Assets represent the premium above the
seller’s shareholders’ equity the buyer pays to acquire the seller. They don’t
correspond to anything tangible, like factories, land, or inventory, but
instead represent items such as:
• The seller’s brand name and recognition in the marketplace.

• The seller’s relationships with customers.
• The seller’s human capital – its employees and the knowledge and
experience they have.
• The seller’s intellectual property.
Whereas Goodwill stays on the combined company’s balance sheet

indefinitely and is tested for impairment each year, Other Intangible Assets
are amortized over time and eventually disappear.
Determine the Financing for the Deal
There are 3 ways to fund the acquisition of another company:
cash, stock, or debt.
o Cash: Payment from the cash balance. The firm need to give up interest
that you could have earned on that cash when you use it to acquire a
company, which is known as the foregone interest on cash.
o Debt: you take out a loan and pay interest on that loan, also repaying the
principal to the lenders over time.
o Stock: You’re using the value of an existing asset – your company – to buy
something else. The downside is that you’ll get additional shares
outstanding, which will reduce your Earnings Per Share and may upset
investors.
There’s no formula to determine the appropriate mix of cash,
debt, and stock – you would look at a wide range of factors:
Factors:
• Feasibility:
o How much cash does the company have? Can it use all, or most of, its cash
balance?
o How much debt can it take on given its EBITDA and Free Cash Flow?
o How much stock can it issue without reducing EPS too much or diluting
shareholders too much?
• The Market:
o How have similar companies completed similar, recent transactions?
o What type of cash / debt / stock mix have they used, and
o how did the market react when they announced the deal?
• Internal Strategy:
o Does the buyer need cash to fund an upcoming expansion?
o Are they in the middle of an equity or debt issuance and can’t afford to be
distracted by more fundraising?
o Generally, the buyer prefers to pay with 100% cash if possible because it’s
the cheapest option – interest rates on cash in a bank account are lower
than interest rates on debt.
o And issuing new stock tends to result in greater dilution unless the buyer
has a much higher P/E multiple than the seller.
o The buyer may choose to issue debt if it has little cash or if debt is cheap at
the moment.
o They may be more likely to issue stock if they’re trading at a high stock
price – that means they won’t have to issue as many shares to acquire the
seller.
Indian Takeover code
SEBI (Substantial Acquisitions of Shares and Takeover) Regulations 2011 to
regulate the acquisition of shares and voting rights in Public Listed
Companies in India.
o Acquirer means any person either directly or indirectly or with Person
acting in Concert (PAC) engages in acquisition. (PAC means any such
person or persons who with common objective of Acquisition directly or
indirectly cooperate for acquisition of shares or voting rights in or
exercise of control over Target Company)
o Initial trigger point for Open offer increased from 15% to 25%.
o When the acquirer alone or with PAC acquire shares which would entitle
them to shares or voting rights in the target company more than 25% of
the voting rights along with the existing holdings, should make public
announcement for open offer. The investors can increase their stake
holding upto 24.99% without open offer.
o The open offer price is determined at volume weighted average market
price at 60 days rather than simple average.
Indian Takeover code
o When the acquirer alone or together with PAC holding more than 25 %
but less than maximum permissible non-public shareholding i.e 75% (or
90% in case of Public sector undertakings) can acquire upto 5% of shares
or voting rights in any financial year without making public
announcement for open offer.
o The open offer for acquiring shares to be made by the acquirer and
persons acting in concert with him shall be for at least 26% of total shares
of the target company.
o Irrespective of acquisition or holding of shares or voting rights in a target
company, no acquirer shall acquire, directly or indirectly, control over such
target company unless the acquirer makes a public announcement of an
open offer for acquiring shares of such target company in accordance with
these regulations.
o Any acquirer, who together with persons acting in concert with him, holds
shares or voting rights entitling them to 5% or more of the shares or
voting rights in a target company, shall disclose every acquisition or
disposal of shares as of the thirty-first day of March.
Indian M&A
First Wave:
o The first wave of takeover witnessed in India during 80s and early 90s.
o There were hardly any regulation and making a tender offer was not
compulsory. Takeover was considered as a willing buyer-seller negotiation.
o During this period some cases were where acquirer was a strong person and
loser were generally small investors e.g. Tata’s acquisition of Special Steel
and HLL’s acquisition of Stepan Chemicals. During this period Swaraj Paul, RP
Goenka, Manu Chabbria, Ambanis and Murrugappa group were the pioneers
Second Wave:
o Second wave in the Indian context started after 1994.
o This was the era of Expansion, Consolidation and restructuring and a marked
shift from friendly to hostile takeover was witnessed during this period.
o The liberalization of Indian economy, dismantling of MRTP and Licensing
regime, relaxation under FERA, availability of foreign funds etc had led to a
rise in the number of mergers and takeovers during this period.
Third Wave:
o The wave gaining momentum now is the third wave. It is significantly
different from earlier two because role of Banks and FIS becomes important
now.
Tax Implications in Indian M&A
Amalgamations and Demergers attract the following taxes:-
a) Capital Gains Tax – Gains arising out of the transfer of capital assets
including shares are taxed. However, if the resultant company of
amalgamation or demerger is an Indian Company, the company is exempted
from paying capital gains tax on the Transfer of Capital Assets.
b) Tax on transfer of Share – Transfer of Shares may attract Securities

Transaction Tax and Stamp Duty. However, when the shares are in
dematerialized form, no Stamp duty is attracted.
c) Tax on transfer of Assets/Business – Transfer of property also attracts tax

which is generally levied by the states.
• Immovable Property – Transfer of Immovable Property attracts Stamp Duty
and Registration fee on the instrument of transfer.
• Movable Property - The transfer of Movable Property attracts VAT which is
determined by the State and also Stamp Duty on the Instrument of transfer.
Tax Concessions to the Indian Amalgamated company
1. Expenditure on scientific research
2. Expenditure on acquisition of patent and copy rights
3. Expenditure on Know-how
4. Expenditure for obtaining licence to operate
telecommunication
5. Concession on Treatment of preliminary expenses (if not yet
written off fully)
6. Amortisation of expenditure in case of amalgamation
7. Treatment of expenditure on prospecting etc. of certain
mineral
8. Treatment of bad debt
9. Carry forward and set off of business losses and unabsorbed
depreciation

Corporate Restructuring-Merged

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Corporate Restructuring-Merged

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CORPORATE

• Explain Different Types of Corporate Restructuring

Corporate restructuring is a broad array

Corporate restructuring is aimed at –

2. Increase Corporate Focus.

3. Unlocking Hidden Value.

4. To avoid takeover since a valuable division is spun

Case Study 1, 2, 3, 4, 5 & 6

Shareholders of parent company get shares in the subsidiary

It is a kind of reorganization of controlling interest.

Case Study 1 & 2

Case Study 1 & 2

The entity which undertakes demerger is termed as

A Ltd. (Demerged Co.) B Ltd. (Resulting Co.)

2. Division/Business may not be sufficiently contributing to

3. To get rid of non profit making company;

4. Size of the firm is too big to handle;

5. Division of Family managed business

6. Making the hived-off business attractive for Strategic

• Existing shareholders get proportionate shares.

• Ownership does not change.

• For ex. Air India formedAir India Engineering Services

• RIL proposed spin-off of O2C (oil-to-chemicals) Business as a

2. Increase Corporate Focus.

3. Unlocking Hidden Value.

4. To avoid takeover since a valuable division is spun

Case Study 1, 2, 3, 4, 5 & 6

A sell off is the sale of an asset, factory, division, product line

Reliance Infrastructure Birla Corporation Cement Unit for Rs.

Jaypee Group Ultra Tech Cement Plant for Rs.

GVK Power Fairfax Holdings Bengaluru Airport stake

Gammon Infrastructure Entity set up by Canadian Nine (9) road assets

Case study 7 & 8

Theparent company no longer legally exists and

Shareholders of parent company get shares in the subsidiary

It is a kind of reorganization of controlling interest.

2. Increase Corporate Focus.

3. Unlocking Hidden Value.

4. To avoid takeover since a valuable division is spun

Case Study 1, 2, 3, 4, 5 & 6

2. Increase Corporate Focus.

3. Unlocking Hidden Value.

4. To avoid takeover since a valuable division is spun off;

Reliance Infrastructure Birla Corporation Cement Unit for Rs. 4800

GVK Power Fairfax Holdings Bengaluru Airport stake

Gammon Infrastructure Entity set up by Canadian Nine (9) road assets

The parent company no longer legally exists and

It is a kind of reorganization of controlling interest.

A shareholder has two choices:

If the shareholders wishes to obtain shares in

TCS was a division of Tata Sons Ltd.

It was decided to carve out the TCS Division into a separate

Case Study 1 & 2

• Bhushan Steel represented one of the largest of the “Dirty Dozen”

• On April 17, 2018 The Kolkata Bench of the National

• The value of the bid was Rs.5,320 crore, against

Insolvency Professionals (IP) Information Utility (IU) NCLT DRT

Insolvency and Bankruptcy Information Utilities (IUs)

Appointment of Registered IPs

Committee of Creditors (CoC)

Who Can File the Application Approve or Reject

Interim Resolution Professional / The Adjudication

Key points to focus for the financial creditors: