FORMS OF CORPORATE RESTRUCTURING

Prof. B.D.Panda

MERGER
It involves combination of all the assets, liabilities, loans, and businesses (on a going concern basis) of two (or more) companies such that one of them survives. Merger is primarily a strategy of inorganic growth. Merger by absorption and by consolidation.

MERGER
Example:- X limited has a paid up equity capital of Rs.10 crore consisting of 1 crore shares of face value of Rs.10 each. Y ltd. has a paid up equity capital of Rs.50 crore consisting of 5 crore shares of face value of Rs.10 each. X ltd. is proposed to be merged with Y ltd., where in based on the relative valuation of both the companies, shareholders of X ltd. will be given, two shares of Y ltd for every five shares of X ltd held by them. Upon the merger being carried out,

MERGER

Shares of X ltd. will get cancelled since X ltd. cease to exhist through a legal process. All the assets and liabilities of X ltd. will be transferred to Y ltd. Balance sheet of Y ltd will have equity capital of Rs.54 crore and will include assets and liabilities of both X ltd. and Y ltd. Business of X ltd. will be conducted under the name of Y ltd along with the erstwhile business of Y ltd. All rights exercisable by X ltd against the third parties will now be exercisable by Y ltd.

CASE STUDY : ICICI BANK

Mergers by ICICI Bank Ltd. in India S. No. Mergers by ICICI Bank Ltd. in India Merger
1. SCICI 2. ITC Classic Finance Ltd. 1997 3 Anagram Finance 4. Bank of Madura Ltd. 5. Sangli Bank Ltd. 2007 6. The Bank of Rajasthan Ltd. (BoR)

Year of
1996

1998 2001

2010

CONSOLIDATION

It involves creation of an altogether new company owning assets, liabilities, loans and businesses (on going concern basis) of two or more companies, both/all of which cease to exist.

Example:- X ltd has a paid up equity capital of Rs. 10crore consisting of Rs.10 each. Y ltd has paid up equity capital of Rs.50 crore consisting of 5 crore shares of face value of Rs.10 each. X ltd and Y ltd decide to consolidate themselves into C ltd. In the process, based on relative valuation of the shares of X ltd and y ltd, it is decided that for every two shares of X ltd, shareholders of X ltd will get one share of C ltd and for every five shares of Y ltd, shareholders of Y ltd will get two shares of C ltd.

CONSOLIDATION

Shares of X ltd and Y ltd will get cancelled since X ltd and Y ltd will cease to exhist through a legal process. All the assets and liabilities of X ltd and Y ltd will be transferred to C ltd. Business of X ltd and Y ltd will be conducted under the name C ltd. All the rights exercisable by X ltd and Y ltd against the third parties will now be exercisable by C ltd against them.

ACQUISITION
# Acquisition is an attempt or a process by which a company or an individual or a group of individuals acquires control over another company called target company. # Acquiring control over a company means acquiring the right to control its management and policy decisions.

ACQUISITION
# It also means the right to appoint (and remove) majority of the directors of a company. # In acquisition, often the target companys identity remains intact. Acquisition of a target company through acquisition of its shares # The most common method is to acquire i.e.
purchase substantial voting capital (i.e. equity capital) of the target company.

ABSOLUTE CONTROL
# This would mean an unfettered right to take any decision. Needless to add that a 100 per cent acquisition of equity shares of a company would give such a control

# However, in such a case, the company cannot become a listed company or continue to be listed company if it was listed earlier.

ABSOLUTE CONTROL
# This can be defined as an ability to get any and all

resolutions passed in the general body meeting of the shareholders

# Most of the important decisions, such as further issue of capital other than a rights issue, buy-back of shares, reduction of capital, delisting of the company, etc., can be taken, only by passing a special resolution.

SUBSTANTIAL ACQUISITION OF SHARES

(A) The existing promoters being dislodged as promoters and the acquirer stepping into their shoes and becoming the promoter. This would be called a successful acquisition. (B) The acquirer managing to acquire more or less the same percentage or a little less percentage of shareholding than the existing promoters, thereby getting fair representation on the board and some say in the management of the target company but not being able to dislodge the existing promoters. This would be a partially unsuccessful acquisition.

SUBSTANTIAL ACQUISITION OF SHARES

(c) The acquirer not managing to get any
substantial percentage of share capital. This would be an unsuccessful acquisition.

Acquisition of a target company through power of attorney, etc.

This is not a commonly used way of effecting acquisition of a company. It could be used only as a short-term tactic, probably as a precursor to the substantial acquisition of shares from existing promoters or a faction of the existing promoters, who, pending the conclusion of Memorandum of Understanding (MOU) to sell their shares to the acquirer, may allow him to vote on their behalf on certain key resolutions.

CASE STUDY: DAICHI SANKYO - RANBAXY

Ranbaxy grew at over 10% in 2007 while Daichi only grew at 4.7%. Daichi, the third largest drug manufacturer of Japan purchased 34.81% of Ranbaxy Lab Ltd. at a negotiated price of Rs. 737. The offer price was 31% over the market price of the Ranbaxy Lab Ltd. Two companies ranked at 15 in the world pharma market. Combination of these two company reached to 56 companies.

DIVESTITURE
Divestiture means an out and out sale of all or substantially all assets of the company or any of its business undertaking/divisions, usually for cash (or for a combination of cash and debt) and not against equity shares. Divestiture means sale of assets, but not in a piecemeal manner. Accordingly, all assets, i.e., fixed assets, capital works progress, current assets and many a times even investments are sold as one lump and the consideration is also determined as one lump sum amount and not for each asset separately. Due to this reason, it is also called slump sale under the Income Tax Act, 1961.

DIVESTITURE
The consideration is normally payable in cash for two reasons:

to pay off the liabilities and secured/unsecured loans. to bring cash into the company for pumping into remaining business or to start a new business.

No part of consideration is payable in the form of equity shares.

DEMERGER
Forms of Demerger: Spin-off Split-up

Split-off

SPIN-OFF
Spin-off involves transfer of all or substantially
all the assets, liabilities, loans and business (on a going concern basis) of one of the business divisions or undertakings to another company whose shares are allotted to the shareholders of the transferor company on a proportionate basis.

In spin-off, the transferor company continues to

carry on at least one of the businesses.

SPLIT UP

Split-up involves transfer of all or

substantially all assets, liabilities, loans and businesses (on a going concern basis) of the company to two or more companies in which, again like spin-off, the shares in each of the new companies are allotted to the original shareholders of the company on a proportionate basis but unlike spin-off, the transferor company ceases to exist.

SPIN-OFF AND SPLIT-UP

In case of both, i.e., spin-off and split-up, the shares of the resulting
company, i.e., transferee company have to be issued to the shareholders of the transferor company in proportion to their shareholding in the transferor company.

Spin-off and split-ups are normally resorted to achieve focus in the

respective businesses, especially if the businesses are unrelated (non-synergistic).

They are used to improve the price earning ratio and consequently,
the market capitalization by demerging not so profitable businesses into a separate company or companies.

EXAMPLE

ABC ltd has three business divisions, A, B and C. A is engaged in textiles, B is engaged in Steel and C is engaged in software. If ABC Ltd transfers the assets, liabilities and business of its division C, i.e. software business to a separate company complying with other conditions mentioned below and continues its other two division A and B. It is a case of Spin off. However if the parent company will transfer all its assets and liabilities of its three divisions to two or three companies and the ABC limited will either remain as a shell company or cease to exist. Then it will be a case of Split-Up.

SPLIT-OFF
A split-off differs from a spin-off in that the
shareholders in a split off must relinquish their shares of stock in the parent corporation in order to receive shares of the subsidiary corporation, whereas the shareholders in a spin off need not do so. For example :- Viacom announced a split off of its interest in blockbuster in 2004. Whereby Viacom offered stock in Blockbuster in exchange for an appropriate amount of Viacom stock.

CARVE-OUT
It is a hybrid of divestiture and spin-off. In carve-out, a company transfers all the assets, liabilities, loans and business of one of its divisions/undertakings to its 100 per cent subsidiary . At the time of transfer, the shares are issued to the transferor company itself and not to its shareholders.

CARVE OUT
Later on, the company sells the shares in parts to outsiders - whether institutional investors by private placement or to retail investors by offer for sale. In case of carve-out, the consideration for transfer of business to a new company eventually comes in the coffers of the transferor company.

CARVE-OUT

Carve-outs are normally used to mobilize funds for core business or businesses of a company by realizing the value of non-core businesses. They are also used to carve out capital hungry businesses from the businesses requiring normal levels of capital so that further fund raising by equity dilution can be restricted to capital intensive businesses sparing the other businesses from equity dilution.

JOINT VENTURES

It is an arrangement in which two or more companies (called joint venture partners) contribute to the equity capital of a new company (called joint venture) in pre-decided proportions. Normally, joint venture partners are limited companies, one or all of them may not be limited companies. The biggest joint venture in India, viz., Maruti Suzuki had the Government of India as one of the joint venture partners.

JOINT VENTURE

Normally, joint ventures are formed to pool the resources of the partners and carry out a business or a specific project beneficial to both the partners but which none of the partners wants to carry out under its own corporate entity for any one of the given reasons:

The venture may be highly risky. Joint venture partners may otherwise be
competitors but may be wanting to collaborate only for a specific project or business.

JOINT VENTURE

Neither of the partners may be willing to dilute

control on their business by accepting funding, especially equity funding, in their own balance sheet. To ensure that management control of the common business or project is shared in the agreed proportion through charter of the joint venture company. To ensure that rewards of the common business or the project are shared in the predetermined ratio without the possibility of manipulation in favour of either side.

JOINT VENTURE-BASIC OBJECTIVES

To obtain distribution channels or raw materials supply. To overcome insufficient financial or technical ability to enter a particular line of business. To achieve economies of scale. To share technology and general management skills in the organization.

REDUCTION OF CAPITAL

This is a legal process under Companies Act, 1956, by which a company is allowed to extinguish or reduce liability on any of its shares in respect of share capital not paid up or is allowed to cancel any paid-up share capital which is lost or is allowed to pay off any paid-up capital which is in excess of its requirements.

REDUCTION OF CAPITAL, WHY?

(A)

By extinguishing or reducing the liability in respect of share capital not paid-up.

# A company may have come out with an issue of capital, wherein shareholders would be required to pay the issue price in stages, as and when called. Before all the calls are made, the project may be over and further funds may not be immediately required.

REDUCTION OF CAPITAL, WHY?

(B) By writing off or cancelling the capital which is
lost. # If a company has been incurring losses for a long
period of time and the accumulated loss has gone beyond the reserves (if any) which it had built in past, it would have actually lost a part of its paid-up capital, i.e., a part of the paid-up capital is no more represented by any real assets. Hence, the company would have been showing the accumulated loss as a fictitious asset on the asset side of the balance sheet and simultaneously would have been showing its paid-up capital at the historical figure.

REDUCTION OF CAPITAL, WHY?

(c) By paying off or returning excess capital that is not required by the company. # A company may have been extremely profitable and thereby, it may be having excess/ surplus cash. In such a case, the company may want to return the excess cash to its shareholders since idle cash will reduce its ROCE and ROE.

REDUCTION OF CAPITAL, WHY?

By returning the excess cash and in process, reducing either the face value of its shares or the number of outstanding shares, it can not only maintain/improve its ROCE and ROE, but also boost its earnings per share, thereby, pushing the market price up. It may also want to effect early redemption of its preference share capital if any.

BUY BACK OF SECURITIES

This is yet another important tool of capital restructuring. If the company is holding excess cash and there is no profitable ventures, then its prudent to return this excess cash to its shareholders. Buy-back of equity shares indirectly increases the promoters stake in the voting (equity) capital of the company without being required to make an open offer and reduces or eliminates the possibility of takeover bid by an outsider.

BUY BACK OF SECURITIES

ABC ltd. has a paid up capital of Rs.100 crore consisting of 10 crore shares of face value Rs.10 each. The promoters are holding 3 crore shares i.e. a stake of 30%.ABC ltd. come with a but back of 25% and reduces the paid up capital to 7.5 crore shares. The promoter's stake will go up to 46.67 per cent. Companies find it prudent to reduce the capital base by either resorting to reduction of capital under sections 100 to 104 of the Companies Act, 1956, or to buy-back its equity (sometimes even preference) shares.

BUY BACK OF SECURITIES

Reasons why a company may still resort to reduction of capital under section 100 to 104 and not buy-back under section 77A:

# Under section 77A, a company can buy-back only 25 percent of its paid-up equity capital in a financial year. If a company wants to effect a larger buy-back, it will have to follow the reduction of capital route.

BUY BACK OF SECURITIES

# In buy-back under section 77A, shareholders may
or may not participate even after passing a special resolution in general meeting. # Other conditions of section 77A, such as, post buyback debt equity of 2:1, buy-back amount not to exceed 25 percent of share capital plus free reserves, are not applicable to reduction of capital under sections 100 to 104.

DELISTING
Delisting of a security is delisting of any of the securities (and not necessarily all) from any of the stock exchanges (and not necessarily all). Delisting of a company as a form of corporate restructuring refers to delisting of its equity shares from all stock exchanges.

DELISTING, WHY?

To reduce costs of maintaining large number of reports and having an expensive work force. To avoid sharing a lot of information in public domain. Promoters delist to make use of the level of freedom that unlisted companies enjoy. MNCs especially delist so that they do not get listed at very low prices due to FERA requirements.