1

Corporate restructuring
Mergers & Amalgamations and Take overs

Term debt restructuring

Divestments

Demerger


2
Corporate Reorganisations
To create long term holding structures
Cohesiveness in group structure and corporate objectives
Faster growth rate then an organic growth rate
To enter into a new market or grow beyond a saturated market
To capture forward and backward linkages in the value chain
To attain control on a larger fund / manufacturing base / Resources /
Intellectual property rights / patents etc.
To attain or better utilise tax covers
To facilitate distribution of assets and family settlements
To exit non-core business
Valuation of business


3
Forms of Corporate Restructuring
Expansions
- Mergers & Acquisitions
- Tender offers / Take over
- JVs / Asset acquisition

Sell-offs
- Spin offs
- Divestitures / Demergers

Corporate Control
- Share buybacks
- Defence mechanisms

Changes in Ownership structure
- Swaps
- Going private
4
Restructuring - key issues



COMMERCIAL

Scales of Operation
Identify markets
Prioritise resources allocated
LEGAL

Tax,Regulatory
Direct / Indirect
Cost of restructuring
FINANCIAL

Exsisting group networth
Promoter funding / resources
Future funding / internal reqt.

Operational

Managerial bandwidth
Stratergic alliances
Exsisting level of expertise


5
Dilution Management
Rights Renounciation
Preferential allotment of shares to Promoters
Private placement to Promoter group
Issue of convertibles
Creeping acquisition
Share Buyback
Shares with differential rights
Delisting of shares


6
Merger
Defined as the fusion or absorbtion of one Co into another.
It is an arrangement whereby assets of two or more
companies become vested in , or under the control of one
Co.
One of the two existing Co merges its identity into another
existing Co or one or more existing Co may form another
Co.
Allotment of shares will be done in accordance with the
share exchange ratio incorporated in the scheme of merger.
7
Amalgamation
Amalgamation is the process by which two or more
companies are joined together to form a new identity
It is an arrangement to bring assets of two companies
under the control of one which may or may not be one of
the original companies.
For the purpose s of companies act Mergers &
Amalgamations are synonymous.
The former loses its entity and is dissolved without
winding up.
8
Rationale
Low promoter holdings
Market capitalisation lower than book value
Low book values vis-a vis high replacement value
Under performing businesses
Sectoral growth potential
Swift addition of facilities , personnel & processes
Tax efficiency / savings
Diversification
Access to inputs
Defensive considerations
9
Operating or Financial Synergy
Greater pricing power
Combination of functional strengths
Higher growth in emerging markets
Debt capacity increase
Tax benefits
Value of control
Reduced risk resulting in improvement of credit
rating

10

Mergers

Types of merger :

1. Horizontal merger :
Merger of companies in same business segments.

2. Vertical mergers :
Merger of companies which would result in either
backward/forward integration.

3. Conglomerate merger :
Unrelated business

4. Concentric merger



11
Structuring an M & A transaction

- Evaluate options

- Finalise strategy

- Due diligence

- Valuation / Negotiations

- Preparation of a scheme of merger / Amalgamation

- Board meeting / Application to High court

- Notices and General body meeting

- Approval by court

12
Steps in a Valuation
Calculate NOPAT and invested capital
Calculate value drivers
Develop an integrated historical perspective
Analyze financial health

Understand strategic position
Develop performance scenarios
Forecast individual line items
Check overall forecast for reasonableness

Develop target market value weights
Estimate cost of non equity financing
Estimate cost of equity financing


Select appropriate technique
Select forecast horizon
Estimate the parameters
Discount continuing value to present


Calculate and test results
Interpret results within decision context
13
Methods of Valuation
Asset Based Market Based Earning based
Realisable
Value
Adjusted NAV
Replacement
cost
Price/Earning
Price /Book
Value
Current market
price
Discounted
Cash Flow
Earnings
capitalisation
Comparable
multiples
14
Balance sheet approach
Based on NAV & book value
Establishes minimum / floor price at which seller may like
to sell
Method pertinent when value of intangibles is not
significant & business is recently set up
Takes into account amount historically spent & earned and
does not consider future earnings potential and hence is
seldomly used for a going concern
15
Transaction multiples with comparables
Select comparable firms with operational and structural
similarities
Value paid for similar transactions in the industry with
benchmarks
EBITDA capitalised to get appropriate value
Sales / EPS / BV multiples
EV / EBITDA multiple
Conversion of Equity to Debt will reduce EV thereby
improving the EV /EBIDTA multiple

16
Discounted Free cash flows
Forecast free cash flows for the future

Establish discounting factor

Discount free cash flows

PV of future free cash flows would be the capitalised value
of equity
17
Enterprise valuation
Using free cash flow discounting approach determine
value of equity

Determine value of debt outstanding on date


Enterprise value = Equity valuation + Value of debt

EV / EBITDA Multiple measures the degree of dispersion
in an inter firm analysis.( Lower the ratio the better )


18
Ideal methodology for
Businesses which are a going concern

Businesses which posses intangibles such as brand ,
technology,market leadership,goodwill,marketing &
distribution channels etc.

Substantial undisclosed assets

19
It takes into account.
All available free cash flows to stake holders and it takes
into consideration the wacoc and associated risk factors.
Value of core assets gets captured while non-core assets
need to be added separately
Captures incremental capital cost for balancing /
modernisation / expansion with associated benefits.
Intangibles like market share, technological superiority etc
gets factored in while in the other methods of valuation
they are ignored.
20
Shortcomings
The estimation of risk adjusted discount rate for base projects are
difficult to estimate.

The cost of equity is a difficult proposition even with the use of CAPM
as the Beta used to value is an approximation at best.

The WACC for the company changes with time. Estimation of WACC,
which remains valid in the future, is difficult.

Many projects under taken by the company may have embedded real
options.

The value of equity arrived at after the DCF process does not take into
consideration the default option exercisable by the shareholders
21
Asset based Valuation

Fair market value

Realiseable value

Adjusted book value

Replacement cost

Depreciated replacement cost (New price-WDV )

Ideal methodology in the event of liquidation / closure
22
Impact of key variables on value creation
Example: Acquistion of two Thai telecommunications companies
Worst case Expected Case Best case
Net value to buyer
100
27
-50
Economic outlook GDP grows more slowly GDP grows as expected GDP grows faster than
than expected in the next in the next 5 years(3-4% expected in the next 5
5 years(0-1% in reals terms) in real terms) years (5-7% in real terms.
Demand is at low end of Demand meets base case Demand is at hig end
forecast forecast of forecast
Regulation Operational consolidation Operational consolidation Operational consolidation
prohibited allowed allowed
Many new licences issued New licences limited No new licences issued
Royalties to regulatory Royalties to rgulatory Royalties to regulatory
bodies remain bodies remain bodies diminish
Level of Many new entrants to the Few new entrants to the No new entrants to the
Competion market market market
market shares fall after Market shares rise Market shares rise steadily
2-3 years gradually, then stabilize over the next few years
Revenues per subscriber Revenues per subscriber Revenues per subscriber
fall faster than expected falls slowly fall after 2-3 years
23
Exchange Ratios
EPS based
firms could follow different accounting policies

Book value based
historical value of assets may not account for current market
realizations

NAV based
will have to necessitate revaluation of assets

Market price based
average price over a period of time.
only applicable if both the firms are listed
It is based on the discounted value of future earnings incorporating
risk
24
Exchange ratios
Capitalisation rate based
used when firms are not listed or frequently traded
uses EPS as a base with an appropriate PE multiple
has element of judgment attached to it.

Composite based
frequently used methodology
combination of above methods with weights for each
multiple regression model
weights can be highly subjective
25

Bid Range


Valuation range



- Return criteria

- Other bidders

- Vision of future value

- Other acquisition opportunities

- Defensive considerations

- Financing constrainst

- Buyers long-term objectives

- Dilution







26
Transaction structure
Upfront 100% Exit
Phased exit
Continual holding with minority rights
Continual holding with majority rights

27
Shareholders agreement
Earn out mechanism for loss of value
ROFR with tag / drag along
Asset stripping
White knight structuring of powers / rights / obligations
Board representation
Voting arrangements / management control
Estoppel powers
Affirmative rights for specific items
Put / call options between inter-se holders
Post closing adjustments
Raising of Capital



28
Value drivers
Effects of regulatory framework
Market leadership
Synergies in capacity imbalances
Business fit
Brand acquisition / withdrawal
Backward / forward integration resulting in integration of
operations
Prevent shake out effect
Barrier to entry
High replacement cost
29
Value Discharge
Earn out mechanism
Profit from current year other revenues
Cash
Debt discharge
Liability guarantee take over
Issuance of shares of new company
Asset sale
Sale of Brands

30
Valuation of intangibles
Brands including brands of goods and corporate names
Publishing rights

Intellectual property patents, copyrights, trademarks

Licenses distribution rights, franchises
31
Special valuation situations
Valuation of cyclical firms


Valuation of firms in financial distress


Valuation of thinly traded/illiquid shares
32

Legal & Regulatory framework for Mergers,
Acquisitions and Takeovers

- Companies act 1956 & 2000

- FEMA

- Income tax act, 1961

- SEBI guidelines

- FIPB guidelines



33
M&A under Companies act
Provisions contained under sections 390 to 396A contain the following :

1. There should be a scheme of arrangement

2. Holding a meeting of shareholders in terms of
direction of the high court.

3. Scheme to be approved by 75% in value of creditors
and shareholders.

4. Application to Court for scantion of scheme.Courts order
binding on all but appeal able in a superior court.

34
Scheme of Amalgamation
1. Effective date.
2. Capital structure of the transferor & transferee co.
3. Share exchange ratio
4. Transfer of undertaking and liabilities and continuance of legal
proceedings by the transferee co.
5. Transfer of contracts , services of employees
6. Allotment date of transferee co shares
7. Dissolution of transferor co.
8. Conditions subject to which the scheme is to take effect.



35
Statutory Approvals
Approval of board of directors
Approval of shareholders and creditors
Approval of Financial institutions
Approval of Land owners
Approval of the High court
Approval of RBI
Notice to Central Government
36
SEBI Take over code
Acquirer must disclose to Company / stock exchange upon acquisition of
5% of shares.

Public offer mandatory once acquirer acquires more than 15% of the
companys shares

Public offer at 6 months average or 2 weeks which ever is higher.

Minimum 20% of the voting capital must be acquired from the public

Upward revisions in price /quantity can be made upto 7 days prior to the
closure of the offer.

In a PSU disinvestments a subsequent Put / call option will not trigger a
public offer if it is a part of SHA.

37
SEBI Take over code

The date of opening of the offer shall be within 16 days of the public
announcement and shall remain open for a period of 30 days.

In a PSU disinvestments public offer will have to be at the offer price by
SP to Govt. or last 6 months weekly average which ever is higher.

Counter offer within 21 days

Persons acting in Concert broad definition

Maintaining of Escrow cover and security deposits with the Merchant
bankers

Creeping acquisition upto 5% per annum will not trigger take over code
from 15% to 75%.
38
Taxation Aspects
Benefit u/s 72 A of carry forward & set off of accumulated
loss and unabsorbed depreciation allowed in the event the
transferee co holds for a minimum period of 5 years 75% of
the value of the assets and continues the business of the
amalgamated co also for a period of 5 years.

Capital gains tax not applicable since it does not involve sale
, relinquishment or exchange.

Amortisation of preliminary expenses allowed

Tax aspects on slump sale

39

Asset purchase: Pros

- Enables acquisition of identified assets only

- Enables purchase of depreciable assets at high value, therby
getting future tax shields

- Enables keeping off undesirable liabilities

- Need not absorb all employees

- Less due diligence

- Buyer can create a suitable SPV, does not have to put up with
shareholders of the selling company.


40

Asset purchase: cons


- Tax inefficient for the seller

- Capital gains long term on non depreciable assets, could be
short term on depreciable assets

-Further taxation, when the proceeds are distributed to
shareholders as dividends (10% distribution tax)

- High transaction costs
- Stamp duty (conveyance)
- Sales tax, in certain cases

- Shareholder and lender consent required
41

Share purchase: pros


- Immediate acquisition of an operating business

- Tax efficient for the seller (long term capital gains with
indexation)

- Lowest transaction costs (0.5% stamp duty, no sales tax)

- Quicker in terms of third party approvals

- Consideration flows to shareholders directly


42


Share Purchase: cons

- Buyer inherits all liabilities (disclosed and contingent)

- Buyer inherits all manpower

- A stricter and detailed due diligence

- In case of purchase of shares in a listed entity, takeover code
will get triggered in case of acquisition.

- Buyer has to put up with other shareholders of the company
43
Funding corporate acquisitions
Direct balance sheet financing by acquirer

Thru a SPV with cross holdings

Consortium of firms acting in concert as acquirers

Combination of all cash / all stock / hybrid

Objectives of share holders of acquiring firm differ from
those of acquired firm

44
Funding corporate acquisitions equity
stock financing route
Acquirer issues stock of his firm
Cash outflows are prevented
Ideal for companies in the sunrise industry or for firms with high
growth prospects who have yet to generate cash
Dilution of EPS and shareholding of the existing shareholders will take
place
As compared to debt tangible, cost being dividend does not increase
the fixed cost
Synergetic benefits must pay for enhanced equity servicing as well as
the PE multiple of the merged entities must not fall which could
signify value destruction
Risks as well as value from synergies will be shared by the share
holders of both the firms
45
Equity stock financing
In the event acquiring firms shares are perceivably under valued then it
may be in efficient to the acquirer firm as its cost of acquisition will
increase


Will have an impact on the market perception of the acquirer firm and
could result in destruction of value as compared to a all cash
transaction

Provisions of NBFC not applicable for SPVs created for acquiring
PSU shares under the Disinvestment policy of GOI.
46
Cash financing
Entail heavy out flow of cash upfront ( PSU divestment )
Synergetic benefit must pay for interest cost.
Long term / medium term instruments
Impact of dilution of earnings due to interest burden
Impact on credit rating / debt appetite of acquirer
Use of warrants / debentures / convertible bonds
Sale of assets of not related business segment
In event of excessive liquidity short term sources could be deployed
Leveraging group companies through a SPV
May be in efficient to the share holders of the acquired firm due to tax
liabilities

47
Transaction Strategy



Identify and review
stakeholder objectives
Structure a controlled
and competitive
process
Devise and implement
the sale strategy
Timing and Confidentiality
Value expectations
Management control and
other strategic
considerations
Structuring considerations
in terms of tax, legal and
regulatory issues
Strategic fit with Company
Employee concerns

Release of Advertisement
Approach potential
partners with limited
information and solicit
preliminary interest
Identify further shortlist
required, to proceed with
comprehensive due
diligence, solicit binding
bids, negotiate and select
successful bidder
Review list of potential
partners
Maintain information
control, process and timing
Create and maintain
competitive tension
Minimise disruption of
business operations
48
Transaction Methodology
PHASE 1 PHASE 2 PHASE 3 PHASE 4 PHASE 5
4 weeks 4 weeks 6 weeks 4 weeks 3 weeks
Receipt and
evaluation of
binding bids
Recommendation
Winning bidder
selection
Preliminary
interest by
potential partners

Review list of
potential partners


Circulate
Confidentiality
Undertaking and
Information
Memorandum
Define Objectives
Transaction
Structuring
Valuation
Documentation
Others
Release of
Advertisement
Circulate due
diligence visit
rules
Data room and
site visits
Circulate Draft
Share
Purchase
Agreement
Pre-bid
conference
Agreement
Signing

Statutory
Approvals

Closure
49
Transaction Methodology Phase 1

Definition Valuation Documentation Others
Transaction
structuring
Restructuring, if
required
Objectives
Maximise
proceeds
Attract
funds/technology
Mktg./Ops
expertise
Transparency
Employee Welfare
Size of stake to
be offered
Fund
requirements
Management
control / other
strategic issues
Employee
issues
Regulatory
issues
Discussions with
management and
info collection
Business
valuation of
companies
Sensitivity
analysis for
transaction
structuring
Assess optimal
capital structure
Finalise
Investment
Profile
Confidentiality
Undertaking
Information
Memorandum
Draft Share
Purchase Agr.
Assist in
Agreements
Regulatory
Prepare Data
Room
Finalise
technical and
financial bid
evaluation
criteria
Draft rules
for site visits
and due
diligence
50
Transaction Methodology
Phase 3 Phase 4 Phase 5


Shortlist, if
required
Circulate
Confidentiality
Undertaking
Circulate IMs
and due
diligence rules
on receipt of
Confidentiality
Undertaking
Co-ordinate due
diligence
Manage data
room, site visits
Circulate draft
Share Purchase
Agreement
Pre-bid
conference &
supply of addl.
information
Finalise Share
Purchase
Agreement
Co-ordinate and
receive final
bids
Evaluate bids
Assist in
negotiations
Choose the
partner(s)
Complete legal
formalities such
as obtain
approvals and
sign
Agreements
Transfer of
funds
Issue and / or
transfer shares
to partner(s)
Marketing Shortlisting Due-diligence
Selection
Signing
Release
advertisement


Follow up with
calls/mailers and
one-to-one
meetings

Receive
preliminary bids
51

Price Earning Ratio
Valuation Comparison with Management control
Sale of Shares Strategic Disinvestment

1991-99 2000 onwards
1. IOC = 4.9 1. BALCO = 19
2. BPCL = 5.7 2. CMC = 12
3. HPCL = 5.9 3. HTL = 37
4. GAIL = 4.4 4. MFIL = very high *
5. VSNL = 6.0 5. LJMC = - do -
(in monopoly days) 6. PPL = - do -
7. JESSOP = - do -
8. IBP = 63
9. VSNL = 11 **
10. HZL = 26
11. MARUTI = 89
12. IPCL = 58

* As earning per share was negative.
** inclusive of income from dividend etc. (after the end of monopoly)