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Corporate Restructuring:

Meaning
It is a process by which an

organisation drastically alters its


capital structure, asset mix and
organisation for increasing the
firms value and performance

Reasons for Capital


Restructuring
Globalisation
Liberalisation
Privatisation
Development in IT
Core Competence
Rationalisation
Economy of Scale
Diversification

Takeover of Sick
Companies
Strategic Tax
Planning
Reduction of Cost of
Capital
Competition
Supply Chain
Management

Methods of Restructuring
Merger/Amalgamatio

Master Limited

n
Consolidation
Acquisition
Take-over
Joint Venture
Divestiture
Leveraged Buy-out
Management Buy-out

Partnership
Employee Stock
Ownership Plans
Strategic Alliance
Holding Company
Reverse Merger
Pyramiding

I Merger/Amalgamation
It is a process by which one firm acquires

assets and liabilities of another firm in such a


way that the latter firm ceases to exist e.g.
HDFC Bank & Centurion Bank of Punjab in
2008
It is cheaper and less time consuming and
procedure ridden than than buying individual
assets
It must be approved by either 2/3 majority or
majority

II Consolidation

It is a business combination by

which both the acquiring firm


and acquired firm lose their
identities and create a new firm
E.g. Centurion Bank and Bank
of Punjab creating Centurion
Bank of Punjab in 2007

III Acquisition
It is a process by which one firm purchases

substantial percentage of shares of another


firm from the open market or directly from the
shareholders through a tender offer
The target company or its promoters or its
managers do not come into the picture
No formalities need be fulfilled by the target
company
It is between the Acquiring Firm and the
shareholders of the Target Company

IV Take-over
It is a process by which control of a corporate

is transferred from one group of promoters to


another group
Cash or securities may be paid for the
transfer
A newly elected Board of Directors
E.g. ADAG (Anil Dhirubhai Ambani Group)
taking over Adlabs in 2007 from the promoter
Manmohan Shetty

V Joint Venture
It is a form of business combination in which

two different firms contribute financial,


production, organisation/marketing skills to
form a new company or to carry out a
particular economic activity
E.g: Bharti Televenture has a JV with Nokia for
its network maintenance, another JV with
Nokia for marketing the handsets of Nokia,
and another JV with RIM for marketing Blue
Berry Mobiles

Rationale/ Motive for JV


Entry into New

Reaching Global

Markets
Sharing Technology
Complementary
Products or Services
Distribution Network
Meeting Competition
Carrying Out a
Specific task

Markets
Organising Skills
Brand Equity
Sharing Research
Facilities
Sharing a License

Joint Ventures in India


Pre-2000

Post-2000-Success Story

A few JVs like Godrej-

Automobiles

Proctor & gamble failed


in India
Attempt to kill the brands
of the partner
Family Politics and the
JVs interference
Each partner had an
ultimate objective
contrary to that of the JV

Consumer Electronics
Telecommunication
Insurance
Pharmaceuticals
Hospitality
Space Technology
Information Technology

VI Divestiture
Divestiture is the sale of a segment of a

company to a third party.


The segment may be assets, product lines,
subsidiaries or divisions
The sale may be for cash or securities

Motives/Objectives/Ratio
nale
Prejudice of Investment Analysts
Managerial Efficiency
Managerial Remuneration
Strategic Tax planning
Changing Economic Environment
Increased Market Spanning
More Focussed Merger

Methods of Divestiture
A. Sell-off
B. Spin-off
C. Split-Up
D. Equity Carve-Out

A. Sell-Off
It is a sale of part of the firm to a third party
The shareholders of the selling firm do not get

either cash or securities


The selling company receives cash usually for
the sale
E.g. L&T selling its cement division to Grasim
Industries of AV Birla Group which was named
as Ultratech Cement later

Advantages of Sell-off
Better Liquidity
Concentrating on Core Business (Tata Steel

selling its cement division to La Farge)


Improving Profitability
Increasing Efficiency
Reducing Business Risks

B. Spin-Off
It is a process by which a division or

department is converted into a separate


company
Shareholders get the equity shares in the new
company created
It is done for better accountability and also
profitability accounting
Indiabulls Financials spinning of Indiabulls Real
Estate in 2007, and again Indiabulls Securities
in 2008

Rationale/Reasons for
Spin-Off
Core Competence
Enhancing Responsibility
Profit Center
Protection of Crown Jewels in case of a Hostile

Take-over
Government Regulation
Dividing Family Business
Shedding Unwanted Activities

Disadvantages of Spin-off
Loss of Economy of Scale
Higher Overheads
Reduced Ability to Raise funds
No Benefit of Diversification
No Benefit of Synergy
Lower Turnover and Profitability

C. Split-Up
It is a process by which a single company is

divided into two or more companies without


any company being a subsidiary
Shareholders get the shares in all the
companies created
Advanced Micro Devices(AMD) split into two
companies in October 2008 for Designing and
Manufacturing

D. Equity Carve-out
Equity Carve-out is the sale of shares of a

subsidiary company by the Holding company


for getting additional cash
Cash is available only to the Holding Company
and not to the shareholders
Venture Capital and Private Equity have
contributed to a major extent to the Equity
Carve-out Deals

VII Leveraged Buyout


LBO is , the acquisition, financed largely by

borrowing, of all the stock, or assets of a


hitherto public company by a smll group of
investors-Weston

Stages of LBO operation


A. First Stage: Raising Funds
B. Second Stage: Creating an Shell Company or
an
SPV and Transferring the Funds raised
C. Third Stage: Purchasing the Shares or Assets
D. Fourth Stage: Putting the Taken-Over
Company on Track
E. Fifth Stage: Taking the Company Public againSecond IPO

VIII Management Buy-Out


MBO is a process by which the substantial

part of the shares of the company are


purchased by the Executives of the company
from the promoters
When the promoters are planning to sell a
firm, the managerial personnel may buy the
same from the promoters

Differences between LBO &


MBO
LBO

MBO

Outside Firm Purchases

Executives of the same

SPV is Created
Shareholders lose the

share
Another set of Promoters

manage the company

company purchases
No SPV is created
Only Promoters sell the
shares
Mangers and Promoters
become one and the
same

IX Master Limited
Partnership
It is a type of limited liability partnership

where the limited liability portion of the


partnership interests are divided into units
and traded just like equity shares
It enjoys the limited liability of a company and
also unlimited existence and at the same time
getting the tax treatment of a partnership

Categories of MLP
Roll Up MLP: Combination of two or more

partnership into one publicly traded partnership


Acquisition MLP: An MLP offering units to the
public with a view to using the proceeds to buy
assets for the MLP
Liquidation MLP: MLP formed out of the
liquidation of a corporate
Roll-Out MLP: MLP formed by exchange of
operating assets of a corporate for the units of
an MLP

Advantages of MLP
Tax Advantage
Converting a Corporate into an MLP for easier

decision making
The benefits of a corporate like limited liability
and Unlimited existence
Best Suited for Professionals
No limitation of partnership like limited
existence

X Employee Stock
Ownership
Plan
ESOP is a stock bonus
plan investing primarily
in the securities of the employer firm
In India, it is known as Employee Stock
Options
It is in the form of options convertible into
equity shares of the employing company in
the future
They are provided to attract talents at the top
managerial positions and to get their loyalty

Benefits of ESOPs
Attracting Managerial Talent
Getting the Loyalty
Giving Ownership Interest to the Managers
Helping MBO in the future
Executive Compensation Plan
Inducing the Mangers to perform well

XI Strategic Alliance
It is an agreement among two or more firms

to co-operate in order to achieve a


commercial objective
In the form of JV, Franchising, Supply
Agreement, Purchase Agreement, Marketing
Agreement, Technology Supply Agreement,
Technical Support Agreement etc.
Based on trust and preset priorities

XII Holding Company


It is a company that has controlling interest in

another company. It owns majority of shares in


another company, which is called the
subsidiary company

Holding Company
Advantages

Disadvantages

Independent Operation
Separate Profit Center

No economy of Scale
More Overheads

Better Accountability
Quick Decisions

Lacking Synergy

Independent Valuation in

the Financial Markets


Core Competence

XIII Pyramiding
Establishing a large number of holding companies

and subsidiaries with crossholdings for easier


ownership of a large number of companies with a
limited amount of funds
Involves buying a company and using its cash
reserves to take over a second company and
using the cash reserves and borrowings of second
and third companies to take over a third company
E.g. Manu Chabrias Jumbo Group taking over
Dunlop, Shaw Wallace, Nihon Electronics etc with
only a limited capital
Financially Imprudent and Dangerous