Corporate Restructuring

Meaning
Corporate restructuring refers to the changes in
ownership, business mix, assets mix and alliances
with a view to enhance the shareholder value.

Hence,

corporate

restructuring

may

involve

ownership restructuring, business restructuring and

assets restructuring.

Forms of Corporate Restructuring

1) Merger or Amalgamation
Merger or amalgamation may take two forms:

Absorption

Consolidation

In merger, there is complete amalgamation of the assets

and liabilities as well as shareholders interests and

businesses of the merging companies.
There is yet another mode of merger. Here one company

may

purchase

proportionate

another

ownership

company
to

the

without

shareholders

giving
of

the

acquired company or without continuing the business of the

Forms of Corporate Restructuring (cont..)

Forms of Merger
(1)Horizontal Merger
Acquisition of a company in the same industry in which the acquiring
firm competes increases a firms market power by exploiting

(2) Vertical Merger

Acquisition of a supplier or distributor of one or
more of the firms goods or services

(3) Conglomerate Merger

Acquisition by any company of unrelated industry

Forms of Corporate Restructuring (cont..)

Acquisition

acquiring

may be defined as an act of

effective

control

over

assets

or

management of a company by another company

without

any

combination

of

businesses

or

companies.
A substantial

acquisition occurs when an

acquiring firm acquires substantial quantity of

shares or voting rights of the target company.

Forms of Corporate Restructuring (cont..)

Takeover The term takeover is understood to connote
hostility. When an acquisition is a forced or unwilling
acquisition, it is called a takeover.
A holding company is a company that holds more than half
of the nominal value of the equity capital of another
company, called a subsidiary company, or controls the
composition of its Board of Directors. Both holding and
subsidiary companies retain their separate legal entities
and maintain their separate books of accounts.

Motives of Corporate Restructuring

Limit competition.
Utilise under-utilised market power.
Overcome the problem of slow growth and
profitability in ones own industry.
Achieve diversification.
Gain economies of scale and increase income
with proportionately less investment.
Establish a transnational bridgehead without
excessive start-up costs to gain access to a
foreign market

Motives of Corporate Restructuring (Cont..)

Utilise

under-utilised

resourceshuman

and

physical and managerial skills.

Displace existing management.
Circumvent government regulations.
Reap speculative gains attendant upon new
security issue or change in P/E ratio.
Create an image of aggressiveness and strategic
opportunism, empire building and to amass vast
economic powers of the company.

Legal Procedures for merger and

acquisition

10

Legal Process of Merger &

Acquisition

Process (Cont)
Approval of
Merger

Sanction by High
Court

Information to
stock Exchange

Shareholders &
Creditors meeting

Approval of
Board of
Directors

Application in
High Court

Process (Cont)
Filing of Court Transfer of Assets
Order
& Liabilities

Payment By cash
or Securities

Methods of Valuation
Discounted Cash flow Method

In order to apply DCF technique, the

following information is required:

Estimating Free Cash Flows
Revenues

and expenses
Cor.tax and depreciation:
Working capital changes

Estimating the Cost of Capital

Terminal Value

Calculation of financial
synergy
(1) Pooling of Interests Method:
In the pooling of interests method of accounting,
the balance sheet items and the profit and loss
items of the merged firms are combined without
recording the effects of merger. This implies that
asset, liabilities and other items of the acquiring and
the acquired firms are simply added at the book
values without making any adjustments.

Calculation of financial synergy

(cont..)
Company X

Company y

After Merger

Share Capital

200

240

= 440

Fixed Assets

150

170

= 320

Liabilities

250

200

= 450

Current Assets

250

120

= 370

Particulars

After merger both balance sheet will be combined is

called pooling of interest method

Calculation of financial synergy

(cont..)
(2) Purchase Method
Under the purchase method, the assets
and liabilities of the acquiring firm after the
acquisition of the target firm may be stated
at their exiting carrying amounts or at the
amounts adjusted for the purchase price
paid to the target company.

Company X

Company X

Share Capital

200

240

Fixed Assets

150

170

Liabilities

250

200

Current Assets

250

120

Particulars

If you paid for the company X Rs. 100 than the value of firm is
equal to
Firm value = Total Assets total liabilities

150

= 400-250

So share capital is shown at Rs.100. and Rs.50 is shown as

Divestiture
A divestment involves the sale of a companys
assets, or product lines, or divisions or brand to
the outsiders.
It is reverse of acquisition.

Motives:
Strategic change
Selling cash cows
Disposal of unprofitable businesses
Consolidation
Unlocking value

Strategic Alliance
A strategic alliance is a voluntary, formal
arrangement between two or more parties to pool
resources to achieve a common set of objectives
that

meet

critical

independent entities.

Example -

needs

while

remaining

Joint Ventures
A joint venture (JV) is a business agreement

in which parties agree to develop, for a finite

time,

a new entity and

new assets by

contributing equity. They exercise control over

the

enterprise

and

consequently

revenues,
and assets
ICICI GROUPexpenses
INDIA
PRUDENTIAL
GROUP

share

Sell-off
When a company sells a part of its business to a

third party, it is called sell-of.

It is a usual practice of a large number of

companies to sell-off to divest unprofitable or less

profitable businesses to avoid further drain on its
resources.
Sometimes the company might sell its profitable

but non-core businesses to ease its liquidity

problems.

Spin-off
When a company creates a new company

from the existing single entity, it is called a

spin-of.
The spin-off company would usually be
created as a subsidiary.
Hence, there is no change in ownership.
After the spin-off, shareholders hold shares in
two different companies.

Employee Stock Ownership

An employee stock ownership plan (ESOP) is an

employee-owner scheme that provides a company's

workforce with an ownership interest in the company.
In an ESOP, companies provide their employees with
stock ownership, often at no cost to the employees.
Shares are given to employees and may be held in an
ESOP trust until the employee retires or leaves the
company. The shares are then sold.
E.g. First company introduce ESOP is Inforsys.

Leverage Buy-out (LBO)

A leveraged buy-out (LBO) is an acquisition of a company in which

the acquisition is substantially financed through debt. When the

managers buy their company from its owners employing debt, the
leveraged buy-out is called management buy-out (MBO).
The following firms are generally the targets for LBOs:
High growth, high market share firms
High profit potential firms
High liquidity and high debt capacity firms
Low operating risk firms

The evaluation of LBO transactions involves the same analysis as for

mergers and acquisitions. The DCF approach is used to value an LBO.