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: 09BS0000682 Nisha Rani: 09BS0001458
y Introduction y Economic rationale of Corporate
Restructuring. y Types of Mergers. y Debt Restructuring. y Expansions And Tender Offer. y Sell Offs , Spin Offs and Divestiture. y Legal aspects and accounting aspects. y Conclusion
y Corporate restructuring is the process of redesigning
one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction. Here are some examples of why corporate restructuring may take place and what it can mean for the company.
Economic Rationale of Corporate Restructuring
Types of Corporate Restructuring
Integration of Existing Companies
Restructuring of Existing Companies with or without split-up of Balance Sheet
Through Transfer of Assets Mergers (Amalgamation) Absorption, Consolidation
Through Transfer of Equity Acquisition Takeover
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Exchange Offers. Going Private. Joint Venture y Contraction: Sell offs. Proxy Contests y Changes in Ownership Structures: Leveraged Buyout.y Expansion: Mergers. Divestitures. Share Repurchases. Acquisitions. Equity Carve outs y Corporate Control: Takeover Defenses. Takeovers. ESOPs. Spin offs. Split offs. Tender offer. Split ups. MLPs (Master Limited Partnerships) .
government incentives. unabsorbed depreciation.g. sales and excise duty benefits y Utilization of surplus funds y Managerial effectiveness y Diversification y Lower financing costs y Earnings growth etc.y Strategic benefit: competition. entry. . Technology and Marketing y Tax benefits: accumulated losses. risk and cost reduction y Complementary resources: e.
y Concentric Mergers. y Conglomerate Mergers. . y Vertical Mergers.y Horizontal Mergers.
y Number of firms in an industry will be reduced due to Horizontal Mergers and this may lead firms to Earn huge monopoly profits. .y A Type of Merger occurred when two companies competing in the same line of Business Activities. y Horizontal mergers are regulated by government for their negative effect on competition. y The Effect on the Market Would be Either Large or a little to No Effects.
It refer to a situation where a product manufacturer merges with the supplier of Inputs or Raw Materials.y A Merger between two companies producing different y y y y goods or services for one Specific Finished Products. y Balanced Vertical Mergers. y Forward Vertical Mergers. Cost Reduction and Minimization Of Transportation cost. . Three Types Of Vertical Mergers y Backward Vertical Mergers. Also Known as ³Vertical Foreclosure´.
Synergy and Cross Selling. . Exp: the Merger between Walt Disney company and the American Broadcasting Company. Pure and Mixed. Two Types of Conglomerate mergers.e. The main reason behind this kind of Merger are increasing Market Share. They also Merged to diversify and reduce their risk Exposure.y A Merger Between Firms that are involved in totally y y y y unrelated business activities . i.
y In short combining two or more businesses in order to pool expertise. y A Merger between a Motorcycle Manufacturer and an Automobile Manufacturer would be an Example. . y Example: Citi Group buying Salomon Smith Barney.y A type of merger where the two companies coming together to share some common expertise that may posses mutually advantageous. The Common Expertise may be Managerial or Technological Know How that may not be Industry or Product Specific.
y Debt restructuring is a process that allows a private and public company or a sovereign entity facing cash flow problems and financial distress. y Debt Restructuring is court ordered or mutual agreement. to reduce debts. and/or conversion of a portion of debt into equity. . y Debt restructuring may involve debt forgiveness.y Definition: y A method used by companies with outstanding debt obligations to alter the terms of the debt agreements in order to achieve some advantage. debt rescheduling.
This move has helped IDBI to save substantial amount in interest cost over the rest of the life of bonds. IDBI issued Flexi-bonds in 1996 with a coupon rate of about 16%.5%. y For example.y A company will often issue callable bonds to allow them to readily restructure debt in the future. So. . the interest rates fallen considerably to be able to borrow at about 11.5%. IDBI exercised a call option in 2001 and raised the funds at 11. Later.
For example. creating an equal amount of equity. thereby recapitalizing the bank. Debt-for-equity swap may also be called a bondholder haircut. .y Debt restructuring is usually less expensive and a preferable y y y y alternative to bankruptcy. a 20% haircut would reduce its debt. Debt-for-Equity Swaps: In a debt-for-equity swap. Converting debt to equity via bondholder haircuts presents an elegant solution to the problem . in case of a large US bank. a company's creditors generally agree to cancel some or all of the debt in exchange for equity in the company.
B Separate y Takeover y Tender offer y Asset Acquisition y Joint Venture Hostile (A¶ + B¶) . Total Assets y Merger y Amalgamation or Consolidation y Absorption y Acquisition (A + B = A) (A + B = C) A. Balance Sheet.y Expansion: Growth in Size.
In a tender offer. For example. the bidder contacts shareholders of target company directly. subject to the tendering of a minimum and maximum number of shares. open offer or invitation. Mittal Steel announced a tender offer to the shareholders of Arcelor steel . usually announced in a newspaper by a prospective acquirer (bidder) to all stockholders of a publicly traded company (target company) to offer their stocks for sale at a specified price during a specified time.y Tender offer is a public.
y Tender offers may be friendly or unfriendly. When securities are offered in a tender offer it is called as an exchange offer. .y To attract the shareholders of the target company to sell. Cash or other securities may be offered to the target company's shareholders. SEBI laws require any company or individual acquiring 5% of a company to disclose information to the SEBI. the acquirer's offer price usually includes a premium over the current market price of the target company's shares. the target company and the exchange.
y Current stockholders.y A tender offer may be made by a firm to its own shareholders to reduce the number of outstanding shares. The shareholders who accept the tender offer make a significant profit on their holdings and the acquirer gains control of the company . or it may be made by an outsider wishing to obtain control of the firm. can accept or reject the offer. Alternatively. y A tender offer may be made by the company's management in a bid to prevent a hostile takeover. it may be a made by an outside company as part of a hostile takeover. individually or as a group.
split ups. y Sell offs is a generic term and under it. divestitures. operational. These activities allow the firm to maximize shareholder¶s value by redeploying assets through contraction and downsizing of the parent company.y Sell offs are the form of contraction or downsizing activities undertaken by the companies as a part of corporate restructuring. labor. profits. various forms exist such as spin offs. split offs. y There are various considerations to sell offs such as economic. synergy etc. equity carve outs etc. tax. capital redeployment. .
y Wealth Transfers: Sell offs may transfer the wealth from debt holders to the shareholders. This may be taken in a positive sense and boost share price. y Information effects: Announcement of sell offs can be seen as change in investment strategy or in operating efficiency. it is better to sell off wholly or in part.Rationale for Gains to Sell offs y Efficiency gains and refocus: A particular business may be more valuable to someone that will be paying higher price. y Tax Reasons: When company is making loss and is unable to use tax-loss carry forward. .
y Typically parent corporation distributes on pro rata basis. y No money generally changes hands y Non taxable event y as long as it jumps through substantial hoops . all the shares it owns in subsidiary to its own shareholders.
Company A without Subsidiary B Subsidiary B Shareholders own shares of combined company. . Own the equity in subsidiary implicitly.
.Company A after spinoff New company B Shareholders receive Shares of company B Old shareholders still own shares of company A. which now only represent ownership of A without B.
no money (necessarily) comes into the parent company as a result y No shares (or assets) of the subsidiary are sold to the market (IPO) or to acquirer (divestiture) y Distribution in most instances is tax free .y Spin offs are a distribution of subsidiary shares to parent company shareholders y As such.
RCVL RCoVL REVL GFML .
y Selling assets. divisions. subsidiaries to another corporation or combination of corporations or individuals .
Company A without Subsidiary B Subsidiary B Company C .
securities or assets as consideration Old Sub B Company C .Company A w/o subsidiary B Cash.
y Selling corporation typically receives consideration for the assets sold y cash y securities y other assets y Divestitures are typically taxable events for selling corporation (new basis for purchaser) y Example of Divestiture: JLR .
Substantial Acquisition of Shares and Takeovers. Regulation 1997 Accounting Aspects y Pooling Method y Purchase Method .M&A ± Legal aspects and Accounting aspects Legal Aspects y Company Act. 1956 y SEBI.
y Merger regulation needs to evaluate the trade-off between reduction in competition and potential gains in economic efficiencies. foreign firms pose a competition to domestic firms. Mergers can lead to big firms. . y With globalization.M&A: Legal Aspects y Mergers lead to reduction in the number of players in the market. which may discourage new entrants. This has an adverse impact on customers and public interest by increasing price and reducing customer service. Regulatory system must take into account these things.
y The Supreme Court of India in the judgment of HLLTOMCO merger has said that: ³In this era of hypercompetitive capitalism and technological change.M&A: Legal Aspects y Economic reforms initiated in year 1991. Since then number of M&As are increased. The harsh reality of globalization has dawned that companies which cannot compete globally must sell out as an inevitable alternative. industrialists have realized that mergers/acquisitions are perhaps the best route to reach a size comparable to global companies so as to effectively compete with them.´ .
amalgamation and disputes will be transferred to µNational Companies Law Tribunal (NCLT). 1956: y Prepared by the companies which have arrived at a consensus to merge. y As per the Companies (Amendment) Act. 2002.Companies Act Compliance under the Companies Act. the powers of the high court relating to reduction of capital. y Respective Board of Directors of companies are required to approve the scheme of amalgamation/merger.¶ .
y Intimation to stock exchange about proposed amalgamation/merger y Application to NCLT for directions y NCLT directions for members¶ meeting y Companies shall submit for approval of amalgamation/merger to the Registrar of the respective NCLTs.Companies Act y Approval of the scheme by financial institutions. banks/trustees for debenture holders. .
Companies Act y Notice to the members/shareholders. y Shareholders¶ general meeting and passing the resolution y Dissolution of transferor company y Transfer of assets and liabilities y Allotment of shares to shareholders of transferor company y Listing of shares at stock exchange y Post-merger secretarial obligations .
y It was amended and in 1997. in many cases.SEBI. . Substantial acquisition of shares and takeover Regulation was created. Takeover Code was introduced. y SEBI guidelines relating to ESOPs do not permit grant of ESOPs to the promoters. (In foreign countries. the management increases its holding by granting stocks at a low cost or no cost). This regulation has undergone several amendments. Substantial Acquisition of Shares and Takeovers Regulation y In 1994. latest 2006.
intimate the target company and the stock exchange Public offer for minimum 20% of voting capital Public offer price: Higher of the average price (average of daily high and low) for last 6 months or last two weeks Public offer to be managed by SEBI registered merchant banker .SEBI. Substantial Acquisition of Shares and Takeovers Regulation Salient features of Takeover Code of India as When holding crosses 5% and 15% of voting capital.
. shareholders do not have a proportionate share in the equity. shareholders¶ interests and business of companies y Amalgamation in the nature of purchase: when one company is acquired by other company. business not continued. liabilities.Accounting for Mergers and Acquisitions y Amalgamation in the nature of merger (combining): Combining of assets.
Method of Accounting for Amalgamation y The Pooling of Interest Method: Combines assets. No goodwill. y The Purchase Method: Combines assets and liabilities at their existing carrying amounts or by allocating the purchase consideration on the basis of their fare value . reserves at their existing carrying amounts. liabilities. nor capital reserves arise in this case.
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