Module 5

Corporate Finance
Abin Mathew
Asst Professor
Marian Academy of Management Studies
Business Valuation
A business valuation is a general process of
determining the economic value of a whole
business or company unit. Business valuation
can be used to determine the fair value of a
business for a variety of reasons, including
sale value, establishing partner ownership,
taxation, and even divorce proceedings.
Owners will often turn to professional business
evaluators for an objective estimate of the
value of the business.
Business Valuation
Methods of Valuation
 Historical Cost
 Current Cost
 Economic Valuation
 Asset Valuation
 Market Valuation
Business Valuation
Methods of Valuation
 Historical Cost Valuation

Also known as the Book Value Method. All

assets are taken at their respective historical
costs. Value of goodwill is ascertained and
added to such historical cost of assets.
Business Valuation
Methods of Valuation
 Current Cost Valuation

Current cost of assets are taken for valuation purposes,

instead of historical costs.
1. Tangible assets:- current replacement price is taken
2. Investment:– valued at current market prices,
unquoted investments are taken at cost, unless MP
determined
3. Inventory:– current market prices

4. Debtors:- net collection / realizable amount.

5. Intangibles:– current acquisition prices.

Business Valuation
Methods of Valuation
 Economic Valuation (Income based)

Fundamental logic behind the concept is that

values of business are determined by its
profitability (present and future) and cash
generation ability. There are three
techniques
Capitalization method 
Profit Earning Capacity Value
Discounted Cash Flow 
Business Valuation
Capitalization method:- past profits (3-4 yrs.)
are capitalized at a proper rate of return, as
applicable to the company and the industry.
Profit Earning Capacity Value:- similar to
capitalization method, except that future
maintainable profits are considered for
capitalization.
Discounted Cash Flow:- value of business is
the present value of all future cash flows. Better
method, since it considers time value of money.
Business Valuation
Methods of Valuation
 Asset based Valuation

This method is used in combination with

profitability and market value methods.
While valuing assets under this approach,
total assets are divided into operating and
non-operating assets.
Non-operating assets are valued at realizable
value, while operating assets are valued at
their book values.
Business Valuation
Methods of Valuation
 Market Valuation

Applicable for listed companies, where share

price is determined by market forces. Average
price is selected for valuation purposes
 Comparative companies

Certain parameters of comparative companies

are used for valuation. This method is more
used for negotiation, rather than valuation.
Business Valuation
Approaches
 Cost Approach
 Market Approach
 Income Approach
Business Valuation Approaches
 Cost Approach
Measure the value of an intangible asset by taking into
account all relevant occurring costs and investments
related to the appraised asset
Historic costs:- accounting all costs directly related to the
appraised asset 
Replacement costs:- valuing the costs for buying an asset
bringing the same utility than the appraised one
Reproduction cost:- valuing the costs induced in creating,
at the time of the appraisal, a similar asset based on actual
knowledge Cost approach is generally used in situations of
high uncertainty and limited information exist
Business Valuation Approaches
Market approach
Value consists in the price of a comparable
asset in a similar market transaction.
Market approach relates to the quantification
and adjustment of pricing multiples in order to
create theoretical comparable conditions.
Lack of active and transparent market for
Intellectual Property transactions and market
dynamics have to be taken into account in the
process
Business Valuation Approaches
 Income approach
It measure the value of an intangible asset by
reference to the expected and actualized benefits,
incomes or saved costs over the remaining life of the
asset.
Such prospective-based quantification of financial
flows needs to take into account various risk-related
factors such as.
Endogenous:- Extend of IP protection, nature of
competition, …
Exogenous:-Substitute product development risks,
maturity of market, …
 Corporate Restructuring
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.
 Corporate Restructuring
Forms of Corporate Restructuring
 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 another company without giving
proportionate ownership to the shareholders’ of the
acquired company or without continuing the business of
the acquired company.
Corporate Restructuring
Forms of Merger
 Horizontal Merger:- Acquisition of a

company in the same industry in which the

acquiring firm competes increases a firm’s
market power by exploiting
 Vertical Merger:- Acquisition of a supplier or

distributor of one or more of the firm’s goods

or services
 Conglomerate Merger:- Acquisition by any

company of unrelated industry

Corporate Restructuring
Forms of Corporate Restructuring
Acquisition may be defined as an act of
acquiring 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.
Corporate Restructuring
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.
Corporate Restructuring
Motives of Corporate Restructuring
 Limit competition.

 Utilise under-utilised market power.

 Overcome the problem of slow growth and

profitability in one’s 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.
Corporate Restructuring
Motives of Corporate Restructuring
 Utilise under-utilised resources–human 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.
Corporate Restructuring
Legal Procedures for merger and acquisition
 Permission for merger
 Information to the stock exchange

 Approval of board of directors

 Application in the High Court

 Shareholders’ and creditors’ meetings
 Sanction by the High Court

 Filing of the Court order

 Transfer of assets and liabilities Payment by

cash or securities
Amalgamation
Definition 
Amalgamation is an arrangement wherein the
assets and liabilities of two or more companies
get vested in another company (which may or
may not be the original Companies) and which
would have as its shareholders substantially
all the shareholders of the amalgamating
companies.
Amalgamation
Amalgamation (Eg)
 Company A and Company B comes to an
arrangement wherein they agree that the entire
assets and liabilities of Companies A and B
shall vest in Company C, which is newly
incorporated. Post amalgamation, Company C
shall have substantially all the shareholders of
Company A and Company B. 
Amalgamation
Legal Procedures
1. Any Company, creditors of the Company,
any class of them, members or any class of
them can file an application under Section
391 seeking sanction of any scheme of
compromise or arrangement. While filing an
application under section 391 or 394, the
applicant is supposed to disclose all
material particulars in accordance with the
provisions of the Act.
Amalgamation
Legal Procedures (Cont.)
2. Upon satisfying that the scheme is prima facie
workable and fair, the Tribunal order for the
meeting of the members, class of members,
creditors or the class of creditors as the case
may be. Rather, passing an order calling for
meeting, if the requirements of holding
meetings with class of shareholders or the
members, are specifically dealt with in the
order calling meeting, then, there won’t be any
subsequent litigation.
Amalgamation
Legal Procedures (Cont.)
3. The scheme must get approved by the
majority of the stake holders viz., the
members, class of members, creditors or
such class of creditors. The scope of
conduct of meeting with the members, class
of members, creditors or such class of
creditors will be restrictive somewhat in an
application seeking compromise or
arrangement.
Amalgamation
Legal Procedures (Cont.)
4. There should be due notice disclosing all
material particulars and annexing the copy of
the scheme as the case may be while calling
the meeting.
5. In a case where amalgamation of two
companies is sought for, before approving the
scheme of amalgamation, a report is to be
received from the registrar of companies that
the approval of scheme will not prejudice the
interests of the shareholders.
Amalgamation
Legal Procedures (Cont.)
6. The Central Government is also required to
file its report in an application seeking
approval of compromise, arrangement or
the amalgamation as the case may be
under section 394A.
7. After complying with all the requirements, if
the scheme is approved, then, the certified
copy of the order is to be filed with the
concerned authorities.
Acquisition
Definition
When one company takes over another and
clearly established itself as a new owner , the
purchase is called an acquisition
Acquisition
Types of Acquisition
 Friendly acquisition
 Reverse acquisition
 Back flip acquisition
 Hostile acquisition
Acquisition
 Friendly acquisition
Both the companies approve the acquisition
under friendly terms.
 Reverse acquisition

 A private company takes over a public

company.
 Back flip acquisition

 The purchasing company becomes a

subsidiary of the purchased company.
Acquisition
Hostile acquisition
Here, the entire process is done by force. 
Difference between M & A
 Meaning
In Mergers, Fusion of two or more companies
voluntarily form a new company
In Acquisition, When one entity purchases the
business of other entity.
 Formation of new firm

In Mergers, there is a formation of new firm

In Acquisition, there is no formation.
Difference between M & A
 purpose
In Mergers, the main purpose is decrease
competition & increase operational efficiency In
Acquisition, the major purpose is for instantaneous
growth
 Size of business

Size of merging companies is more or less same

 In Acquisition, Size of the acquiring company is

bigger than acquired company

 No. of companies involved

In merged companies 3 and in acquisition there is 2

Memorandum of Understanding
A memorandum of understanding is an
agreement between two or more parties
outlined in a formal document. It is not legally
binding but signals the willingness of the
parties to move forward with a contract.
Memorandum of Understanding
Key Points
 A memorandum of understanding is a document

that describes the broad outlines of an agreement

that two or more parties have reached.
 MOUs communicate the mutually accepted

expectations of all of the parties involved in a

negotiation.
 While not legally binding, the MOU signals that a

binding contract is imminent.

 The MOU is most often found in international

relations.
Memorandum of Understanding
Objectives
The statement that the parties are currently
negotiating.
Clarifying the key points of an operation for the
convenience of the parties.
Assess the interest of the other party to carry out
the business.
Collect the advances that occur in each of the
negotiations.
Provides guarantees if the deal collapses during
negotiation.
Memorandum of Understanding
Contents
 Name of the Project
 Name of the parties and their responsibilities
 Length of the agreement
Memorandum of Understanding
Elements
 An Offer
 Acceptance of the Offer
 Legally binding intention
 Consideration
Memorandum of Understanding
Advantages
 An MOU allows for the establishment of a

mutual intention. It enables each party’s

goals and objectives to be clear.
 The finalization of an MOU allows for having

a paper trail or records of the terms that have

been in the negotiations leading towards
finalization.
Memorandum of Understanding
Advantages(Cont.)
 MOUs reduce the levels of uncertainty between

the involved parties because the document

usually highlights the expectations and objectives
and prevents possible future disagreements.
 An MOU provides ease of exit, as any party that

finds the objectives and goals not being met can

easily end the agreement.
 Because the MOU already outlines objectives and

terms, the document can serve as the foundation

for a possible future contract.
Disinvestment

Disinvestment is the action of an organization

or government selling or liquidating an asset or
subsidiary. Absent the sale of an asset,
disinvestment also refers to capital
expenditure reductions, which can facilitate
the re-allocation of resources to more
productive areas within an organization or
government-funded project.
Disinvestment

Key Points
 Disinvestment is when governments or

organizations sell or liquidate assets or

subsidiaries.
 Disinvestments can take the form of

divestment or a reduction of capital

expenditures.
 Disinvestment is carried out for a variety of

reasons, such as strategic, political, or

environmental.
Disinvestment
Objectives
 To release the large amount of public resources

locked up in non strategy Public Sector

Enterprises and redistribution of these
resources in areas of higher social important
such as basic health, family welfare, primary
education and essential infrastructure and
reducing the public debt.
 Preventing further outflow of scarce public

resources for maintaining the unviable non

strategic public sector enterprises
Disinvestment
Objectives (Cont.)
 Transferring the commercial risk of public sector

to private sector
 Releasing the large manpower locked up in the

public sector enterprises and redeployment of

these human resources to high priority sectors
that are short of it
 To ensure market disciplines among the private

company by forcing them to become more

efficient and to manage their business in a
professional manner
Disinvestment
Objectives (Cont.)
 To facilitate wider distribution of wealth

through offering of shares of privatized

companies to small investors and employees
 To provide better quality of product and

services to the costumers

 To generate more employment opportunities

and increase tax revenues for building a

strong economy