Corporate Restructuring

Unit 8
Chapter 29
Restructuring - Concepts

 Restructuring the assets and liabilities of corporations, including their debt-to-equity

structures, in line with their cash flow needs in order to.
 Promote efficiency,
 Restore growth,
 And minimize the cost to tax payers
 Activities related to
 Expansion/ contraction of a firms operation
 Changes in its Assets or Financial or Ownership structure
 Changes in corporate control
Forms of Corporate Restructuring

 Merger / amalgamation
 Acquisition / take over
 Financial restructuring
 Divestiture / demerger
 Buy-outs
Merger versus Consolidation

 Merger
 One firm is acquired by another
 Acquiring firm retains name and acquired firm ceases to exist
 Advantage – legally simple
 Disadvantage – must be approved by stockholders of both firms
 Combining of two business entities under common ownership
 One party almost always dominates
 Consolidation
 Entirely new firm is created from combination of existing firms
Acquisitions
 A firm can be acquired by another firm or individual(s) purchasing
voting shares of the firm’s stock
 Tender offer – public offer to buy shares
 Takeover implies the acquiring firm is larger than the target
 Reverse takeover if the target is larger than the acquirer
 Stock acquisition
 No stockholder vote required
 Can deal directly with stockholders, even if management is unfriendly
 May be delayed if some target shareholders hold out for more money –
complete absorption requires a merger
Types of mergers

 Horizontal mergers
 Vertical mergers
 Conglomerate mergers
 And combinations of these
Horizontal mergers

• Involves two firms that operate and compete in the same market
• A horizontal merger results in the consolidation of firms that are direct rivals—that is, sell
substitutable products within overlapping geographic markets.
• Nepali Example: NIC Bank and Bank Of Asia
Vertical Mergers

• The merger of firms that have actual or potential buyer-seller relationships

Or
• Occurs between two companies when firms are in different stages of
production
• Example: Pharmaceutical company-One may be expertise in Research
and Development and another in production, Cable operator Comcast’s
acquisition television network NBC. Time Warner-TBS; Disney-ABC
Capitol Cities; Cleveland Cliffs Iron-Detroit Steel; Brown Shoe-Kinney,
Ford-Bendix
Conglomerate mergers

 Consolidated firms may sell related products, share marketing and

distribution channels and perhaps production processes; or they may be
wholly unrelated
 Product extension conglomerate mergers involve firms that sell non-
competing products use related marketing channels of production
processes.
 Examples: Cardinal Healthcare-Allegiance; AOL-Time Warner; Phillip
Morris-Kraft; Citicorp-Travelers Insurance; Pepsico-Pizza Hut; Proctor &
Gamble-Clorox
Motives and Benefits of Mergers and Acquisitions (M&A)

 Argument: Benefit of Economic of Scale from two large companies

 However: What about small firms that merged horizontally
Some questions

 Why do firms decide to merge at a particular point?

 Why do they choose merger than internal growth?
Regulated
 It may create monopoly power on part of combining firms enabling it to engage into
anticompetitive practice
Mergers and Acquisition Trends in Nepal

 started in the year 2004 till 2011

 with the merger of Laxmi Bank and Himalayan Saving and Finance Company
(HISEF)
 board provision of Company Act and Bank and Financial Institution Act (BAFIA)
 five cases of merger
Introduction of Merger bylaw 2011

 banking crisis in between 2011 and 2012

 2012 to 2015- 35 merger cases
 huge amount of investment in Real estate sector
 Above 50 percent was turned to be non-performing loan
 important tools with the aim to enhance the capital base, strengthen the resilience
and achieve operational efficiency
8 billion capital requirement for Commercial
bank
 Period 2016 to 2019 -69 merger cases
 Commercial bank –from 2 billion to 8 billion
 Deadline mid July 2017
 right issue, bonus share issue and FPO
Leveraged Buy-Outs (LBO)

 The existing management buys the firm from the shareholders and takes it private.

 If it is financed with a lot of debt, it is a leveraged buyout (LBO).

 The extra debt provides a tax deduction for the new owners, while at the same time turning
the pervious managers into owners.

 This reduces the agency costs of equity.

Divestures

 Divestiture – company sells a piece of itself to another company

 Equity carve-out – company creates a new company out of a subsidiary and then sells a
minority interest to the public through an IPO

 Spin-off – company creates a new company out of a subsidiary and distributes the shares
of the new company to the parent company’s stockholders
Business Failure

 Business failure occurs due to different reasons.

 While few firms fail within first year or two of life, few others grow, mature and fail much
later.
 The failure can occur in a number of ways and also from different reasons
Major Causes of Business Failure

 An imbalance of skills within the top level.

 A chief executive who dominates a firms operations without regard for the inputs of peers
 An inactive board of directors. The board of Directors lack of interest in the financial
position of the company may lead to insolvency.
 A deficient finance function within the firm’s management.
 The absence of responsibility for the chief executive officer.
Reason of failure

 Vulnerable to several mistakes,

 Management may be negligent in developing effective accounting system
 The company may be unresponsive to change
 Management may be inclined to undertake an investment project that is disproportionately
large relative to firm size. If the project fails the probability of insolvency is greatly
increased.
 Finally the management may rely heavily on debt financing that even a minor problem can
place the firm in a dangerous position.
Types of Business Failure

 Insolvency
 returns are negative or even low
 losses at operational level
 Technical Insolvency
 Unable to pay its liabilities as they become due
 liquidity crisis
 Bankruptcy
 assets are less than the liabilities
 negative shareholder’s equity
 Courts treat technical insolvency and bankruptcy in the same way