Pillai Institute of Management Studies and

Research (PIMSR),
New Panvel

Master of Management Studies (MMS)

(Batch : 2022 – 2024)

1
 MMS - Semester – III
Subject : Corporate Valuation and Mergers &
Acquisitions (CV & MA)

Chapter - 11 : Alternative Business

Restructuring Strategies

Lecture date: 7.12.2023

by
Dr. K.G.S. MANI

2
Lecture date : 7.12.2023
Chapter –11: Alternative Business Restructuring Strategies
(1) Definition of Business Restructuring (or) Corporate
Restructuring:
The Business Restructuring (or Corporate restructuring) is a
comprehensive process by which a company can consolidate/split
up its business operations and strengthen its position for
achievement of its short term and long term corporate objectives.
‘Corporate Restructuring’ is also known as ‘Business Restructuring’.
The concept of Corporate Restructuring is defined as under:
(i) According to author Sander, “Restructuring is an attempt to
change the structure of an institution in order to relax some or all
of the short run constraints. It is concerned with changing
structures in pursuit of a long run strategy”.
(ii) Goldberg defined, “restructuring of a company as, “a set of
discrete decisive measures taken in order to increase the
competitiveness of the corporate and thereby to enhance its value.

3
(2) Meaning of Business Restructuring:
Business Restructuring (or) Corporate Restructuring means re-
organisation of business to create new synergies to face the
competitive environment and changed market conditions. The
aspects relating to expansion or contractions of a company’s
operations or change in its aspect or financial or ownership
structure are known as corporate restructuring. It involves major
organisation changes such as shift in corporate strategies.
Restructuring can be internally in the form of new investments in
plant and machinery, production processes, research and
development of products, hiving-off of non-core businesses,
divestment, sell-off, de-merger, etc. Restructuring can also take
place externally through amalgamation, mergers, acquisition, take-
over and also by forming Joint-Ventures, and having Strategic
Alliances with other companies. The corporate structuring also
include leveraged buyouts, management buyouts.

4
(3) Financial implication of Corporate Restructuring:
The financial implications of restructuring are as follows:
(i) The resources of all the companies are pooled up to effect
economies in production, marketing and financial management.
(ii) Securing required amount of loans from banks.
(iii) Cutting down cost of production.
(iv) Improvement in productivity and profitability.
(v) Concentration on core competence of the merged company.
(vi) Utilisation of financial resources.
(vii) Improvement of managerial effectiveness.

5
(4) Types of Business Restructuring (Corporate Restructuring)
The following are various types of business restructuring :
(i) Joint Ventures (page-9)
(ii) Strategic Alliance (page-15)
(iii) Demerger (page-)
(iv) Divestitures (Disinvestment) (page-)
(v) Spin-offs (page-)
(vi) Hive-Offs (page-)
(vii) Split-ups (page-)
(viii)Sell-off (page-)
(ix) Equity Carve out (page-)
(x) Buy-outs (Management Buy-Out, Leveraged Buy-Out) (page-)

6
(5) Types of Business Restructuring (individually explained):
(5)(i) Joint Ventures (JV):
(i) Definitions of JV :
(6) Joint Venture (often abbreviated JV) as “an entity formed between
two or more parties to undertake economic activity together. The
parties agree to create a new entity by both contributing equity,
and they then share in the revenues, expenses and control of the
company. The Venture can be for one specific project only, or a
continuing business relationship. This is in contrast to a strategic
alliance, which involves no equity stake by the participants, and is
much less rigid arrangement”.

(2) Levin has defined a Joint Venture as “a new firm formed to achieve
specific objectives and temporary arrangement between two or
more corporates (firms). JVs are advantageous as a risk reducing
mechanism in the new-market penetration, and in pooling of
resource for large projects. They however, present unique
problems in equity ownership, operational control, and distribution
of profits (or losses)”.
7
(3) In the words of Cary and James “A Joint Venture is contractual
agreement joining together two or more parties for the purpose of
executing a particular business undertaking. All parties agree to
share in the profits and losses of the enterprise”.

(ii) Meaning of Joint Venture (JV):

(1) Joint Venture (JV) is a classic type of strategic alliance between
two or more companies.
(2) It is entered into by executing a shareholders agreement to
promote and incorporate a company by subscribing to the shares
in agreed proportion to start the business.
(3) JV is a new corporation formed through participation of two or
more companies in an enterprise in which each party contributes
assets, owns the equity in agreed proportion and shares the risks
and benefits of the new enterprise.
Example: Maruti Udyog Ltd and Suzuki of Japan entered into the firat
Joint Venture business in public sector in 1982.

8
(iii) Benefits of Joint Venture:
A successful JV provides the following benefits :
(1) Provide the companies with the opportunity to obtain new capacity
and expertise.
(2) Efficient commercilisation of new technology.
(3) Combining complementary Research & Development.
(4) Developing or acquiring marketing or distribution expertise.
(5) Sharing the professional competence and unique skills.
(6) Allow companies to enter new geographic markets.
(7) Have a relatively short life of 5 to 7 years and therefore, do not
represent a long-term commitment.
(8) Improving access to the financial resources for both JV partners.
(9) Share of economic and business risks and rewards (profits).
(10)Acceleration of revenue growth, ability to increase profit margins.
(11) New product development.
(12)Tax advantages are a significant factor in many JVs.

9
(iv) Joint Venture Companies in India (examples) :
The following are examples of Joint Venture business in India.
(1) Suzuki Motor Corp. first entered the Indian market in 1982, when
it started a joint venture with Maruti Udyog Ltd, an Indian state-
owned firm. Despite many ups and downs.
(2) Hero-Honda Ltd (two wheeler mfg Co)
(3) Tata-AIG Insurance Co. Ltd
(4) HDFC Standard Life Insurance Co. Ltd.
(5) ICICI Lombard General Insurance Co. Ltd.
(6) Avantika Gas Ltd (JV of GAIL and HPCL)
(7) Indian Oil Corporation Ltd and Petronet (Gas) Ltd.

10
(6) Strategic Alliances:
(i) Meaning of Strategic Alliance:
(7) A ‘strategic alliance’ is defined as associations to further the
common interests of the members.
(8) Any arrangement or agreement under which two or more business
firms (companies) operate jointly in order to achieve certain
commercial objectives while remaining independent entities. This
is known as ‘strategic alliance’.
(9) In strategic alliance, two or more companies unite to pursue a set
of agreed upon goals, remain independent, subsequent to the
formation of an alliance.
(10)It is an alliance between companies, whereby resources,
capabilities and core competencies are combined to pursue
common and mutual interests.
(11)The motives behind strategic alliances is to reduce cost,
technology sharing, product development, market access,
availability of caital, risk sharing.

11
(6) Strategic alliance agreement contains the terms like capital
contribution, infrastructure, sharing of risk and return.
(7) Mutual understanding and trust are the basic tenets of ‘strategic
alliance’.
(8) For smooth functioning of an alliance, the alliance companies are
required to have preset priorities and expectations from each other.
(ii) Forms of Strategic Alliances:
(i) Franchising (Bata, coco-cola gave francising to manufacture coke in
India, Pathanjali has given to Divya Pharma)
(ii) Licensing of technology
(iii) Licensing of patent/trade mark/design (Pharmaceutical companies)
(iv) Management Control
(v) Agreement to provide technical services (companies in India
operate under technology transfer agreement from foreign companies)
(example : Siemens India) (Siemens is a German Co.)
(vi) Marketing or Distribution Agreement (LG, Sony, etc, foreign
companies enters into agreement with Indian companies for marketing
and distribution of their products in the Indian market).
12
(iii) Examples of Strategic Alliance:
(1) ICICI Bank and Vodafone India: A strategic alliance
example in India is of ICICI Bank, India's largest private sector
bank and Vodafone India, one of India's largest telecom service
providers, entered into a strategic alliance to launch a unique
mobile money transfer and payment service called 'm-pesa‘.
(2) Bank of India and SIDBI : Bank of India and Small Industries
Development Bank of India (SIDBI) have entered into a strategic
alliance and signed an Memorandum of Understanding (MoU)
which formalises a comprehensive arrangement to boost credit
flow to the small and medium (SME sector).
(3) Asian Paints, the largest paint-maker in India, acquired a strategic
stake in Singapore-based Berger International in 2002.
(4) Marketing Strategic Alliance : Pfizer and Biocon : To market
Biocon’s insulin bio-similar products in world markets.
(5) Manufacturing Strategic Alliance : GSK – Dr. Reddy Labs: The
Indian company will manufacture nearly 100 products mainly under
GSK brand name for sale in some emerging markets.

13
(7) Demerger :
(i) Meaning of Demerger:
(8) The demerger is also called as ‘spin-off’ or ‘hiving-off’
(9) Demerger is not just opposite to the term ‘merger’.
(10) It is a form of restructuring (re-organisation) where business
activities owned by one company or group are separated out into
several companies or groups.
(11) Each business will usually have the same ultimate ownership as
before.
(12) This refers to a situation, where an undertaking is separated and
transferred to a separate company and decided to run into as an
independent unit from the earlier company.
(13) For strategic reasons, a conglomerate is splitted into two or more
independent separate companies and assets are transferred to
such companies.
(14) For example, XYZ Co. Ltd carries on business of textile, cement,
and chemical. If textile unit is not doing well, it may be split-off
into a separate company to have sharp focus.
14
(ii) Example of Demerger :
Case Study : (to be done by students)
Demerger of DCM Limited :
The scheme of demerger scheme had become effective from 1.4.1990.

DCM Limited, promoted by late Shri Ram in 1889, has become a

conglomerate of 13 units with multifarious manufacturing activities in
sugar, textile, chemicals, ryon type cord, fertilisers and so on. These
units on their own being of the size of independent companies, the
Directors felt that greater focus on the operation of the various unit
of the company would result in substantial improvement in the
results of their operations. The post-organisation slogan would be
“The trimmer we are, The faster we are”.

On the basis of various discussions, meetings, consultations

between the members of the Board of Directors, Investment Bankers
(consultants), financial institutions and Banks, it was decided to take
appropriate steps to carry on the business of various units

15
 more effectively and efficiently in the large interests of the
shareholders, debenture-holders, creditors, employees and in the
general public interest (investors). To achieve the objective of
carrying the business of DCM Limited more smoothly and
profitably. DCM Limited was organised by dividing its business
among four companies having shareholders with the same interest
and, to be managed and operated independently, as per the
scheme of Demerger approved by the Board of Directors. The
following companies were formed under ‘Demerger Scheme’

(i) DCM Limited, comprising DCM Mills (DCM Estate), DCM

Engineering Products, DCM Data Products, Hissar Textiles Mills, Sri
Ram Fibres Limited and DCM Toyota Limited.

(ii) DCM Shri Ram Industries Limited, comprising Shri Ram

Rayons, Dauria Sugar Works, and Hindon River Mills Ltd.

(PTO)
16
(iii) DCM Shri Ram Consolidated Limited, comprising Shri Ram
Fertilisers and Chemicals Industries Ltd, Shri Ram Cement Works
Ltd, Swatantra Bharat Mills Ltd, and DCM Silk Mills Limited.

(iv) Shri Ram Industrial Enterprises Limited, comprising Shri Ram

Food and Fertilisers Ltd, and Mawana Sugar Works Limited.

17
(8) Divestitures (or) Divestment :
A divestiture is a sale of a portion of investment of a company
(firm) to another company or investors outside. The company that
sells a part receives the payment in cash, marketable securities, or
a combination of both. It results in infusion of cash to the selling
company. A company may choose to sell an undervalued
operations/assets that is considered as non-strategic or unrelated
to the core business and to use the proceeds of the sale to fund
investments in the potentially higher return opportunities.
Divestitures are simple exit routes and do not result in the creation
of a new company. They involve simultaneous contraction (of the
selling company) and expansion (of the buying company). The
primary reasons for divestitures areas follows:
(i) Certain (saleable) assets do not contribute to the company’s
profits, rather, they put extra pressure on its resources.
(ii) Divesting the excess assets can help a company to focus on its
remaining assets, thereby increasing the overall efficiency of the
company. (Recent example : (i) BPCL divestment (disinvestment)
and (ii) LIC)
18
Examples of Divestiture (or) Disinvestment:
(i) TATA Steels Limited have divested 4 businesses in Europe to bring
down their financial commitments substantially. They are
(1) Electrical Steel manufacturing Unit in Sweden, (2) An
aluminum roofing business in Germany, (3) A steel coating unit
in UK, (4) A metal manufacturing company in Turkey. These
divestments would help TATA Steel to bring their financial
commitments in these foreign entities to Rs 90,000 crores.
(ii) Govt. of India divested its stake in Life Insurance Corporation of
India and made a Private Sector Insurance Company.
(iii) Central Govt has initiated the process of disinvesting its stake in
Bharat Petroleum Corporate Limited(BPCL).

19
(9) Spin-off :
In the case of ‘Spin-Off’ a part of the business is separated and
created as a separate company. The shares of the newly created
company are distributed on a pro rate basis to the existing
shareholders of the parent company. Such a distribution enables
the existing shareholders to maintain the same proportion of
ownership in the newly created company as they had in the
original firm. As a sequel, the newly created company becomes an
independent company, taking its own decisions and developing its
own policies and strategies, which need not necessarily be the
same of those of the parent company. In brief, the new company
acts as a separate business entity. The management of the spun-
off division is however parted with. Spin-off does not bring fresh
cash. The reasons for spin-off are as follows:
(i) Separate identify to a part/division.
(ii) To avoid the takeover attempt by a predator by making the
company unattractive to the hostile company, since a valuable
division is spun-off.
(iii) To create separate Regulated and unregulated line of business.
20
Examples of Spin-off :
(i) Kotak Mahindra Capital Finance Limited, formed a subsidiary
company called Kotak Mahindra Capital Corporation, by spinning-
off its Investment Division.
(ii) Kishore Biyani led Future Group to spin-off its consumer durable
business, Ezone, into a separate company in order to maximise
value from it.

21
(10) Hive-off :
Hiving –off is a process wherein an existing company sells a
particular division to reduce unproductive expenditure. It also helps
the company to reap the benefits of core competencies,
competitive advantage and optimum capacity. Examples of hiving–
off are as under :
(i) Modern Woollen Mills hived-off its yarn manufacturing division to
Modern Threads Co. Ltd;
(ii) Dollops of Cadbury to Hindustan Unilever Ltd (HUL);
(iii) Kissan and Dipy brands of UB Group to HUL;
(iv) Dr. Reddy’s Laboratories, Sun Pharma, Nicholas Piramal
companies, hiving-off their Research & Development Divisions.

22
(11) Split-ups:
A variation of ‘spin-off’ is the ‘split-up’. Split-up involves breaking
up of the entire company into a series of spin-offs (by creating
separate legal entities). The parent company no longer legally
exists and only the newly created companies exist/survive. For
example, a corporate firm has 4 divisions namely, A, B, C, D. All
these 4 divisions shall be split-up to create 4 new corporate firms
with full autonomy and legal status. The original (parent) company
is to be wound up. Since de-merged companies are relatively
small in size, they are logistically more convenient and
manageable. Therefore, it is understood that spin-off and split-up
are likely to enhance shareholders value and bring efficiency and
effectiveness.
Examples:
(i) Philips, the Dutch conglomerate that started making light bulbs 123
years ago, has split-up its lighting business to expand its high-
margin healthcare and consumer divisions. The new structure
enabled Philips Company to save Euros 100 million in 2015 and
Euros 200 million in 2016.
23
(ii) Split-up example:
Erstwhile, Andhra Pradesh State Electricity Board (APSEB) was
split in 1999 as part of the Power Sector reforms. The power
generation business, transmission and distribution business were
transferred to two separate companies called APGENCO and
APTRANSCO respectively. Subsequently, APSEB ceased to exist as
a result of ‘split-up’.

(11) Sell-off :
A sell-off is the sale of an asset, factory, division, product-line or
subsidiary by one company to another for a purchase consideration
payable either in cash or in the form of shares (securities).

Example:
DLF Limited completed the sale of its Luxury Hotel Unit – Aman Resorts
to another company – Peak Hotels & Resorts Group for USD 360
million in the year 2014.

24
(12) Equity Carve-out:
(i) Equity carve-out is defined as a partial spin-off in which a
company creates its own new subsidiary and subsequently bring
out its Initial Public Offer(IPO).
(ii) The parent company retains its control and only a part of new
shares are issued to the public or to a strategic investors.
(iii) An equity carve-out enables the parent company to generate
cashinflow which can be used for further investments.

Examples: (i) Maharashtra State Electricity Board divided into two

companies namely, (i) Electricity Generation Co. and (ii) Electricity
Supply and Distribution Company.

25
(13)Buy-Outs :
Buy-outs constitute yet another form of corporate restructuring. In
the corporate world, buy-outs (Management Buy-Outs) are the
more usual modes of acquisition. There are two types of Buy-outs:

(i) Management Buy-Out (MBO):

Management Buy-out is sale of the existing company to the
management. The management may be from the same company
or may be from outside (entrepreneurs) or may assume a hybrid
form (i.e. management may be from the existing company as well
as from outside).

(ii) Leveraged Buy-Out (LBO):

Leveraged buy-out implies acquisition of a company that is
financed principally by borrowing on a secured basis. In cases
when debt forms a substantial part of the total financing from
outsides, the buy-out transaction is referred to as “Leveraged Buy-
Out” (LBO). To ensure the success of LBO, it is imperative that the
26
 acquiring management should carry out the exercise to determine
the maximum level of debt to be borrowed based on capacity to
service the debt in future. This exercise would enable the
company to determine the maximum degree of financial leverage.

Examples of Buy-Outs:
(i) Tata Steel and Corus Steels (largest manufacturer of steel in UK), is
a classic example of Leveraged Buy-out.
(ii) Another example of leveraged buy-out was the acquisition of
Tetley (UK) (largest producer of tea in UK) by Tata Tea Ltd (which
was done in 2000 by RK Krishna Kumar who died yesterday
(2.1.2023). It was the biggest deal at that time in 2000.

27
THANK YOU

28