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Corporate Restructuring

Prof Ashish K Mitra

Restructuring can be defined as a strategy by which a firm changes it business or financial structure. Firms use restructuring strategies in response to changes in external & internal environment, to create value for its stakeholders. Business or Operational restructuring refers to outright or partial purchase or sale of companies, businesses ,product lines, or downsizing by closing unprofitable / non strategic facilities. Restructuring can lead to radical changes in composition of the business. Often organizational structure reorganization could be done to improve efficiency, cut costs . Asset restructuring also could be done to improve productivity of assets Financial restructuring refers to actions taken by the firm to change its total debt or equity structure.

The success of GE highlights the importance of restructuring in a competitive business environment. As CEO, Jack Welch during 1981-2001, sold 350 businesses for a total of $23.8 b and acquired some 900 businesses worth $105.5b. Under Welch, restructuring became a continuous process, resulting in greater efficiencies and globalization of operations. In Europe & US, between 1960s & 1990s, diversification to an unmanageable extent led to bureaucratic inefficiencies, plummeting performance and sharp fall in stock prices. As a result many became soft targets for hostile takeovers. Firms often undertook to restructuring to come out of mess.

FORMS of RESTRUCTURING

Expanding operations
Merger & Acquisitions Joint Ventures Tender Offers ( a firm buys controlling interest in another firm) Asset acquisition

Contraction (Sell Offs )


Spin offs (creation of separate legal entity with independent power)
Split offs Split-ups

Divestiture sale of a portion of the firm to a third party Equity Carve-outs

Changes in ownership structure:


exchange offers share repurchase, going private, Leveraged buyouts( LBO) premium buybacks, standstill agreement, anti-takeover amendments proxy contests

Corporate Control:

Merger two or more companies combine into a single company. Merger can take place in either as
an amalgamation : two merging companies after merger loose their individual identity & a new company is formed. This generally applier of firms of some what equal sizes. Eg: merger of Brooke Bond india Ltd with Lipton India Ltd to form Brook Bond Lipton India Ltd. Absorption: Fusion of a smaller company with a larger company. After merger smaller company ceases to exist. Eg ICICI bank & Bank of Madura

Asset Acquistion buying tangible ( like manufacturing unit) or intangible assets ( like brands) of another company. Eg; Laffarge bought cement division of TISCO. HLL bought Lakme brand.

Takeovers are seen as strategy of faster route to growth and expansion of business. A takeover refers to the acquisition of a certain block of paid-up equity capital of a company with the intention of acquiring control over the affairs of the company. After the take over, the target company remains a separate entity ie; it is not merged with the acquirer. Three types of takeovers : negotiated or friendly takeover, Open market or hostile takeover, and bail-out takeover

Tender Offer
In a Tender Offer, a firm which intends to acquire a controlling interest in another firm , basically asks the shareholders of the target firm to submit (tender) their shares in the firm at a given price. Bear Hug approach : in this approach , a company communicates in writing with the directors of target company regarding its acquisition proposal (putting pressure). The directors are required to make a quick decision on the proposal. If the acquiring company does not get the approval of the directors, then it can directly appeal to the stock holders through tender offer.

If the company obtains a favorable response to the tender offer, the acquiring company can gain control over the company and replace the directors who did not cooperate in the takeover effort. This referred as hostile takeover. A target company , to avoid being taken over, may join hands with another company ( referred to as White Knight) with which it would like to form association. Target company can also go for defensive measures against takeover by some form of restructuring such as offering shareholders a large cash dividend financed by debt . Golden Parachute features for top managers in another tactics.

Hostile takeovers / Attempts

Raasi Cement India Cements Arun Bajoria ( Hooghly Jute Mill) Bombay Dying Abhishek Dalmia GESCO Corporation Mahindra Reality & Infrastructure Shaw Wallace Gammon India Oracle vs Yahoo

Sell-Offs
There are two major types of sell-offs
Divestiture : involves the sale of a portion of a firm to a third party. Since the buyer is an existing firm, no new legal entity is created. The two main reason for divestures are the assets being divested are worth more as part of the buyers organization than as part of the sellers or the assets are actively interfering with other profitable operations of the seller.( Sale of TOMCO by Tatas , sale of ITC classic by ITC) Efficiency gains, refocus on wealth transfers and tax reasons could be other reasons for divestures.

Spin-Offs: Spin-Offs results in a creation of a separate legal entity The shares of the new spun-off unit are distributed among the existing shareholders of the parent company on a prorata basis. As a result two publicly held independent company emerge. The new entity has the power to make independent decisions. It can develop policies and strategies which are different from those of parent companies. In spin-offs only shares are transferred or exchanged and no money is transacted.

There are two types of Spin-Offs


Split-offs : existing shareholders receive stock in the subsidiary in exchange for the stocks of the parent company Split-ups: The entire firm is fragmented into a series of spin-offs. The parent company no longer exist.

Spin off , Split ups, Equity Carve outs NIIT -- NIIT Ltd , NNIT Technologies (spin off) Godrej - GCPL, Godrej Industries ( split up) HP--- Agilent Technologies ( equity carve out) GM - Delphi Automotive Component Ford Visteon

Equity Carve-out
Equity carve-out is a variation of divestiture. In this a portion of wholly owned subsidiary of the firm or portion of a firm is sold to the outsiders through an equity offering, giving them ownership of the previously existing firm. Equity carve-out results in a new legal entity. The sale can be made either through a secondary offering by the parent company or through a primary offering by the subsidiary itself.

Restructurings at AT &T during last 25 years Yr


1984 1993 1996 1996 1996 1997 1998

Type

Subsidiary

Effect

Spin off 7 Baby Bells 1 share each bbell for 10 AT&T shr Eqt carveout AT&T Capital 14% eqty sale to public ($10.5m) Divest AT&T Capital sold completely $2.2 b Eqt carvout Lucent Tech 18% public offer ( raised $3b) Spinoff Lucent Tech AT&T sh holder 0.324 Lucent sh Spinoff NCR 0.0625 sh of NCR for 1 AT&T sh Divest Universal card Sold to Citi Corp $3.5 b

As firms Change their strategies, they also need to change the organizational structure Organizational Restructuring
Horizontal structure As firms grow they may need to adopt Multidivisional structure to help in effective allocation of resources, strategic planning, monitoring & controlling Vertical Structure- Forward and backward integration of businesss lead to vertical relationship within a firm.

Numerator and Denominator Management -as


expressed by Hamel & Prahalad

During economic downturns, Two alternatives for maintaining profitability levels: Denominator management reduce head count, stringent cost cutting, reduce investments and sell assets under a denominator driven belt-tightening program Numerator management seeking ways of increasing revenues , improving productivity and increase net profit , rather than the denominator oriented approach of cutting investment and reducing head counts. Hamel & Prahlad say regardless of business cycle, talented CEOs are devoted to adopting numerator driven business strategy.