INTRODUCTION TO CORPORATE RESTRUCTURING

Corporate restructuring is one of the most complex and fundamental phenomena that management confronts. Each company has two opposite strategies from which to choose: to diversify or to refocus on its core business. While diversifying represents the expansion of corporate activities, refocus characterizes a concentration on its core business. From this perspective, corporate restructuring is reduction in diversification. Corporate restructuring is an episodic exercise, not related to investments in new plant and machinery which involve a significant change in one or more of the following attern of ownership and control

Composition of liability !sset mix of the firm. "t is a comprehensive process by which a co. can consolidate its business operations and strengthen its position for achieving the desired ob#ectives: $a% &ynergetic $b% Competitive $c% &uccessful "t involves significant re'orientation, re'organization or realignment of assets and liabilities of the organization through conscious management action to improve future cash flow stream and to ma(e more profitable and efficient.

MEANING & NEED FOR CORPORATE RESTRUCTURING

Corporate restructuring is the process of redesigning one or more aspects of a company. )he 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. *ere are some examples of why corporate restructuring may ta(e place and what it can mean for the company. +estructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as ta(ing advantage of tax brea(s that would allow the corporation to divert more revenue to the production process. "n this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the corporation gain a larger mar(et share. Corporate restructuring may also ta(e place as a result of the ac,uisition of the company by new owners. )he ac,uisition may be in the form of a leveraged buyout, a hostile ta(eover, or a merger of some type that (eeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile ta(eover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to ma(e a profit from the buyout. What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the ta(eover too( place "n general, the idea of corporate restructuring is to allow the company to continue functioning in some manner. Even when corporate raiders brea( up the company and leave behind a shell of the original structure, there is still usually a hope, what remains can function well enough for a new buyer to purchase the diminished corporation and return it to profitability.

Purpose of Corporate Restructuring )o enhance the share holder value, )he company should continuously evaluate its:

-. ortfolio of businesses, .. Capital mix, /. 0wnership 1 2. !sset arrangements to find opportunities to increase the share holder3s value. )o focus on asset utilization and profitable investment opportunities. )o reorganize or divest less profitable or loss ma(ing businesses4products. )he company can also enhance value through capital +estructuring, it can innovate securities that help to reduce cost of capital.

C aracteristics of Corporate Restructuring -. )o improve the company3s 5alance sheet, $by selling unprofitable division from its core business%. .. )o accomplish staff reduction $ by selling4closing of unprofitable portion% /. Changes in corporate mgt 2. &ale of underutilized assets, such as patents4brands. 6. 0utsourcing of operations such as payroll and technical support to a more efficient /rd party. 7. 8oving of operations such as manufacturing to lower'cost locations. 9. +eorganization of functions such as sales, mar(eting, 1 distribution :. +enegotiation of labor contracts to reduce overhead ;. +efinancing of corporate debt to reduce interest payments. -<. ! ma#or public relations campaign to reposition the co., with consumers.

!!"Categor# of corporate restructuring

Corporate +estructuring entails a range of activities including financial restructuring and organization restructuring. FINANCIA$ RESTRUCTURING Financial restructuring is the reorganization of the financial assets and liabilities of a corporation in order to create the most beneficial financial environment for the company. )he process of
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financial restructuring is often associated with corporate restructuring, in that restructuring the general function and composition of the company is li(ely to impact the financial health of the corporation. When completed, this reordering of corporate assets and liabilities can help the company to remain competitive, even in a depressed economy. =ust about every business goes through a phase of financial restructuring at one time or another. "n some cases, the process of restructuring ta(es place as a means of allocating resources for a new mar(eting campaign or the launch of a new product line. When this happens, the restructure is often viewed as a sign that the company is financially stable and has set goals for future growth and expansion.

Need For Financial Restructuring )he process of financial restructuring may be underta(en as a means of eliminating waste from the operations of the company. For example, the restructuring effort may find that two divisions or departments of the company perform related functions and in some cases duplicate efforts. +ather than continue to use financial resources to fund the operation of both departments, their efforts are combined. )his helps to reduce costs without impairing the ability of the company to still achieve the same ends in a timely manner "n some cases, financial restructuring is a strategy that must ta(e place in order for the company to continue operations. )his is especially true when sales decline and the corporation no longer generates a consistent net profit. ! financial restructuring may include a review of the costs associated with each sector of the business and identify ways to cut costs and increase the net profit. )he restructuring may also call for the reduction or suspension of production facilities that are obsolete or currently produce goods that are not selling well and are scheduled to be phased out. Financial restructuring also ta(e place in response to a drop in sales, due to a sluggish economy or temporary concerns about the economy in general. When this happens, the corporation may need to reorder finances as a means of (eeping the company operational through this rough time. Costs may be cut by combining divisions or departments, reassigning responsibilities and eliminating personnel, or scaling bac( production at various facilities owned by the company. With this type of corporate restructuring, the focus is on survival in a difficult mar(et rather than on expanding the company to meet growing consumer demand. !ll businesses must pay attention to matters of finance in order to remain operational and to also hopefully grow over time. From this perspective, financial restructuring can be seen as a tool that can ensure the corporation is ma(ing the most efficient use of available resources and thus
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generating the highest amount of net profit possible within the current set economic environment.

ORGANI%ATIONA$ RESTRUCTURING "n organizational restructuring, the focus is on management and internal corporate governance structures. 0rganizational restructuring has become a very common practice amongst the firms in order to match the growing competition of the mar(et. )his ma(es the firms to change the organizational structure of the company for the betterment of the business. Need For Organization Restructuring >ew s(ills and capabilities are needed to meet current or expected operational re,uirements. !ccountability for results are not clearly communicated and measurable resulting in sub#ective and biased performance appraisals. arts of the organization are significantly over or under staffed.

0rganizational communications are inconsistent, fragmented, and inefficient. )echnology and4or innovation are creating changes in wor(flow and production processes. &ignificant staffing increases or decreases are contemplated. ersonnel retention and turnover is a significant problem.

Wor(force productivity is stagnant or deteriorating. 8orale is deteriorating.

&ome of the most common features of organizational restructures are: +egrouping of business )his involves the firms regrouping their existing business into fewer business units. )he management then handles theses lesser number of compact and strategic business units in an easier and better way that ensures the business to earn profit. ?ownsizing 0ften companies may need to retrench the surplus manpower of the business. For that purpose offering voluntary retirement schemes $@+&% is the most useful tool ta(en by the firms for downsizing the businessAs wor(force. ?ecentralization "n order to enhance the organizational response to the developments in dynamic environment, the firms go for decentralization. )his involves reducing the layers of management in the business so that the people at lower hierarchy are benefited. 0utsourcing 0utsourcing is another measure of organizational restructuring that reduces the manpower and transfers the fixed costs of the company to variable costs. Enterprise +esource lanning Enterprise resource planning is an integrated management information system that is enterprise'wide and computer'base. )his management system enables the business management to understand any situation in faster and better way. )he advancement of the information technology enhances the planning of a business.

 5usiness rocess Engineering "t involves redesigning the business process so that the business maximizes the operation and value added content of the business while minimizing everything else. )otal Buality 8anagement )he businesses now have started to realize that an outside certification for the ,uality of the product helps to get a good will in the mar(et. Buality improvement is also necessary to improve the customer service and reduce the cost of the business.

)he perspective of organizational restructuring may be different for the employees. When a company goes for the organizational restructuring, it often leads to reducing the manpower and hence meaning that people are losing their #obs. )his may decrease the morale of employee in a large manner. *ence many firms provide strategies on career transitioning and outplacement support to their existing employees for an easy transition to their next #ob.

Corporate Restructuring Acti&ities

E'pansion
8ergers 1 ac,uisition )ender offers =oint venture

SE$$-OFFs
&pin'off &plit'off E,uity carve'out

Corporate Restructuring ! Acti&ities

Corporate contro(
remium buy'bac( &tandstill !greements !nti'ta(e over roxy contests

C ange in o)ners ip
Exchange offer &hare repurchase Coing private Deveraged buyout

CORPORATE RESTRUCTURING- $e&erage* +u#out, -osti(e Ta.eo&er & Merger

Corporate restructuring may ta(e place as a result of the ac,uisition of the company by new owners. )he ac,uisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that (eeps the company intact as a subsidiary of the controlling corporation. HOSTIL T!" O# R ! hostile ta(eover is a type of corporate ta(eover which is carried out against the wishes of the board of the target company. )his uni,ue type of ac,uisition does not occur nearly as fre,uently as friendly ta(eovers, in which the two companies wor( together because the ta(eover is perceived as beneficial. *ostile ta(eovers can be traumatic for the target company, and they can also be ris(y for the other side, as the ac,uiring company may not be able to obtain certain relevant information about the target company. Companies are bought and sold on a daily basis. )here are two types of sale agreements. "n the first, a merger, two companies come together, blending their assets, staff, facilities, and so forth. !fter a merger, the original companies cease to exist, and a new company arises instead. "n a ta(eover, a company is purchased by another company. )he purchasing company owns all of the target companyAs assets including company patents, trademar(s, and so forth. )he original company may be entirely swallowed up, or may operate semi'independently under the umbrella of the ac,uiring company. )ypically, a company which wishes to ac,uire another company approaches the target companyAs board with an offer. )he board members consider the offer, and then choose to accept or re#ect it. )he offer will be accepted if the board believes that it will promote the long term welfare of the company, and it will be re#ected if the board disli(e the terms or it feels that a ta(eover would not be beneficial. When a company pursues ta(eover after re#ection by a board, it is a hostile ta(eover. "f a company bypasses the board entirely, it is also termed a hostile ta(eover. ublicly traded companies are at ris( of hostile ta(eover because opposing companies can purchase large amounts of their stoc( to gain a controlling share. "n this instance, the company does not have to respect the feelings of the board because it already essentially owns and controls the firm. ! hostile ta(eover may also involve tactics li(e trying to sweeten the deal for individual board members to get them to agree. !n ac,uiring firm ta(es a ris( by attempting a hostile ta(eover. 5ecause the target firm is not cooperating, the ac,uiring firm may unwittingly ta(e on debts or serious problems, since it does not have access to all of the information about the company. 8any firms also have trouble getting financing for hostile ta(eovers, since some ban(s are reluctant to lend in these situations.
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MERGER
! merger occurs when two companies combine to form a single company. ! merger is very similar to an ac,uisition or ta(eover, except that in the case of a merger existing stoc(holders of both companies involved retain a shared interest in the new corporation. 5y contrast, in an ac,uisition one company purchases a bul( of a second companyAs stoc(, creating an uneven balance of ownership in the new combined company. )he entire merger process is usually (ept secret from the general public, and often from the ma#ority of the employees at the involved companies. &ince the ma#ority of merger attempts do not succeed, and most are (ept secret, it is difficult to estimate how many potential mergers occur in a given year. "t is li(ely that the number is very high, however, given the amount of successful mergers and the desirability of mergers for many companies. ! merger may be sought for a number of reasons, some of which are beneficial to the shareholders, some of which are not. 0ne use of the merger, for example, is to combine a very profitable company with a losing company in order to use the losses as a tax write'off to offset the profits, while expanding the corporation as a whole. "ncreasing oneAs mar(et share is another ma#or use of the merger, particularly amongst large corporations. 5y merging with ma#or competitors, a company can come to dominate the mar(et they compete in, giving them a freer hand with regard to pricing and buyer incentives. )his form of merger may cause problems when two dominating companies merge, as it may trigger litigation regarding monopoly laws. !nother type of popular merger brings together two companies that ma(e different, but complementary, products. )his may also involve purchasing a company which controls an asset your company utilizes somewhere in its supply chain. 8a#or manufacturers buying out a warehousing chain in order to save on warehousing costs, as well as ma(ing a profit directly from the purchased business, is a good example of this. ay alAs merger with e5ay is another good example, as it allowed e5ay to avoid fees they had been paying, while tying two complementary products together. ! merger is usually handled by an investment ban(er, who aids in transferring ownership of the company through the strategic issuance and sale of stoc(. &ome have alleged that this relationship causes some problems, as it provides an incentive for investment ban(s to push existing clients towards a merger even in cases where it may not be beneficial for the stoc(holders. 8ergers and ac,uisitions are means by which corporations combine with each other. 8ergers occur when two or more corporations become one. )o protect shareholders, state law provides procedures for the merger. ! vote of the board of directors and then a vote of the shareholders of both corporations is usually re,uired. Following a merger, the two corporations cease to exist as separate entities. "n the classic merger, the assets and liabilities of one corporation are

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automatically transferred to the other. &hareholders of the disappearing company become shareholders in the surviving company or receive compensation for their shares. 8ergers may come as the result of a negotiation between two corporations interested in combining, or when one or more corporations EtargetE another for ac,uisition. Combinations that occur with the approval and encouragement of the target companyAs management are called EfriendlyE mergersF combinations that occur despite opposition from the target company are called EhostileE mergers or ta(eovers. "n either case, these consolidations can bring together corporations of roughly the same size and mar(et power, or corporations of vastly different sizes and mar(et power. )he term Eac,uisitionE is typically used when one company ta(es control of another. )his can occur through a merger or a number of other methods, such as purchasing the ma#ority of a companyAs stoc( or all of its assets. "n a purchase of assets, the transaction is one that must be negotiated with the management of the target company. Compared to a merger, an ac,uisition is treated differently for tax purposes, and the ac,uiring company does not necessarily assume the liabilities of the target company. ! Etender offerE is a popular way to purchase a ma#ority of shares in another company. )he ac,uiring company ma(es a public offer to purchase shares from the target companyAs shareholders, thus by passing the target companyAs management. "n order to induce the shareholders to sell, or Etender,G their shares, the ac,uiring company typically offers a purchase price higher than mar(et value, often substantially higher. Certain conditions are often placed on a tender offer, such as re,uiring the number of shares tendered be sufficient for the ac,uiring company to gain control of the target. "f the tender offer is successful and a sufficient percentage of shares are ac,uired, control of the target company through the normal methods of shareholder democracy can be ta(en and thereafter the target companyAs management replaced. )he ac,uiring company can also use their control of the target company to bring about a merger of the two companies. 0ften, a successful tender offer is followed by a Ecash'out merger.E )he target company $now controlled by the ac,uiring company% is merged into the ac,uiring company, and the remaining shareholders of the target company have their shares transformed into a right to receive a certain amount of cash. !nother common merger variation is the EtriangularE merger, in which a subsidiary of the surviving company is created and then merged with the target. )his protects the surviving company from the liabilities of the target by (eeping them within the subsidiary rather than the parent. ! Ereverse triangular mergerE has the ac,uiring company create a subsidiary, which is then merged into the target company. )his form preserves the target company as an ongoing legal entity, though its control has passed into the hands of the ac,uirer. "n general, mergers and other types of ac,uisitions are performed in the hopes of realizing an economic gain. For such a transaction to be #ustified, the two firms involved must be worth more together than they were apart. &ome of the potential advantages of mergers and ac,uisitions include achieving economies of scale, combining complementary resources, garnering tax
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advantages, and eliminating inefficiencies. 0ther reasons for considering growth through ac,uisitions include obtaining proprietary rights to products or services, increasing mar(et power by purchasing competitors, shoring up wea(nesses in (ey business areas, penetrating new geographic regions, or providing managers with new opportunities for career growth and advancement. &ince mergers and ac,uisitions are so complex, however, it can be very difficult to evaluate the transaction, define the associated costs and benefits, and handle the resulting tax and legal issues. When a small business owner chooses to merge with or sell out to another company, it is sometimes called EharvestingE the small business. "n this situation, the transaction is intended to release the value loc(ed up in the small business for the benefit of its owners and investors. )he impetus for a small business owner to pursue a sale or merger may involve estate planning, a need to diversify his or her investments, an inability to finance growth independently, or a simple need for change. "n addition, some small businesses find that the best way to grow and compete against larger firms is to merge with or ac,uire other small businesses. "n principle, the decision to merge with or ac,uire another firm is a capital budgeting decision much li(e any other. 5ut mergers differ from ordinary investment decisions in at least five ways. First, the value of a merger may depend on such things as strategic fits that are difficult to measure. &econd, the accounting, tax, and legal aspects of a merger can be complex. )hird, mergers often involve issues of corporate control and are a means of replacing existing management. Fourth, mergers obviously affect the value of the firm, but they also affect the relative value of the stoc(s and bonds. Finally, mergers are often Eunfriendly.E

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+enefits of Mergers an* Ac/uisitions

8erger refers to the process of combination of two companies, whereby a new company is formed. !n ac,uisition refers to the process whereby a company simply purchases another company. "n this case there is no new company being formed. 5enefits of mergers and ac,uisitions are ,uite a handful. 8ergers and ac,uisitions generally succeed in generating cost efficiency through the implementation of economies of scale. "t may also lead to tax gains and can even lead to a revenue enhancement through mar(et share gain. 5ird3s Eye @iew of the 5enefits !ccruing from 8ergers and !c,uisitions )he principal benefits from mergers and ac,uisitions can be listed as increased value generation, increase in cost efficiency and increase in mar(et share. 8ergers and ac,uisitions often lead to an increased value generation for the company. "t is expected that the shareholder value of a firm after mergers or ac,uisitions would be greater than the sum of the shareholder values of the parent companies. !n increase in cost efficiency is affected through the procedure of mergers and ac,uisitions. )his is because mergers and ac,uisitions lead to economies of scale. )his in turn promotes cost efficiency. !s the parent firms amalgamate to form a bigger new firm the scale of operations of the new firm increases. !s output production rises there are chances that the cost per unit of production will come down.

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DEMERGER
?emergers are situations in which divisions or subsidiaries of parent companies are split off into their own independent corporations. )he process for a demerger can vary slightly, depending on the reasons behind the implementation of the split. Cenerally, the parent company maintains some degree of financial interest in the newly formed corporation, although that interest may not be enough to maintain control of the functionality of the new corporate entity. ! demerger results in the transfer by a company of one or more of its underta(ings to another company. )he company whose underta(ing is transferred is called the demerged company and the company $or the companies% to which the underta(ing is transferred is referred to as the resulting company. ! demerger may ta(e the form of ' ! spinoff or a split'up.

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Met o*s of Corporate Restructuring

=oint ventures &ell off and spin off ?ivestitures E,uity carve out Deveraged buy outs $D50% 8anagement buy outs 8aster limited partnerships Employee stoc( ownership plans $E&0 %

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0oint 1enture $
=oint ventures are new enterprises owned by two or more participants. )hey are typically formed for special purposes for a limited duration. "t is a combination of subsets of assets contributed by two $or more% business entities for a specific business purpose and a limited duration. Each of the venture partners continues to exist as a separate firm, and the #oint venture represents a new business enterprise. "t is a contract to wor( together for a period of time each participant expects to gain from the activity but also must ma(e a contribution. For Example: C8')oyota =@: C8 hoped to gain new experience in the management techni,ues of the =apanese in building high',uality, low'cost compact 1 subcompact cars. Whereas, )oyota was see(ing to learn from the management traditions that had made CE the no. - auto producer in the world and "n addition to learn how to operate an auto company in the environment under the conditions in the H&, dealing with contractors, suppliers, and wor(ers. ?C8 group and ?aewoo motors entered in to =@ to form ?C8 ?!EW00 Dtd. to manufacture automobiles in "ndia. Reasons for Forming a %oint #enture 5uild on companyAs strengths &preading costs and ris(s "mproving access to financial resources Economies of scale and advantages of size !ccess to new technologies and customers !ccess to innovative managerial practices Rational For %oint #entures )o augment insufficient financial or technical ability to enter a particular line or business.
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 )o share technology 1 generic management s(ills in organization, planning 1 control. )o diversify ris( )o obtain distribution channels or raw materials supply )o achieve economies of scale )o extend activities with smaller investment than if done independently )o ta(e advantage of favorable tax treatment or political incentives $particularly in foreign ventures%. Ta& as'ects of (oint venture) "f a corporation contributes a patent technology to a =oint @enture, the tax conse,uences may be less than on royalties earned though a licensing arrangements. Example ' 0ne partner contributes the technology, while another contributes depreciable facilities. )he depreciation offsets the revenues accruing to the technology. )he =.@. may be taxed at a lower rate than any of its partner 1 the partners pay a later capital gain tax on the returns realized by the =.@. if and when it is sold. "f the =.@. is organized as a corporation, only its assets are at ris(. )he partners are liable only to the extent of their investment, this is particularly important in hazardous industries where the ris( of wor(ers, production, or environmental liabilities is high.

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SPIN OFF &pinoffs are a way to get rid of underperforming or non'core business divisions that can drag down profits. *rocess of s'in off -. )he company decides to spin off a business division.
2. )he parent company files the necessary paperwor( with the &ecurities and Exchange

5oard of "ndia $&E5"%. /. )he spinoff becomes a company of its own and must also file paperwor( with the &E5".
4. &hares in the new company are distributed to parent company shareholders.

6. )he spinoff company goes public. >otice that the spinoff shares are distributed to the parent company shareholders. )here are two reasons why this creates value: -. arent company shareholders rarely want anything to do with the new spinoff. !fter all, itAs an underperforming division that was cut off to improve the bottom line. !s a result, many new shareholders sell immediately after the new company goes public. capitalization, increased ris(, or poor financials of the new company. )herefore, many large institutions automatically sell their shares immediately after the new company goes public. &imple supply and demand logic tells us that such large number of shares on the mar(et will naturally decrease the price, even if it is not fundamentally #ustified. "t is this temporary mispricing that gives the enterprising investor an opportunity for profit. )here is no money transaction in spin'off. )he transaction is treated as stoc( dividend 1 tax free exchange.

2. Darge institutions are often forbidden to hold shares in spinoffs due to the smaller mar(et

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SP$IT 2 OFF & SP$IT-UPS'lit$off+' "s a transaction in which some, but not all, parent company shareholders receive shares in a subsidiary, in return for relin,uishing their parent company3s share. "n other words some parent company shareholders receive the subsidiary3s shares in return for which they must give up their parent company shares Features ! portion of existing shareholders receives stoc( in a subsidiary in exchange for parent company stoc(. S'lit$u':' "s a transaction in which a company spins off all of its subsidiaries to its shareholders 1 ceases to exist. )he entire firm is bro(en up in a series of spin'offs. )he parent no longer exists and 0nly the new offspring survive. "n a split'up, a company is split up into two or more independent companies. !s a se,uel, the parent company disappears as a corporate entity and in its place two or more separate companies emerge. &,ueeze'out: the elimination of minority shareholders by controlling shareholders.

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SE$$ OFF 2
&elling a part or all of the firm by any one of means: sale, li,uidation, spin'off 1 so on. or Ceneral term for divestiture of part4all of a firm by any one of a no. of means: sale, li,uidation, spin'off and so on. !+)"!D &EDD'0FF ! partial sell'off4slump sale, involves the sale of a business unit or plant of one firm to another. "t is the mirror image of a purchase of a business unit or plant. From the seller3s perspective, it is a form of contractionF from the buyer3s point of view it is a form of expansion. For example: When Coromandal Fertilizers Dimited sold its cement division to "ndia Cement Dimited, the size of Coromandal Fertilizers contracted whereas the size of "ndia Cements Dimited expanded. ,otives for sell off +aising capital Curtailment of losses &trategic realignment Efficiency gain. Strategic Rationale $ ?ivesting a subsidiary can achieve a variety of strategic ob#ectives, such as: Hnloc(ing hidden value I Establish a public mar(et valuation for undervalued assets and create a pure'play entity that is transparent and easier to value Hndiversification I ?ivest non'core businesses and sharpen strategic focus when direct sale to a strategic or financial buyer is either not compelling or not possible "nstitutional sponsorship I romote e,uity research coverage and ownership by sophisticated institutional investors, either of which tend to validate &pinCo as a standalone business.

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ublic currency I Create a public currency for ac,uisitions and stoc('based compensation programs.

8otivating management I "mprove performance by better aligning management incentives with &pin Co3s performance $using &pin Co3s, rather than arent Company, stoc('based awards%, creating direct accountability to public shareholders, and increasing transparency into management performance. Eliminating dissynergies I +educe bureaucracy and give &pin Company management complete autonomy. Anti-trust I 5rea( up a business in response to anti'trust concerns. Corporate defense I ?ivest Ecrown #ewelE assets to ma(e a hostile ta(eover of arent Company less attractive

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DI1ESTITURES ?ivesture is a transaction through which a firm sells a portion of its assets or a division to another company. "t involves selling some of the assets or division for cash or securities to a third party which is an outsider. ?ivestiture is a form of contraction for the selling company. means of expansion for the purchasing company. "t represents the sale of a segment of a company $assets, a product line, a subsidiary% to a third party for cash and or securities. 8ergers, assets purchase and ta(eovers lead to expansion in some way or the other. )hey are based on the principle of synergy which says . J . K 6L , divestiture on the other hand is based on the principle of ManergyG which says 6 I / K /L. !mong the various methods of divestiture, the most important ones are partial sell'off, demerger $spin'off 1 split off% and e,uity carve out. &ome scholars define divestiture rather narrowly as partial sell off and some scholars define divestiture more broadly to include partial sell offs, demergers and so on. ,OTI# S FOR -I# STIT.R S Change of focus or corporate strategy Hnit unprofitable can mista(e &ale to pay off leveraged finance !ntitrust >eed cash ?efend against ta(eover Cood price.

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E3UIT4 CAR1E-OUT
! transaction in which a parent firm offers some of a subsidiaries common stoc( to the general public, to bring in a cash infusion to the parent without loss of control. "n other words e,uity carve outs are those in which some of a subsidiaries shares are offered for a sale to the general public, bringing an infusion of cash to the parent firm without loss of control. E,uity carve out is also a means of reducing their exposure to a ris(ier line of business and to boost shareholders value. F !T.R S OF /.IT0 1!R# O.T "t is the sale of a minority or ma#ority voting control in a subsidiary by its parents to outsider investors. )hese are also referred to as Msplit'off " 03sG ! new legal entity is created. )he e,uity holders in the new entity need not be the same as the e,uity holders in the original seller. ! new control group is immediately created. ?ifference between &pin'off and E,uity carve outs: -. "n a s'in off, distribution is made pro rata to shareholders of the parent company as a dividend, a form of non cash payment to shareholders "n e2uity carve outF stoc( of subsidiary is sold to the public for cash which is received by parent company .. "n a s'in off, parent firm no longer has control over subsidiary assets. "n e2uity carve out, parent sells only a minority interest in subsidiary and retains control.

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$E1ERAGED +U4OUT
! buyout is a transaction in which a person, group of people, or organization buys a company or a controlling share in the stoc( of a company. 5uyouts great and small occur all over the world on a daily basis. 5uyouts can also be negotiated with people or companies on the outside. For example, a large candy company might buy out smaller candy companies with the goal of cornering the mar(et more effectively and purchasing new brands which it can use to increase its customer base. Di(ewise, a company which ma(es widgets might decide to buy a company which ma(es thingamabobs in order to expand its operations, using an establishing company as a base rather than trying to start from scratch. "n a leveraged buyout, the company is purchased primarily with borrowed funds. "n fact, as much of ;<N of the purchase price can be borrowed. )his can be a ris(y decision, as the assets of the company are usually used as collateral, and if the company fails to perform, it can go ban(rupt because the people involved in in the buyout will not be able to service their debt. Deveraged buyouts wax and wane in popularity depending on economic trends. )he buyers in the buyout gain control of the companyAs assets, and also have the right to use trademar(s, service mar(s, and other registered copyrights of the company. )hey can use the companyAs name and reputation, and may opt to retain several (ey employees who can ma(e the transition as smooth as possible. *owever, people in senior management may find that they are not able to (eep their #obs because the purchasing company does not want redundant personnel, and it wants to get its personnel into (ey positions to manage the company in accordance with their business practices. ! leveraged buyout involves transfer of ownership consummated mainly with debt. While some leveraged buyouts involve a company in its entirety, most involve a business unit of a company. 0ften the business unit is bought out by its management and such a transaction is called management buyout $850%. !fter the buyout, the company $or the business unit% invariably becomes a private company. 3hat -oes -ebt -oO ! leveraged buyout entails considerable dependence on debt. 3hat does it im'ly4 ?ebt has a bracing effect on management, whereas e,uity tends to have a soporific influence. ?ebt spurs management to perform whereas e,uity lulls management to relax and ta(e things easy. Risks and Re5ards, )he sponsors of a leveraged buyout are lured by the prospect of wholly $or largely% owning a company or a division thereof, with the help of substantial debt finance. )hey assume considerable ris(s in the hope of reaping handsome rewards. )he success of the entire operation depends on their ability to improve the performance of the unit, contain its business
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ris(s, exercise cost controls, and li,uidate disposable assets. "f they fail to do so, the high fixed financial costs can #eopardize the venture. *ur'ose of debt financing for Leveraged 6uyout )he use of debt increases the financial return to the private e,uity sponsor. )he tax shield of the ac,uisition debt, according to the 8odigliani'8iller theorem with taxes, increases the value of the firm. Features of Leveraged 6uyout Dow existing debt loadsF ! multi'year history of stable and recurring cash flowsF *ard assets $property, plant and e,uipment, inventory, receivables% that may be used as collateral for lower cost secured debtF )he potential for new management to ma(e operational or other improvements to the firm to boost cash flowsF 8ar(et conditions and perceptions that depress the valuation or stoc( price. Example I !c,uisition of Corus by )ata. Pohlberg Pravis +oberts, the >ew Qor( private e,uity firm, has agreed to pay about R;<< million to ac,uire :6 percent of the "ndian software ma(er Flextronics &oftware &ystems is the largest leveraged buyout in "ndia.

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Manage5ent 6u#out 2
"n this case, management of the company buys the company, and they may be #oined by employees in the venture. )his practice is sometimes ,uestioned because management can have unfair advantages in negotiations, and could potentially manipulate the value of the company in order to bring down the purchase price for themselves. 0n the other hand, for employees and management, the possibility of being able to buy out their employers in the future may serve as an incentive to ma(e the company strong. "t occurs when a companyAs managers buy or ac,uire a large part of the company. )he goal of an 850 may be to strengthen the managersA interest in the success of the company. *ur'ose of ,6O I from management point of view may be: )o save their #obs, either if the business has been scheduled for closure or if an outside purchaser would bring in its own management team. )o maximize the financial benefits they receive from the success they bring to the company by ta(ing the profits for themselves. )o ward off aggressive buyers. )he goal of an 850 may be to strengthen the manager3s interest in the success of the company. Pey considerations in 850 are fairness to shareholders price, the future business plan, and legal and tax issues. 6enefits of ,6O "t provides an excellent opportunity for management of undervalued co3s to realize the intrinsic value of the company. Dower agency cost: cost associated with conflict of interest between owners and managers. &ource of tax savings: since interest payments are tax deductible, pushing up gearing rations to fund a management buyout can provide large tax covers.

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Master $i5ite* Partners ip 2

8aster Dimited artnership3s are a type of limited partnership in which the shares are publicly traded. )he limited partnership interests are divided into units which are traded as shares of common stoc(. &hares of ownership are referred to as units. 8D s generally operate in the natural resource $petroleum and natural gas extraction and transportation%, financial services, and real estate industries. )he advantage of a 8aster Dimited artnership is it combines the tax benefits of a limited partnership $the partnership does not pay taxes from the profit ' the money is only taxed when unit holders receive distributions% with the li,uidity of a publicly traded company. )here are two types of partners in this type of partnership: -. )he limited 'artner is the person or group that provides the capital to the 8D and receives periodic income distributions from the 8aster Dimited artnershipAs cash flow .. )he general 'artner is the party responsible for managing the 8aster Dimited artnershipAs affairs and receives compensation that is lin(ed to the performance of the venture.

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E5p(o#ees Stoc. Option P(an 7ESOP8 !n Employee &toc( 0ption is a type of defined contribution benefit plan that buys and holds stoc(. E&0 is a ,ualified, defined contribution, employee benefit plan designed to invest primarily in the stoc( of the sponsoring employer. Employee &toc( 0ption3s are M,ualifiedG in the sense that the E&0 3s sponsoring company, the selling shareholder and participants receive various tax benefits. With an E&0 , employees never buy or hold the stoc( directly. F !T.R S Employee &toc( 0wnership lan $E&0 % is an employee benefit plan. )he scheme provides employees the ownership of stoc(s in the company. "t is one of the profit sharing plans. Employers have the benefit to use the E&0 3s as a tool to fetch loans from a financial institute. "t also provides for tax benefits to the employers. The benefits for the com'any: increased cash flow, tax savings, and increased productivity from highly motivated wor(ers. The benefit for the em'loyees+ is the ability to share in the companyAs success. HO3 IT 3OR"S4 0rganizations strategically plan the E&0 s and ma(e arrangements for the purpose. )hey ma(e annual contributions in a special trust set up for E&0 s. !n employee is eligible for the E&0 3s only after he4she has completed -<<< hours within a year of service. !fter completing -< years of service in an organization or reaching the age of 66, an employee should be given the opportunity to diversify his4her share up to .6N of the total value of E&0 3s.

T e $e&erage* +u#-out Dea( of Tata & Tet(e#

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Case overview:' )he case A)he Deveraged 5uyout ?eal of )ata 1 )etleyA provides insights into the concept of Deveraged 5uyout $D50% and its use as a financial tool in ac,uisitions, with specific reference to )ata )eaAs ta(eover of global tea ma#or )etley. )his deal which was the biggest ever cross' border ac,uisition, was also the first'ever successful leveraged buy'out by any "ndian company. )he case examines the )ata )ea')etley deal in detail, explaining the process and the structure of the deal. )he case helps them to understand the mechanism of D50. )hrough the )ata')etley deal the case attempts to give students an understanding of the practical application of the concept. "n the summer of .<<<, the "ndian corporate fraternity was witness to a path brea(ing achievement, never heard of or seen before in the history of corporate "ndia. "n a landmar( deal, heralding a new chapter in the "ndian corporate history, )ata )ea ac,uired the HP heavyweight brand )etley- for a staggering .9- million pounds. )his deal which happened to be the largest cross'border ac,uisition by any "ndian company, mar(ed the culmination of )ata )eaAs strategy of pushing for aggressive growth and worldwide expansion. )he ac,uisition of )etley pitch for(ed )ata )ea into a position where it could rub shoulders with global behemoths li(e Hnilever and Dawrie. )he ac,uisition of )etley made )ata )ea the second biggest tea company in the world. $)he first being Hnilever, owner of 5roo(e 5ond and Dipton%. 8oreover it also went through a metamorphosis from a plantation company to an international consumer products company. +atan )ata, Chairman, )ata group said, E"t is a great signal for global industry by "ndian "ndustry. "t is a momentous occasion as an "ndian company has been able to ac,uire a brand and an overseas company.E !part from the size of the deal, what made it particularly special was the fact that it was the first ever leveraged buy'out $D50%. by any "ndian company. )his method of financing had never been successfully attempted before by any "ndian company. )etleyAs price tag of .9- million pounds $H& R26< m% was more than four times the net worth of )ata tea which stood at H& R --2 m. )his ?avid 1 Coliath aspect was what made the entire transaction so unusual. What made it possible was the financing mechanism of D50. )his mechanism allowed the ac,uirer $)ata )ea% to minimize its cash outlay in ma(ing the purchase. )ata )ea was incorporated in -;7. as )ata Finlay Dimited, and commenced business in -;7/. )he company, in collaboration with )ata Finlay 1 Company, Clasgow, HP, initially set up an instant tea factory at 8unnar $Perala% and a blending4pac(aging unit in 5angalore.

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0ver the years, the company expanded its operations and also ac,uired tea plantations. "n -;97, the company ac,uired &terling )ea companies from =ames Finlay 1 Company for +s --6 million, using +s -;.: million of e,uity and +s. ;6.. million of unsecured loans at 6N per annum interest. "n -;:., )ata "ndustries Dimited bought out the entire sta(e of =ames Finlay 1 Company in the #oint venture, )ata Finlay Dtd. "n -;:/, the company was renamed )ata )ea Dimited. "n the mid -;:<s, to offset the erratic fluctuations in commodity prices, )ata )ea felt it necessary to enter the branded tea mar(et. "n 8ay -;:2, the company revolutionized the value' added tea mar(et in "ndia by launching Panan ?evan tea/ in poly pac(. "n -;:2, the company set up a research and development center at 8unnar, Perala. "n -;:7, it launched )ata )ea ?ust in 8aharashtra. "n -;::, the )ata )ea Deaf was launched in 8adhya radesh. "n -;:;, )ata )ea bought a 6.N sta(e in Parnata(a'based Consolidated Coffee Dimited'the largest coffee plantation in !sia, in order to expand its coffee business. "n -;;-, )ata )ea formed a #oint venture with )etley "nternational, HP, to mar(et its branded tea abroad. "n -;;., )ata )ea too( a ;.6N sta(e in !sian Coffee'the *yderabad based -<<N export oriented unit (nown for its instant coffee, through an open offer. )his offer was the first of its (ind in "ndian corporate history. Dater, in -;;2, )ata )ea increased its sta(e in !sian Coffee to 72.6N through another open offer. )his helped it to consolidate its position in the coffee industry. "n -;;6, )ata )ea unveiled a massive physical up gradation program at a cost of +s -.7 billion. -e$,ystifying L6O )he )ata')etley deal was rather unusual, in that it had no precedence in "ndia. )raditionally, "ndian mar(et had preferred cash deals, be it the +s.-<.<: billion ta(eover of "ndal by *indalco or the +s. 2.;; billion ac,uisition of "ndiaworld by &atyam. What set the deal apart was the D50 mechanism which financed the ac,uisition. $&ee 5ox item to (now about the basics of D50s%. )he D50 seemed to have inherent advantages over cash transactions. "n an D50, the ac,uiring company could float a &pecial urpose vehicle $& @% which was a -<<N subsidiary of the ac,uirer with a minimum e,uity capital. )he & @ leveraged this e,uity to gear up significantly higher debt to buyout the target company. )his debt was paid off by the & @ through the target companyAs own cash flows. )he target companyAs assets were pledged with the lending institution and once the debt was redeemed, the ac,uiring company had the option to merge with the & @ Structure of the -eal )he purchase of )etley was funded by a combination of e,uity, subscribed by )ata tea, #unior loan stoc( subscribed by institutional investors $including the vendor institutions 8ezzanine

31

Finance, arranged by "ntermediate Capital Croup lc.% and senior debt facilities arranged and underwritten by +aboban( "nternational. )ata )ea created a &pecial urpose @ehicle $& @%'christened )ata )ea $Creat 5ritain% to ac,uire all the properties of )etley. )he & @ was capitalized at 9< million pounds, of which )ata tea contributed 7< million poundsF this included 26 million pounds raised through a C?+ issue. )he H& subsidiary of the company, )ata )ea "nc. had contributed the balance -< million pounds. )he & @ leveraged the 9< million pounds e,uity /./7 times to raise a debt of ./6 million pounds, to finance the deal. )he entire debt amount of ./6 million pounds comprised 2 tranches $!, 5, C and ?% whose tenure varied from 9 years to ;.6 years, with a coupon rate of around --N which was 2.2 basis points above D"50+. The 3ay to 7o &ome analysts felt that )ata )eaAs decision to ac,uire )etley through a D50 was not all that beneficial for shareholders. )hey pointed out that though there would be an immediate dilution of e,uity $after the C?+ issue%, )ata )ea would not earn revenues on account of this investment in the near future $as an immediate merger is not planned%. )his would lead to a dilution in earnings and also a reduction in the return on e,uity. )he shareholders would, thus have to bear the burden of the investment without any immediate benefits in terms of enhanced revenues and profits. From the lenders point of view too there seemed to be some drawbac(s.

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CORPORATE RESTRUCTURING AT AR1IND MI$$S

1ase Overvie5 )he case provides an overview of the !rvind 8illsA expansion strategy, which resulted in the companyAs poor financial health in the late -;;<s. "n the mid -;;<s, !rvind 8illsA undertoo( a massive expansion of its denim capacity in spite of the fact that other cotton fabrics were slowly replacing the demand for denim. )he expansion plan was funded by loans from both "ndian and overseas financial institutions. With the demand for denim slowing down, !rvind 8ills found it difficult to repay the loans, and thus the interest burden on the loans shot up. "n the late -;;<s, !rvind 8ills ran into deep financial problems because of its debt burden. !s a result, it incurred huge losses in the late -;;<s. )he case also discusses in detail the !rvind 8ills debt' restructuring plan for the long'term debts being ta(en up in February .<<-. Issues+ S ?ebt driven expansion plan, financial restructuring of !rvind 8ills Introduction "n the early -;;<s, !rvind 8ills- initiated massive expansion of its denim capacity 5y the late -;;<s, !rvind 8ills was the third largest manufacturer of denim in the world, with a capacity of -.< million metres. *owever, in the late -;;<s, due to global as well as domestic overcapacity in denim and the shift in fashion to gabardine. and corduroy,/ denim prices crashed and !rvind 8ills was hit hard. )he expansion had been financed mostly by loans from domestic and overseas institutional lenders. !s the denim business continued to decline in the late -;;<s and early .<<<, !rvind 8ills defaulted on interest payments on every loan, debt burden (ept on increasing. "n .<<<, the company had a total debt of +s .9 billion, of which ;..; billion was owed to overseas lenders. "n .<<<, !rvind 8ills, once the darling of the bourses was in deep trouble. "ts share price was hovering between a 6. wee( high of +s .< and low of +s ; $in the mid -;;<s, the share price was closer to +s -6<%. Deading financial analysts no longer trac(ed the !rvind 8ills scrip. )he companyAs credit rating had also come down. C+"&"D downgraded it to EdefaultE in 0ctober .<<< from Ehighest safetyE in -;;9. "n early .<<-, !rvind 8ills announced a restructuring proposal to improve its financial health and reduce its debt burden. )he proposal was born out of several meetings and negotiations between the company and a steering committee of lenders. &'ansion at 3hat 1ost
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!rvind 8ills was promoted in =une -;/-, by &an#ay DalbhaiAs grandfather, Pasturbhai Dalbhai, and his two brothers, >arottam and Chimanbhai, in !hmedabad. When &an#ay Dalbhai too( over the reins in -;96, !rvind 8ills was at the crossroads. ! high wage structure, low productivity and surplus labor in the textile mills rendered its businesses unviable in most the products categories in which it competed. )he emergence of power looms in the -;9<s further aggravated the problems of !rvind 8ills. )he governmentAs indirect tax system at that time also reduced the profitability of its product lines. "n the mid':<s, to survive the onslaught of the small'scale power loom sector, the composite mills,2 with their higher overheads had to change their strategies. "t became imperative for them to switch to areas in which the power loom sector could not compete, viz, value added products. "n the mid -;:<s, !rvind 8ills switched to high',uality fabrics re,uiring technical superiority that the power looms could not hope to match. Hntil -;:9, li(e any other textile company, !rvind 8ills had a presence only in conventional products li(e sarees, suitings and low value shirting, and dress materials. +ealizing the blea( growth prospects for textiles in general, !rvind 8ills identified denim as a niche area and set up "ndiaAs first denim manufacturing unit in -;:7 at >aroda +oad, !hmedabad. )o deal with competition from the power loom sector, which rolled out vast ,uantities of inexpensive fabrics, and to cope with the rising cost of raw materials, !rvind 8ills diversified into indigo'dyed blue denimF high ,uality, cotton'rich, two'ply6 shirting, and &wiss voiles Into the Red 5y the late -;;<s, !rvind 8ills was in deep financial trouble $+efer )able """% because of its increasing debt and interest burden. "ts total long'term debt was estimated at +s .9 billion, out of which the total overseas debt was +s ;..; billion and debt to "ndian institutional lenders was +s -9.9- billion. *owever, much of the debt to "ndian financial institutions was secured was not (nown. !rvind 8ills had defaulted on interest payments on every loan. "C"C" was the largest "ndian institutional lender, with a loan of over +s 6 billion to !rvind 8ills. $+efer )able "@ for a list of lenders to whom !rvind 8ills was indebted%. "n .<<<, the company reported a net loss of +s /.-7 billion against a profit of +s .-2 billion in -;;;. Into the 6lack

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"n February .<<-, !rvind 8ills announced a debt restructuring plan for its long term debt $+efer 5ox%. While the company set itself a minimum debt buybac( target of +s 6.6 billion, the management was hopeful of a larger amount, possibly +s 9.6 billion. "n mid'.<<-, !rvind 8ills got the approval of a ma#ority of the lenders for its debt restructuring scheme. Forty'three out of fifty'four lenders approved the plan. !s part of the restructuring, lenders offered over +s 9.6 billion under the companyAs various debt buybac( schemes. &ome of the ban(s agreed to the buybac( at a 66N discount on the principal amount, while some agreed to a five year rollover for which they would be entitled to interest plus the principal. &ome ban(s also agreed to a ten year rollover for which they would be paid a higher rate of interest plus principal. )he debt revamp was expected to reduce !rvind 8illsA interest burden by 6<N.

35

8any firms have begun organizational restructuring exercises in recent years to cope with heightened competition. )he common elements of most organizational restructuring and performance enhancement programmers are: regrouping of business, decentralization, downsizing, outsourcing, business process engineering, enterprise resource planning, and total ,uality management. T Corporate restructuring is often an episodic exercise. Corporate restructuring occurs periodically due to an ongoing tension between the organizational need for stability and continuity on the one hand and the economic compulsion to adapt to changes on the other.

36

)he case discusses the A0rganization .<<6A programF a six'year long organizational restructuring exercise conducted by the H& based rocter 1 Camble $ 1C%, global leader in the fast moving consumer goods industry. )he case examines in detail, the important elements of the restructuring program including changing the organizational structure, standardizing the wor( processes and revamping the corporate culture. )he case elaborates on the mista(es committed by ?ur( =ager, the erstwhile CE0 of 1C and examines the reasons as to why 0rganization .<<6 program did not deliver the desired results. Finally, the case discusses how !lan Ceorge Dafley, the new CE0, accelerated the initiatives under the 0rganization .<<6 program and revived 1CAs financial performance. "ssues: Cain insight into the common causes that contribute to steady decline over a period of time in the performance of a large multi'product multi'national company of high repute. "ntroduction )he H& based rocter and Camble $ 1C%, one of the largest fast moving consumer goods $F8CC% companies in the world, was in deep trouble in the first half of .<<<. )he company, in 8arch .<<<, announced that its earnings growth for the financial year -;;;'.<<< would be 9N instead of -2N as announced earlier. )he news led 1CAs stoc( to lose R.9 in one day, wiping out R2< billion in its mar(et capitalization. )o add to this, in !pril .<<<, 1C announced an -:N decline in its net profit for =anuary ' 8arch .<<< ,uarter. For the first time in the past eight years 1C was showing a decline in profits. "n the late -;;<s, 1C faced the problem of stagnant revenues and profitability $+efer Exhibit "%. "n order to accelerate growth, the erstwhile 1CAs resident and CE0, ?ur( =ager $=ager% officially launched the 0rganization .<<6 program in =uly -;;;. 0rganization .<<6 was a six'year long organizational restructuring exercise which included the standardization of wor( processes to expedite growth, revamping the organizational culture in order to embrace change, reduction in hierarchies to enable faster decision'ma(ing, and retrenchment of employees to cut costs. With the implementation of the program, 1C aimed to increase its global revenues from R/: billion to R9< billion by .<<6. !ccording to analysts, though 0rganization .<<6 program was well planned, the execution of the plan was a failure. !nalysts believed that =ager concentrated more on developing new products rather than on 1CAs well'established brands. !nalysts felt, and =ager himself admitted, that he did too many things in too short a time. )his resulted in the decline of the companyAs revenues and profitability. !fter a brief stint of -9 months, =ager had to ,uit his post. "n =une .<<<, !lan Ceorge Dafley $Dafley% too( over as the new resident 1 CE0 of 1C. Hnder Dafley, 1C seemed to be on the right path. *e was able to turn the company around through his excellent planning, execution and focus. With Dafley at
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the helm, 1CAs financial performance improved significantly $+efer Exhibit ""%. )he companyAs share price shot up by 6:N to R;. by =uly .<</, as against a fall of /.N in &1 As 6<< stoc( index. ! former 1C executive, Cary &tibel said, E"f anybody had any doubts about !C, they donAt anymore. )his is about as dramatic a turnaround as you will see.E *owever, analysts expressed doubts, whether the measures ta(en by Dafley would sustain 1CAs growth in the long term. )hey felt that with a dominant mar(et position in developed mar(ets the scope for generating more growth there would be difficult for 1C. 5ac(ground >ote rocter 1 Camble was established in -:/9 by William rocter, a candle ma(er, and his brother' in'law, =ames Camble, a soap ma(er, when they merged their small businesses. )hey set up a shop in Cincinnati and nic(named it Epor(opolisE because of its dependence on swine slaughterhouses. )he shop made candles and soaps from the leftover fats of the swine. 5y -:6;, 1C had become one of the largest companies in Cincinnati, with sales of R- million. )he company introduced "vory, a floating soap in -:9; and Crisco, the first all'vegetable shortening in -;--. "n the period between the -;2<s and -;7<s, 1C embar(ed on a series of ac,uisitions. )he company ac,uired &pic and &pan $-;26%, ?uncan *ines $-;67%, Chairman aper 8ills $-;69%, Clorox $-;69F sold in -;7:% and Folgers Coffee $-;7/%. "n -;9/, 1C began manufacturing and selling its products in =apan through the ac,uisition of >ippon &unhome Company. )he new company was named E rocter 1 Camble &unhome Co. Dtd.E "n -;:6, 1C announced several ma#or organizational changes relating to category management,/ purchasing, manufacturing, engineering and distribution. "n -;::, the company started manufacturing products in China. 1C became one of the largest cosmetics companies in the H& when it ac,uired >oxell $-;:;% and 8ax Factor $-;;-%. !fter witnessing a period of significant organic and inorganic growth, 1C began to face several problems during the -;;<s. "n the early -;;<s, a survey conducted by the consulting firm, Purt &almon !ssociates,2 had revealed that almost a ,uarter of 1CAs products in a typical supermar(et sold less than one unit a month and #ust 9.7N of the products accounted for :2.6N of sales. )he remaining products went almost unnoticed by consumers. Complicated product lines and pricing were also causing problems to retailers who had to struggle with rebates and discounts... EUCE+ )& )he A0rganization .<<6A rogram "n =anuary -;;;, =ager, a 1C veteran became the new CE0 ta(ing charge at a time when 1C was in the midst of a corporate restructuring exercise that started in &eptember -;;:.

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=ager faced the challenging tas( of revamping 1CAs operations and mar(eting practices. &oon after ta(ing over as the CE0, =ager told analysts that he would overhaul product development, testing and launch processes. )he biggest obstacle for =ager was 1CAs culture. =ager realized the need to change the mindset of the 1C employees who had been used to lifetime employment and a conservative management style. 0n =uly -, -;;;, 1C officially launched the 0rganization .<<6 program. "t was a program of six'year duration, during which, 1C planned to retrench -6,<<< employees globally. )he cost of this program was estimated to be R-.; billion and it was expected to generate an annual savings $after tax deductions% of approximately R;<< million per annum by .<<2... Change in 0rganization &tructure )ill -;;:, 1C had been organized along geographic lines with more than -<< profit centers. Hnder 0rganization .<<6 program, 1C sought to reorganize its organizational structure $+efer Exhibit """ and "@% from four geographically'based business units to five product'based global business units ' 5aby, Feminine 1 Family Care, 5eauty Care, Fabric 1 *ome Care, Food 1 5everages, and *ealth Care. )he restructuring exercise aimed at boosting 1CAs growth $in terms of sales and profits%, speed and innovation and expedition of management decision'ma(ing for the companyAs global' mar(eting initiatives. "t also aimed to fix the strategy'formulation and profit'creation responsibilities on products rather than on regions. )he global business units $C5Hs% had to devise global strategies for all 1CAs brands and the heads of C5H were held accountable for their unitAs profit. )he sourcing, +1? and manufacturing operations were also underta(en by the C5H. &tandardization of Wor( rocesses 0ne of the ma#or ob#ectives of 0rganization .<<6 program was to significantly improve all inefficient wor( processes of 1C including its product development, supply chain management and mar(eting functions. "n order to achieve this ob#ective, 1C undertoo( several ") initiatives including collaborative technologies, 5.C e'commerce, web'enabled supply chain and a data warehouse pro#ect for supplying timely data to companyAs various operations located globally. +evamping the Corporate Culture )he 0rganization .<<6 program made efforts to change 1C from a conservative, lethargic and bureaucratic to modern, ,uic('moving and internet'savvy organization. )he new structure was directed towards revamping the wor( culture of 1C so as to focus on its new &tretch, "nnovation and &peed $&"&% philosophy. Emphasizing on innovation, =ager said, E0rganization .<<6 is focused on one thing: leveraging 1CAs innovative capability. The ,istakes 1ommitted
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)he 0rganization .<<6 program faced several problems soon after its launch. !nalysts were ,uic( to comment that =ager committed a few mista(es which proved costly for 1C. For instance, =ager had made efforts in =anuary .<<< to ac,uire Warner'Dambert and !merican *ome roducts. Contrary to 1CAs cautious approach towards ac,uisitions in the -;;<s, this dual ac,uisition would have been the largest ever in 1CAs history, worth R-2< billion. *owever, the stoc( mar(et greeted the news of the merger negotiations by selling 1CAs shares, which prompted =ager to exit the deal. nter Lafley $ Im'lementing Strategies to Revive *87 "n =une .<<<, !lan Ceorge Dafley $Dafley%, a ./'year 1C veteran popularly (nown as A!C,A too( over as the new resident and CE0 of 1C. )he ma#or difference between Dafley and =ager was their Astyle of functioning.A &oon after becoming CE0, Dafley rebuilt the management team and made efforts to improve 1CAs operations and profitability. Dafley transferred more than half of 1CAs /< senior most officers, an unprecedented move in 1CAs history. *e assigned senior positions and higher roles to women. *87 $ 1urrent Status "n .<</, Dafley continued his efforts to ma(e 1C more adaptable to the dynamic changes in business environment. *e challenged 1CAs traditional perspective that all its products should be produced in'house. "n !pril .<</, Dafley started outsourcing the manufacturing of bar soaps $including 1CAs longest existing brand, "vory% to a Canadian manufacturer. "n 8ay .<</, ") operations were outsourced from * . &ince Dafley became CE0, 1CAs outsourcing contract went up from -<N to .<N. Dafley continued to review 1CAs businesses and new investments with the aim of achieving sharper focus on its core businesses, cost competitiveness and improved productivity.

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5oo(s Corporate Finance' 5y !swath ?amodaran Financial 8anagement' 5y Phan and =ain

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