INTELLECTUAL CAPITAL

• Intellectual capital is all the knowledge resources

possessed by organization and its dynamic
development and renewal can ensure
organization’s advanced position in the market
competition at the era of knowledge economy.
• The Organisation for Economic Co-operation and
Development (OECD) defines intellectual capital
as “the economic value of two categories of
intangible assets of a company'', that is,
organizational (“structural”) and human capital".
• It is invisible
• It is closely related to knowledge and
experiences of employees as well as customers
and technologies of an organization,
• It offers better opportunities for an organization
to succeed in the future.
 COMPONENTS OF INTELLECTUAL
CAPITAL
• Human capital
• Structural capital (or organizational capital)
• Relational (customer) capital
 HUMAN CAPITAL

• It refers to the skills/competences, training and

education, and experience and value
characteristics of an organisation’s workforce that
in the minds of individuals: knowledge, skills,
competences, experience, know-how, capabilities,
expertise of the human members of the
organization.
 RELATIONAL CAPITAL

• (also Relationship Capital, Customer Capital,

External Capital). All relations a company
entertains with external subjects, such as
suppliers, partners, clients. External capital
comprises relationships with customers and
suppliers, brand names, trademarks and
reputation.
 STRUCTURAL CAPITAL

• (also Organizational Capital, Internal Capital) -

"that which is left after employees go home for
the night": processes, information systems,
databases, policies, intellectual property, culture,
etc. Thus, the knowledge embedded in
organisational structures and processes.
 SOME AUTHORS HAVE ALSO
IDENTIFIED THE LEVELS OF
INTELLECTUAL CAPITAL:
I - The level of human capital (Experience,
knowledge, idea, principle, technology, creativity,
values)
II - The level of intellectual achievement (Text,
diagram, program, software, data, invention,
explicit knowledge)
III - The level of knowledge property (Patent,
special technology, brand, copyright, business
secret)
IV - The level of intellectual capital (Production
technique, customer resource, brand, etc.)
 ALTERNATIVE TERMS FOR
INTELLECTUAL CAPITAL
• The terms Intangible Assets, Knowledge
Assets/Capital or Intellectual Assets/Capital are
often used as synonyms for intellectual capital.
• Intangible Assets and Knowledge Assets
The term Intangible Assets can often be found in
the accounting literature, the term Knowledge
Assets is used by economists and intellectual
capital is used in the management and legal
literature. But all refer essentially to the same
thing: the intangible value contained in the heads
and relationships of employees, management
staff, customers and other stakeholders.
WHAT IS MARKET VALUE AND BOOK
VALUE?
• Market value is the value derived by multiplying
stock price by the number of outstanding
shares. In simple words, we can call it market
capitalization also. On the other side, book value
is a value derived from the latest available
balance sheet of a company. It is as good as net
asset value of a company and that can simply be
ascertained by taking all the assets
less depreciation and liabilities.
• Assume there is a company X whose publicly
traded stock price is Rs.20 and it has 1,00,000
outstanding equity shares. Book value of the
company is 15,00,000.
• Market to book value ratio = 20* 1,00,000 /
15,00,000 = 20,00,000/15,00,000 = 1.33
• Here, the market perceives a market value of
1.33 times of book value to company X.
 ANALYSIS & INTERPRETATION

• M/B RATIO LESS THAN 1:

• If we drill down deep, a ratio less than 1 means
the market does not even perceive value equals
to book value. In a not so good investment
scenario, an investor could smell some problem
with the company. He may think that the value
of assets presented in the balance sheet may not
be realizable in the open market in case
of liquidation. Say, in case of liquidation, selling
off the assets will not realize value equals to book
value of the company.
• M/B RATIO GREATER THAN 1:
• M/B greater than 1 suggests overvaluation. The
overvaluation should be considered along with
the facts that tangible assets are not taken into
consideration while calculating the ratio and
secondly future growth in earning are not
considered. Before taking a decision, it should be
compared with the ratios of other industry peers
of that company.
 LIMITATIONS:

• Like any other financial metrics, market to book ratio

also suffered from some limitations.
• The primary issue is that it ignores the intangible
assets of a company like goodwill brand equity patent
etc. In today’s business world, it is well accepted that
intangible assets have got real values. There are ways
and means of bringing them to balance sheet also but
not necessarily every company has already done it.
• It also ignores the prospective earnings growth of
business.
• Therefore, this ratio is seldom meaningful where a
company has majorly intangible assets like software,
know-how or knowledge-based companies etc.
 USES

• This ratio is primarily useful for existing and

prospective investors simply because it will be of
their interest to know whether the company is
under or overvalued. It is best suited for valuing
a company in the field of insurance, finance, real
estate investment trust etc.
MARKET VALUE ADDED
 MEANING

• Market value added is the difference between the

Company’s market and book value of shares
• According to Stern Stewart, if the total market value
of a company is more than the amount of capital
invested in it, the company has managed to create
shareholder value. If the market value is less than
capital invested, the company has destroyed
shareholder value
• Market Value Added = Company’s total Market
Value – Capital Invested
SHAREHOLDER VALUE
ADDED (SVA)
 MEANING

• Shareholder Value Added (SVA) represents the

economic profits generated by a business above
and beyond the minimum return required by all
providers of capital.
• The SVA approach is a methodology which
recognises that equity holders as well as debt
financiers need to be compensated for the bearing
of investment risk.
 BENEFITS OF ADOPTING SVA

1. Overall, value-based performance measures will

result in greater accountability for the investment
of new capital, as well as for the use of existing
investments.
2. Organisation will have the opportunity to apply a
meaningful private sector benchmark to evaluate
performance.
3. Managers will be provided with an improved
focus on maximizing shareholder value.
 DRAWBACKS OF ADOPTING SVA

• A limitation in the use of SVA as a performance measure

is that, by nature, it is an aggregate measure.
• There may be certain enterprises which are subject to
any degree of price regulation then it may not be
possible for management to adjust output prices to
achieve a commercial return in response to upward
movements in input prices.
• a reduction in direct Government funding would result in
a decrease in SVA
• the use of SVA is not a substitute for detailed analysis of
business drivers, rather it is an additional measurement
tool with an economic foundation
DEBT EQUITY RATIO
 MEANING

• The Debt-to-Equity ratio (D/E) indicates the

proportion of the company’s assets that are being
financed through debt.
• Debt to Equity ratio is a long term solvency ratio that
indicates the soundness of long-term financial
policies of the company
 CALCULATION

• In a general sense, the ratio is simply debt divided

by equity.
• Debt / Shareholder Equity
 SIGNIFICANCE

• Debt-to-equity ratio measure of a company's ability

to repay its obligations
• A high debt/equity ratio generally means that a
company has been aggressive in financing its
growth with debt.
 CORPORATE
RESTRUCTURING
 INTRODUCTION
• The business environment is rapidly changing with
respect to technology, competition, products, people,
geographical area, markets, customers.
• There are primarily two ways of growth of business
organization, i.e. organic and inorganic growth.
• Organic growth is through internal strategies, which may
relate to business or financial restructuring within the
organization that results in enhanced customer base,
higher sales, increased revenue, without resulting in
change of corporate entity.
• Inorganic growth provides an organization with an
avenue for attaining accelerated growth enabling it to
skip few steps on the growth ladder. Restructuring
through mergers, amalgamations etc constitute one of
the most important methods for securing inorganic
growth.
 GROWTH CAN BE ORGANIC OR
INORGANIC
• A company is said to be growing organically when
the growth is through the internal sources without
change in the corporate entity. Organic growth
can be through capital restructuring or business
restructuring.
• Inorganic growth is the rate of growth of business by
increasing output and business reach by acquiring
new businesses by way of mergers, acquisitions and
take-overs and other corporate restructuring
Strategies that may create a change in the
corporate entity.
 MEANING OF CORPORATE
RESTRUCTURING
• Restructuring as per Oxford dictionary means “to
give a new structure to, rebuild or rearrange".
• Corporate restructuring is defined as the process
involved in changing the organization of a business
• It implies rearranging the business for increased
efficiency and profitability.
• it is a comprehensive process, by which a company
can consolidate its business operations and
strengthen its position for achieving corporate
objectives-synergies and continuing as competitive
and successful entity.
 CORPORATE RESTRUCTURING AS A
BUSINESS STRATEGY
• Corporate restructuring is the process of significantly
changing a company's business model,
management team or financial structure to address
challenges and increase shareholder value.
Corporate restructuring is an inorganic growth
strategy.
 NEED AND SCOPE OF CORPORATE
RESTRUCTURING
• orderly redirection of the firm's activities;
• deploying surplus cash from one business to finance
profitable growth in another;
• exploiting inter-dependence among present or
prospective businesses within the corporate
portfolio;
• risk reduction; and
• development of core competencies.
• ABC Limited has surplus funds but it is not able to
consider any viable projects. Whereas XYZ Limited
has identified viable projects but has no money to
fund the cost of the project. The merger of ABC LTD
and XYZ Limited is a mutually beneficial option and
would result in positive synergies of both the
Companies.
 IMPORTANT ASPECTS TO BE CONSIDERED WHILE
PLANNING OR IMPLEMENTING CORPORATE
RESTRUCTURING STRATEGIES

• Valuation & Funding

• Legal and procedural issues
• Taxation and Stamp duty aspects
• Accounting aspects
• Competition aspects etc.
• Human and Cultural synergies
 TYPES OF CORPORATE
RESTRUCTURING STRATEGIES
1. Merger
2. Demerger
3. Reverse Mergers
4. Disinvestment
5. Takeovers
6. Joint venture
7. Strategic alliance
8. Franchising
9. Slump Sale
 MERGER

• Merger is the combination of two or more

companies which can be merged together either
by way of amalgamation or absorption or by
formation of a new company. The combining of
two or more companies, is generally by offering the
stockholders of one company securities in the
acquiring company in exchange for the surrender
of their stock.
• Horizontal Merger
• Vertical Merger
• Co generic Merger
• Conglomerate Merger
 HORIZONTAL MERGER

• It is a merger of two or more companies that

compete in the same industry. It is a merger with a
direct competitor and hence expands as the firm's
operations in the same industry. Horizontal mergers
are designed to achieve economies of scale and
result in reducing the number of competitors in the
industry.
• Bank merger in 1980s
• Merger of HP and compaq
 VERTICAL MERGER

• It is a merger which takes place upon the

combination of two companies which are
operating in the same industry but at different
stages of production or distribution system. If a
company takes over its supplier/producers of raw
material, then it may result in backward integration
of its activities.
 CO GENERIC MERGER

• It is the type of merger, where two companies are

in the same or related industries but do not offer the
same products, but related products and may
share similar distribution channels, providing
synergies for the merger
 CONGLOMERATE MERGER

• These mergers involve firms engaged in unrelated

type of activities i.e. the business of two companies
are not related to each other horizontally or
vertically. In a pure conglomerate, there are no
important common factors between the
companies in production, marketing, research and
development and technology
 DEMERGER

• It is a form of corporate restructuring in which the

entity's business operations are segregated into one
or more components. A demerger is often done to
help each of the segments operate more smoothly,
as they can focus on a more specific task after
demerger.
 REVERSE MERGER

• Reverse merger is the opportunity for the unlisted

companies to become public listed company,
without opting for Initial Public offer (IPO). In this
process, the private company acquires majority
shares of public company with its own name
 DISINVESTMENT

• Disinvestment means the action of an organization

or government selling or liquidating an asset or
subsidiary. It is also known as "divestiture".
 TAKEOVER/ACQUISITION

• Takeover occurs when an acquirer takes over the

control of the target company. It is also known as
acquisition. Normally this type of acquisition is
undertaken to achieve market supremacy. It may
be friendly or hostile takeover.
• Friendly takeover: In this type, one company takes
over the management of the target company with
the permission of the board.
• Hostile takeover: In this type, one company takes
over the management of the target company
without its knowledge and against the wish of their
management.
 JOINT VENTURE (JV)

• A joint venture is an entity formed by two or more

companies to undertake financial activity together.
The parties agree to contribute equity to form a
new entity and share the revenues, expenses, and
control of the company. It may be Project based
joint venture or Functional based joint venture.
• Project based Joint venture: The joint venture
entered into by the companies in order to achieve
a specific task is known as project based JV.
• Functional based Joint venture: The joint venture
entered into by the companies in order to achieve
mutual benefit is known as functional based JV.
 STRATEGIC ALLIANCE

• Any agreement between two or more parties to

collaborate with each other, in order to achieve
certain objectives while continuing to remain
independent organizations is called strategic
alliance.
 FRANCHISING

• Franchising may be defined as an arrangement

where one party (franchiser) grants another party
(franchisee) the right to use trade name as well as
certain business systems and process, to produce
and market goods or services according to certain
specifications.
• The franchisee usually pays a one-time franchisee
fee plus a percentage of sales revenue as royalty
and gains.
 SLUMP SALE

• Slump sale means the transfer of one or more

undertaking as a result of the sale for a lump sum
consideration without values being assigned to the
individual assets and liabilities in such sales. If a
company sells or disposes of the whole or
substantially the whole of its undertaking for a
predetermined lump sum consideration, then it
results in a slump sale.
 REGULATORY FRAMEWORK FOR
MERGER/AMALGAMATION
1. The Companies Act, 2013
2. National Company Law Tribunal Rules, 2016.
3. Companies (Compromise, Arrangements and
Amalgamations) Rules, 2016
4. Income Tax Act, 1961
5. SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015
6. Competition Act, 2002
 AMALGAMATION

• Amalgamation is an arrangement or reconstruction.

• It is a legal process by which two or more
companies are to be absorbed or blended with
another.
• As a result, the amalgamating company loses its
existence and its shareholders become
shareholders of a new company or the
amalgamated company.
• Amalgamation signifies the transfers of all or some
part of assets and liabilities of one or more than one
existing company or two or more companies to a
new company.
 AMALGAMATION IN THE NATURE OF
MERGER
• All the assets and liabilities of the transferor company should become,
after amalgamation; the assets and liabilities of the other company.
• Shareholders holding not less than 90% of the face value of the equity
shares of the transferor company (other than the equity shares already
held therein, immediately before the amalgamation, by the transferee
company or its subsidiaries or their nominees) become equity
shareholders of the transferee company by virtue of the
amalgamation.
• The consideration for the amalgamation receivable by those equity
shareholders of the transferor company who agree to become equity
shareholders of the transferee company is discharged by the
transferee company wholly by the issue of equity share in the
transferee company, except that cash may be paid in respect of any
fractional shares.
• The business of the transferor company is intended to be carried on,
after the amalgamation, by the transferee company.
• No adjustment is intended to be made in the book values of the assets
and liabilities of the transferor company when they are incorporated in
the financial statements of the transferee company except to ensure
uniformity of accounting policies.
AMALGAMATION IN THE NATURE OF
PURCHASE
• Amalgamation in the nature of purchase is where one
company’s assets and liabilities are taken over by
another and lump sum is paid by the latter to the former
I. All the properties of amalgamating company(s) should
vest with the amalgamated company after
amalgamation.
II. All the liabilities of the amalgamating company(s)
should vest with the amalgamated company after
amalgamation.
III. Shareholders holding not less than 75% in value or
voting power in amalgamating company(s) should
become shareholders of amalgamated companies after
amalgamation.
 FINANCIAL
RESTRUCTURING
 FINANCIAL STRUCTURE OF A COMPANY

(i) paid up equity and preference share capital;

(ii) various reserves;
(iii) all borrowings in the form of –
(a) long-term loans from financial institutions;
(b) working capital from banks including loans through
commercial papers;
(c) debentures;
(d) bonds;
(e) credits from suppliers;
(f) trade deposits;
(g) public deposits;
(h) deposits/loans from directors, their relatives and business
associates;
(i) deposits from shareholders;
(j) funds raised through any other loan instrument
 NEED FOR FINANCIAL
RESTRUCTURING
(i) necessity for injecting more working capital to
meet the market demand for the company’s
products or services;
(ii) when the company is unable to meet its current
commitments;
(iii) when the company is unable to obtain further
credit from suppliers of raw materials, consumable
stores, bought-out components etc. and from other
parties like those doing job work for the company.
(iv) when the company is unable to utilise its full
production capacity for lack of liquid funds
 RESTRUCTURING OF UNDER-
CAPITALIZED COMPANY
(i) injecting more capital whenever required either by
resorting to rights issue/preferential issue or additional
public issue.
(ii) resorting to additional borrowings from financial
institutions, banks, other companies etc.
(iii) issuing debentures, bonds, etc. or
(iv) inviting and accepting fixed deposits from
directors, their relatives, business associates and
public
 RESTRUCTURING OF OVER-
CAPITALIZED COMPANY
(i) Buy-back of own shares.
(ii) Paying back surplus share capital to shareholders.
(iii) Repaying loans to financial institutions, banks, etc.
(iv) Repaying fixed deposits to public, etc.
(v) Redeeming its debentures, bonds, etc.
 MERGERS &
ACQUISITIONS
 RIGHT PRICE

• If two companies of approx. equal size were to

come together, it is a merger
• Any action that leads to one economic activity
from two or more previous ones is merger
• When larger company takes over a smaller
company is called purchase or acquisition
• The price that one pays is for the value that one
receives
• The right price for the buyer should therefore be
based on what he perceives as its value
 NEED FOR VALUING SHARES

• In case of listed companies

1. There is no guarantee that the market price is not
rigged
2. The market price may not represent fair value as
investor’s psychology drives market prices
• In case of unlisted companies
1. An initial price for purpose of listing is essential, if it were
to go public
2. An equitable price is to be fixed, when it wishes to
transfer some shares to a third party, or where a
merger is involved
3. A loan against the shares may be needed from a
director (Lender may need a value)
 MERGER EQUATION

• Synergies arise from improved management,

production and marketing efficiencies, leading to
cost savings, operating economies and more
attractive growth rates in the long run.