CORPORATE RESTRUCTURING

In a rapidly changing world, companies are facing

unprecedented turmoil in the global markets. Severe
competition, rapid technological change, and rising
stock market’s volatility have increased the burden on
managers to deliver superior performance and value for
their shareholders.
In a response to these pressures, an increasing number
of companies around the world are dramatically
restructuring their assets, operations and contractual
relationship with shareholders, creditors and other
financial stakeholders. Corporate restructuring has
facilitated thousands of organisations to re-establish
their competitive advantage and respond more quickly
and effectively to new opportunities and unexpected
challenges. Corporate restructuring has had an equally
profound impact on the many more thousands of
suppliers, customers, and competitors that do business
with restructured firms.
Generally, most of the corporate growth occurs by
internal expansion, when a firm’s existing division grow
through normal capital budgeting activities.
Nevertheless, if the goals are easily achieved within the
firm, it may mean that the goals are too small. Growth
opportunities come in a variety of other forms and a
great deal of energy and resources may be wasted if an
entrepreneur does not wait long enough to identify the
various dynamics which are already in place. The most
remarkable examples of growth and often the largest
increases in stock prices are a result of merger and
acquisition. M&A is a strategy for growth and
expansion. M&A are expected to increase value and
efficiency and thereby and increase shareholders
wealth. M&A in a generic term used to represent
different types of corporate restructuring exercise.

FORM OF CORPORATE RESTRUCTURING

Business firms in their pursuit of growth, engage in a
broad range of restructuring activities. Actions taken to
expand or contract a firm’s basic operations or
fundamentally change its asset or financial structure
are referred to as corporate restructuring activities.
Corporate structure is a broad umbrella that covers
many things. One of them is merger and takeover.
From the point of view of the buyer, M&A represent
expansion and from the perspective of the seller its
represent the in change in ownership that may or may
not be voluntary. In addition to mergers, takeovers, and
contests for corporate control; there are other types of
corporate restructuring like divestitures,
rearrangements, and ownerships reformulation.
These corporate restructuring activities can be divided
into two broad categories--- operational and functional.
Operational restructuring refers to outright or partial
purchase or sale of companies or product lines or
downsizing by closing unprofitable, and non-strategic
facilities. Financial restructuring refers to the actions
taken by the firm to change its total debt and equity
structure.
An overview of all these restructuring activities, is
shown in a summarized form. The grouping is a bit
random but indicates the direction of the emphasis in
these various practices.

Expansion:
Mergers and Acquisition
Tenders offers
Asset acquisition
Joint ventures

Contraction:
Spin offs
Split offs
Divestitures
Equity care-outs
Asset sale

Corporate control:
Takeover defences
Share repurchases
Exchange offers
Proxy contests

Changes in Ownership Structures:

Leveraged buyout
Junk bonds
Going private
ESOPs and MLPs

Expansion:
Expansion is a form of restructuring, which results in an
increase in the size of the firm. It can take place in the
form of a merger, acquisition, tender offer, asset
acquisition or a joint venture.

Merger:
Merger is defined as a combination of two or more
companies into a single company. A merger can take
place either as an amalgamation or absorption.

Amalgamation:
This type of merger involves fusion of two or more
companies. After the amalgamation the two companies
lose their individual identity and a new company comes
into existence. A new firm that is hitherto, not in
existence comes into being. This form is generally
applied to combination of firms equal size.
Example: The merger of Brooke Bond India Ltd., with
Lipton India Ltd., resulted in the formation of a new
company Brooke Bond Lipton India Ltd.

Absorption:
This type of merger involves fusion of a small company
with a large company. After the merger the smaller
company ceases to exit.
Example: The recent merger of Oriental Bank of
Commerce with Global Trust Bank. After the merger,
GTB ceased to exist while the Oriental Bank of
Commerce expanded and continue.

Tender offer:
Tender offer involves making a public offer for
acquiring the shares of the target company with a view
to acquire management control in that company.
Example: (1) Flextronics International giving an open
market offers at Rs. 548 for 20% of paid-up capital in
Hughes Software Systems.
(2) AstraZenca Pharmaceuticals AB, a Swedish firm,
announced an open offer to acquire 8.4% stake in
AstraZenca Pharma India at a floor price of Rs. 825 per
share.

Asset Acquisition:
Asset acquisition involve buying asset of another
company. These assets may be tangible assets like a
manufacturing unit or intangible assets like brands. In
such acquisitions, the acquirer company can limit its
acquisitions to those parts of the firm that coincide with
the acquirer’s needs.
Example: The acquisition of the cement division of Tata
Steel by Laffarge of France. Laffarge acquired only 1.7
million tone cement plant and its related assets from
Tata Steel.
The asset being purchased may also be intangible in
nature. For example, Coca-Cola paid Rs.170 crore to
Parle to acquire its soft drinks brands like Thums Up,
Limca, Gold Spot, etc.
Joint venture:
In a Joint Venture two companies enter into agreement
to provide certain resources toward the achievements
of a particular common business goal. It involves
intersection of only a small fraction of the activities of
the companies involved and usually for limited
duration. The venture partners according to the pre-
arranged formula, share the returns obtained from the
venture. Usually the multinational companies use this
strategy to enter into foreign market.
Examples: Tata Motors entered into a joint venture with
a South African company, Imperial Group, to market its
pick-up vehicle in the region.

Contraction:
Contraction is a form of restructuring, which results in a
reduction in the size of the firm. It can take place in the
form of a spin-off, split-off, divestiture, or an equity
carve-out.

Spin-Offs:
A spin-off is a transaction in which company distributes
on a pro rata basis all of the shares it owns in a
subsidiary to its own shareholders. Hence, the
stockholders proportional ownership of shares is the
same in the new legal subsidiary as well as the parent
firm. The new entity has its own management and is
run independently from the parent company. A spin-off
does not result in an infusion of cash to the parent
company.
Example: Air-India has formed a separate company
named Air-India Engineering Services Ltd., by spinning-
off its engineering division.

Split-Offs:
In a split-off, a new company is created to takeover the
operations of an existing division or unit. A portion of
the existing shareholders receives stock in a subsidiary
(new company) in exchange for parent company stock.
The logic of split-off is that the equity base of the
parent company is reduced reflecting the downsizing of
the firm. Hence the shareholding of the new entity does
not reflect the shareholding of the parent company. A
split-off does not result in any cash-inflow to the parent
company.

Split-Ups:
In a split-up the entire firm is broken up in a series of
spin-offs, so that the parent company no longer exists
and only the new offspring’s survive. A split-up involves
the creation of a new class of stock for each of the
parent’s operating subsidiaries, paying current
shareholders a dividend of each new class of stock, and
the dissolving the parent company. Stockholders in the
new companies may be different as shareholders in the
parent company may exchange their stock for stock in
one or more of the spin-offs.
Example: The Andhra Pradesh State Electricity Board
(APSEB) was split-up in 1999 as part of the power
sector reforms. The power generation business and the
transmission and distribution business was transferred
to two separate companies called APGENCO and
APTRANSCO respectively. ASPEB ceased to exist as a
result of the split-up.