Corporate Restructuring

What is corporate restructuring? The process of reorganizing a company.

Reasons: To position the company to be more competitive. To survive in adverse economic climate. To Take the company totally in a new direction

Types of Restructuring
Expansion: Mergers, Acquisitions, Takeovers, Tender offer, Joint Venture. Contraction: Sell offs, Spin offs, Split offs, Split ups, Divestitures, Equity Carve outs. Corporate Control: Takeover Defenses, Share Repurchases, Exchange offers, Proxy contests. Changes in Ownership: Leveraged Buyout, Going Private.

Merger
The process by which at least two companies combine to form one single company. Occurs through mutual consent. - consolidation of markets - gaining a competitive edge in the industry - enhancing long-term profitability

Merger or Amalgamation
Merger or amalgamation may take two forms
Absorption: a combination of two or companies into an existing company. Consolidation: a combination of two or more companies into a new company.

In merger, there is a complete amalgamation of the assets and liabilities as well as shareholders interests and business of the merging companies. There is yet another mode of merger. Here, one company may purchase another company without giving proportionate ownership to the shareholders of the acquired company or without continuing the business of the acquired company.

Reasons for Mergers

Strategic benefits: Competition, entry, risk and cost reduction, complementary resources e.g. technology and marketing. Tax benefits: Accumulated losses, unabsorbed depreciation, govt. incentives, excise duty benefits. Utilization of surplus funds. Managerial effectiveness. Diversification. Lower financing costs. Growth.

Types of Mergers There are four types of mergers:

1) Horizontal Merger 2) Vertical Merger 3) Conglomerate Merger 4) Concentric Merger

Horizontal Merger
A type of merger occurred when two companies competing in the same line of business activities. The effect of merger on the market would be large or a little to no effects. Number of firms in an industry will be reduced due to horizontal mergers and this may lead firms to earn huge profits due to monopoly/oligopoly. Horizontal mergers are to be regulated by Govt. for their negative effect on competition. Example: ACC Cement with Damodar Cement, RIL and IPCL.

Vertical Merger
A merger between two companies producing different goods or services for one specific finished products. It refers to a situation where a product manufacturer merges the supplier of inputs or raw materials. Also known as Vertical Foreclosure. Two types of vertical mergers:
1. Backward vertical merger: HLL & TATA tea with tea gardens in Assam & West Bengal. 2. Forward vertical merger: Oil companies buying up service stations.

Conglomerate Merger
A merger between firms that are involved in totally unrelated business activities. Two types of conglomerate mergers; i.e. Pure and Mixed. The main reason behind this kind of mergers are increasing market share, synergy and cross selling. They also merged to diversify and reduce their risk exposure. Example: Walt Disney and the American Broadcasting Company.

Concentric Merger
A type of merger where the two companies coming together to share some common expertise that may posses mutually advantageous. The common expertise may be managerial or technological Know How that may not be industry or product specific. In short combining two or more businesses in order to pool expertise. Example: A merger between a motor cycle manufacturer and automobile manufacture.

Legal Procedure for Merger

Analysis of merger offer-motive, impact on stock price, effect on brand image. Approval from board of directors of both the companies for the merger. Approval of merger by shareholders, bankers, trustees. Intimation to Stock Exchange where these firms are listed. Submission of application to the court. Submission of general meeting report of the chairman to court. Hearing the petition & confirmation of merger. Filling court order with ROC by the firms. Integration of assets and liabilities.

Amalgamation
This involves fusion of one or more companies where the companies lose their individual identity and the new company comes into existence to take over the business of companies being liquidated. The merger of Brook Bond India Limited and Lipton India Limited resulted in formation of new company Brook Bond Lipton India Limited.

Takeover
The term takeover is understood to connote hostility. When an acquisition is a forced or unwilling acquisition, it is called a takeover. A holding company is a company that holds more than half of the nominal value of the equity capital of another company, called a subsidiary company, or controls the composition of its board of directors. Both holding and subsidiary companies retain their separate legal entities and maintain their separate books of accounts.

Absorption
This involves fusion of a small company with a large company; ceases to exist after the merger. The merger of Tata Oil Mills Company Limited (TOMCO) with Hindustan Lever Limited (HLL) is an example of absorption.

Tender Offer
A tender offer is a formal offer to purchase a given number of a companys share at a specific price. Tender offer can be used in two situations:
First, the acquiring company may directly approach the target company for its takeover. If the target company doesnt agree, the acquiring company may directly approach the shareholders by means of a tender offer. Second, the tender offer may be used without any negotiations, and it may be tantamount to a hostile takeover.

Tender Offer
This involves making a public offer for acquiring the shares of a target company with a view to acquire management control in that company. Take over by Tata Tea of Consolidated Coffee Limited (CLL) is an example of a tender offer where more than 50% of share holders of CCL sold their holdings to Tata Tea at the offered price which was more than the investment price.

Asset Acquisition
Acquisition may be defined as an act of acquiring effective control over assets or management of a company by another company without any combination of business or companies. A substantial acquisition occurs when an acquiring firm acquire substantial quantity of shares or voting rights of the target company. This involves buying assets of another company. The assets may be tangible assets like manufacturing units or intangible like brands. HLL buying brands of Lakme is an example of asset acquisition.

Joint Venture
This involves two companies coming together and forming a new company whose ownership is changed. Generally, this strategy is adopted by MNCs to enter into foreign companies. DCM Group and Daewoo Motors entered into a joint venture to form DCM Daewoo Limited to manufacture auto mobiles in India.

Demerger
Demerger means split or division of a company. Such divisions may take place for various internal or external factors. Internal factors generally consists of split in the family rather than lack of competition on the part of the management. For example DCM Limited was divided into four separate companies which are being managed by different family members of Late Shriram.

Spin off
This type of demerger involves division of company into wholly owned subsidiary of parent company by distribution of all its shares of subsidiary company on a pro-rata basis. For example Kotak Mahindra Finance Limited formed a subsidiary called Kotak Mahindra Capital Corporation by spinning off its investment banking division.

Central features of spin offs

Spin offs are a distribution of subsidiary shares to parent company shareholders. As such, no money (necessarily) comes into the parent company as a result. No shares (or assets) of the subsidiary are sold to the market(IPO) or to a acquirer. Example: Dr. Reddy formed new drug development company Parlecan Pharma Sun Pharma demerged its R&D as a separate entity Sun Pharma Advance Research company to reduce R&D cost.

Equity Carve Outs

The firm sell a part (20% or less) of its wholly owned subsidiarys common stock in the market. This is similar to spin-offs, expect that some part of share holders of this subsidiary company is offered to public through a public issue and the parent company continues to enjoy control over the subsidiary company by controlling interest in it.

Split Ups
This type of demerger involves the division of the parent company into two or more separate companies where parent company ceases to exist after the demerger. New business entities took place for parent firm.

Divestitures
These are sale of segment of a company for cash or for securities to an outside party. Selling assets, divisions, subsidiaries to another corporation or combination of corporations or individuals

Features of Divestitures
Selling corporation typically receives consideration for the assets to be sold.
Cash Securities Other assets

Divestitures are usually taxable events for selling corporation(new basis for purchaser). Example of Divestitures is JLR.

Asset Sale
This involves sale of tangible or intangible assets of a company to generate cash. Example: Jaguar brand is sold to Tata motors at very high value as the company was facing serious financial problems. Lakme brand was sold to Hindustan lever to generate cash at the companys end

Reverse Merger
If a sick company extends its embracing arms to a profitable company and in turn absorbs it in its fold, this action is called as reverse merger. It very rarely happens and happens in family owned businesses. The first case of reverse merger formulated by BIFR envisaged the merger of a healthy company Sagar Real Estate Developer limited with a sick textile company SLM Maneklal Industries Limited.