Corporate Restructuring

Restructuring is a process by which a firm does an

analysis of itself at a point of time and alters what it
owes and owns, refocuses itself to specific task of
performance improvements.

Restructuring would radically alter a firm’s

o capital structure,
o asset mix and
o organization
so as to enhance the firm value.
Definition
 Corporate restructuring can be defined as

- any change in business capacity or portfolio that is carried

out by an inorganic route

- any change in the capital structure of the company that is

not in the ordinary course of business
 Any change in business capacity or portfolio carried out by inorganic route.
- merger
- acquisition

 Change in the business portfolio could also be in the nature of reduction of

businesses handled by a company.

 Any change in the capital structure of a company that is not in the ordinary
course of its business
- significant change in the debt equity ratio

 Any change in the ownership of a company or control over its management

- merger of two companies belonging to different promoters
- demerger of a company into two or more with control of the resulting
company passing on to other promoters
- acquisition of a company
- sell-off of a company or its substantial assets
- delisting of the company
The activities or changes which are not
termed as Corporate Restructuring

1. Initial creation of a corporate structure

 Its various examples are
- incorporation of a limited company
- conversion of a proprietary concern into a company
- conversion of a partnership firm into a company
- conversion of a private company into a public
company.
2. Change in internal command structure or hierarchy
3. Change in business process
4. Downsizing
Other activities – outsourcing, enterprise resource planning,
TQM,
Broad Areas of Restructuring
Financial: mergers, acquisition, joint ventures etc.
It also deals with restructuring the capital base

Technological: investment in R& D, alliances

with overseas companies.

Marketing: product market segments

Manpower: internal structures and process for

improving the capability of people
Motives for Restructuring
 Strategic motives
 Expansion and growth
 Dealing with the entry of MNCs
 Economies of scale
 Synergy
 Market penetration
 Market leadership
 Backward/forward integration
 New product entry
 New market entry
 Surplus resource
 Minimum size
 Risk reduction
 Balancing product cycle.
 Arresting downward trend
 Growth and diversification strategy
 Re-fashioning
 Financial Motives
• Deployment of surplus funds
• Fund raising capacity
• Market capitalization
• Tax planning
• Operating economies
Creation of shareholder
• Tax benefits value
• Revival of sick units
• Undervaluation of target
company
Organizational Motive
Superior management
Ego satisfaction
Retention of managerial talent
Removal of inefficient management.
Gains from Corporate Restructuring
Synergistic benefits
Sharper focus
Better corporate governance
Improvement in managerial incentives and motivation
Greater disciplining power of debt
Elimination of cross subsidies.
Types of Restructuring
 Techniques of Corporate Restructuring

Corporate
restructuring
technique

Expansion Divestment techniques Other techniques

technique

Mergers
Acquisition demerger going private
Takeovers sell-off share repurchase
Joint venture management buy out management buy in
Strategic alliance leveraged buy out reverse merger
Franchising liquidation equity carve out
IPRs
Mergers
THANK YOU
THANK YOU
THANK YOU
THANK YOU
THANK YOU
THANK YOU
THANK YOU
 Mergers may take two forms
Merger through absorption
Absorption is a combination of
two or more companies into an
existing company. All companies
except one lose their identity in a
Merger through absorption.
Tata Fertilizer Ltd was absorbed by
Tata Chemical Ltd. TCL survived
But TFL ceased to exist.
Merger through consolidation
Consolidation is a combination of
Companies two or more into a
new company. In this form of merger
companies are legally dissolved
and a new entity is created.
Hindustan Computers Ltd, Hindustan
Instrument Ltd, Indian Software
Company Ltd and Indian Reprographic
Ltd in 1986 merged to form a new
Company called HCL Ltd.
Classifications of mergers
 Horizontal merger - Horizontal mergers are those
mergers where the companies manufacturing similar
kinds of commodities or running similar type of
businesses merge with each other.

 Examples of Horizontal Mergers

 The merger of ACC (erstwhile Associated Cement
Companies Ltd.) with Damodar Cement.
 The formation of Brook Bond Lipton India Ltd. through
the merger of Lipton India and Brook Bond.
Classifications of mergers
• Vertical mergers : A situation where a product
manufacturer merges with the supplier of inputs or raw
materials or a product manufacturer merges with the
product's distributor.

• Example:
A cone supplier merging with an ice cream maker.
Classifications of mergers 
Conglomerate merger : A type of merger whereby the
two companies that merge with each other are involved in
different sorts of businesses.

Example: Voltas limited.

Classifications of mergers
Market-extension merger - Two companies that sell
the same products in different markets.

Product-extension merger - Two companies selling

different but related products in the same market.
 Acquisition
Purchase of one company by another
Types

Nature

Friendly Hostile
There are many ways in which control over a
company can be acquired
1. By acquiring i.e purchasing a substantial percentage of the voting
capital of the target company.

2. By acquiring voting rights of the target company through a power of

attorney or through a proxy voting arrangement.

3. By acquiring control over an investment or holding company,

whether listed or unlisted that in turn holds controlling interest in
the target company.

4. By simply acquiring management control through a formal or

informal understanding or agreement with the existing persons in
control of the target company.
Types of Control

Absolute control

Practically absolute control

General control over a company

 Case Study
Hindalco-Novelis
Company Overview

Hindalco
o Aditya Birla Group
o Largest aluminium producer

Novelis
o World leader
o Aluminum beverage cans
 Why the Deal?
o Gain sheet mills
o Strong presence in recycling of aluminium business

Total
o All cash transaction $6B

o Debt-equity ratio of 7.23:1

$Debt
$3.6B
2.4B

$2.85B $300M $450M

Joint Venture
What is a Joint Venture?
• A Joint Venture (JV) is a cooperative enterprise entered into by
two or more business entities.
•
• The parties in the JV agree to create a new entity by both
contributing equity.

• They share the revenues, expenses, and control of the enterprise

according to a joint venture agreement (contract).

• The venture can be for one specific project only, or a continuing

business relationship.

• The phrase generally refers to the purpose of the entity and not to
a type of entity.
Some of the JV’S in India
Basic elements of a Joint Venture

Contractual Agreement

Specific Limited Purpose and

Duration

Joint Property Interest

Common Financial and Intangible

Goals and Objectives

Shared Profits, Losses, Management

and Control
 Developing Joint Ventures

Partner search
Evaluating Options
Negotiation
Business Valuation
Business Planning

COMPANY A COMPANY B

Legal Procedures
( MOU,
JV Agreement,
Regulatory
Approvals)

JOINT VENTURE (Formation & Management)

 Key Factors
Early Understandi
considerations ng FDI rules

Structuring the Due

JV vehicle Diligence

Regulatory
Company Licences &
formation approvals

Taxation Employee
and Duties Issues

Joint Venture
Documents
Case Study: Hero Honda
What Was Hero Before JV.

Hero Cycles manufactured Over 16000 bicycles a day.

They had nurtured an excellent network of dealers to

serve India’s expansive markets.

Over the years Hero Group had entered multiple

business areas.
Some Facts About Honda.

HMC initial plans called for both two-wheeler market

and the electric generator market.

HMC first chose Kinetic Engineering Ltd. and formed

Kinetic Honda Motors Ltd. But this JV would work in
field of Scooters Manufacturing.

HMC came to Hero Group as the last compromise

choice for its motorcycle venture.
Honda selected the Hero Group for a variety of
reasons, which included:

Its engineering capability

Relevance and salience of HERO brand.
Distribution network.
Commitment to Quality.
Know-how and experience in handling large volume
production and distribution.
Tight focus on financial and raw material processes.
Cordial Industrial Relations.
The Deal Is Done.(June 1984)
Honda agreed to provide tech. know-how to HHM
and setting up manufacturing facilities. This
included the future R & D efforts.

Honda agreed for a lump sum fee of $500,000 & 4%

royalty on SP.

Both Partners held 26% of the equity with other

26% sold to the public and the rest held to financial
institutions.
 Success Story
 HHM had grown consistently, earning the title of the world’s largest
motorcycle manufacturer after having churned out 1.3 million
vehicles in 2001.

 World’s largest two-wheeler manufacturer with annual sales volume

of over 2 million motorcycles.

 Owns world’s biggest selling motorcycle brand – Hero Honda

Splendor.

 Over 9 million motorcycles on Indian roads.

 Deep market penetration with 5000 outlets.

 Success Story (Contd.)
MARKET SHARE (%)

21
OTHER 52
63
S
79
48
HEROHO 37
NDA
97-98 03-04 08-09
 Reasons for success
The deep penetration network of hero largely benefited the
sales.

Absence of major competitors in initial years.

Sound and proven technical capabilities of Honda and the

reliability of Hero.

Increased market for motorcycles:

 Better Fuel efficiency.
 Change in people’s perception.
 Decrease in price difference with scooters.
Strategic Alliance
A strategic alliance is when two or more businesses join
together for a set period of time.

Characteristics
May or may not be a contractual arrangement but this is
always recommended.
Long Term Relationship
High Level of Trust
Win/Win (Mutual Advantage)
Top Management Interchange
Continuous Exchange of Ideas
Business Process Re-engineering
Characteristics Cont…
Focus on Significant Value-Added
Mutual Dependency
Strategic Framework in Place
High Level of Commitment
Increased Capabilities/Capacities
Enhanced Business Opportunities
Improving Shareowner Value
How to create Strategic Alliances

Alliance
Alliance Terminatio
Operation n
Contract
Negotiation
Partner
Assessmen
t
Strategy
Development
 Horizontal and Vertical Alliance

Suppliers Vertical Alliances Customers

Organization

Horizontal
Alliances

Competitors
Forms of alliances
Industry consortium
Technical training

Supplier agreement

Technology licensing

Franchising
Distribution agreement

R&D cooperation

Equity joint venture

Exit from Strategic Alliances

All alliances need an exit strategy

It is important to agree in advance on how the alliance

will be unwound when.

To have such a strategy is commercial best practice.

There are contractual mechanisms for doing this, such

as by including a Savoy clause in the contract.
As in the case of partner selection, exit options and
actions are well described in the literature.
 JV and Strategic Alliance-Difference

C A

A B
A B B

Joint Venture Strategic Alliance

 Joint Venture
• Contractual
• Separate legal entity
• Significant matters of
operating and financial
policy are predetermined
and “owned” by the JV
• Exist for a specific time
• Exist for a specific project or
purpose
• Limited with respect to
future expectations
Strategic Alliance
• May or may not be contractual
• Generally, not a separate legal
entity
• Significant matters of
operating and financial policy
may or may not be
predetermined but are
“owned” by the individual
participants
• Indefinite life or a specific
time
• Fluid and allows for greater
amounts of ambiguity
Franchising
FRANCHISING

Franchising is an arrangement whereby one

party which has developed a proven way of
running and managing a business, licenses
another party and gives him the rights to
operate in the same business format, a trade or
trade name.
Components of Franchising

The three components of the franchise are :

• stipulated way of operating the business
• distinctive trademark or service mark
• payment of fees :- joining fee & on-going fee
and/or royalty payment
The “Proprietary Marks” in Franchising

• Trade Name • Emblem

• Trade Mark • Motto
• Patent • Other Proprietary
Marks / copyrights
• Logo
 How to set up a franchise?

Company has successful

franchise concept Develop franchise
package

Set up model
Recruit franchisees
Franchise outlet
Benefits Of Franchising

Franchising allows the franchisor to :

• expand rapidly
• enhance business image
• save operating costs
• have access to greater geographical location
Advantage to the franchisor

• No Investment in Immovable Property

• Large Scale Turnover
• Sales Staff
• Brand loyalty is developed
• Goodwill of trademark is secured
Benefits to Franchisee
• higher chances of success
• shorter learning curve
• established trade mark or service mark
• economies of scale in bulk purchasing
• joint advertising and promotion
• transfer of management expertise training
• support services from the franchisor
The Two Formats of Franchising

(a) Product Format Franchising

(b) Business Format Franchising

(a) Product Format Franchising

• Franchisor is Typically a Manufacturer

• License covers Proprietary Marks only

• Franchisee may or may not use same marketing efforts

as Franchisor

• Example : Ford, GM, Coca-Cola

(b) Business Format Franchising

• Franchisor may or may not be a Manufacturer

• License covers system + Proprietary Marks

• Franchisee Follows strict & uniform way to operate &

promote Franchise

• Example : Mc-Donalds, Pizza Hut, Starbucks.

CASE STUDY 1
Case Study

• 70% business – Franchising

• Support in terms of operations, training, advertising,
marketing, real estate, construction, purchasing and
equipment.
• Franchisees to Individuals only
• Completion of a 9 month training programme essential
• Site evaluation, Property acquired, construction done by
McDonalds
• Franchisees are responsible for all normal business functions
• No financing
 Case Study

• Agreement is for 25 years ( Mc holds head-lease)

• Franchisees to maintain the restaurant décor and building fabric to a high standard,
repairing lease
• Franchisees may only sell approved McDonald's products through their restaurants.
On Going Fees
• For the use of the Real Estate, McDonald's charge a monthly rent. This is based on
the level of monthly net sales (Total sales less v.a.t.), and currently ranges from
5.65% to 18.4% (of monthly net sales).
• McDonald's charges a monthly royalty of 5% of monthly net sales.
• All McDonald's restaurants make an agreed contribution to a separately managed
marketing fund. The contribution rate is currently 4.5% of monthly net sales.
Divestment
DIVESTMENT
The process of selling an asset , also known
as divestiture, it is made for either financial or social
goals.

Realizing the market value of an asset by selling,

liquidating, or exchanging it.

 Sale of all or majority of voting stock (voting shares

) of a firm.
 TYPES OF DIVESTMENT
Straight sale

Spin-off

Equity carve-out

Outsourcing

Tracking stock

Demerger
 Motives for Divestment
Market Share Too Small

Availability Of Better Alternatives.

Need For Increased Investment.

Lack Of Strategic Fit.

Legal Pressures To Divest.

Curtailment Of Losses
Sell-off: A sell off is a sale of a part of the organization to a third
party in the following circumstances.

To come out of shortage of cash

To protect the firm from takeover activity by selling off desirable
division to the bidder.
To improve profitability by selling loss making unit.
To reduce business risk by selling off high risk activities.
Demerger
 Spin-Offs
STRUCTURE

Transfer of undertaking Y
X Y Y
Consideration in cash
or issue of shares Company B
Company A

 Consideration is usually shares of Company B but

maybe cash.
 Process may or may not be Court sanctioned.
 Salora spinning off Panasonic to Matsushita under
s. 391 Scheme. Consideration in cash.
78
Tracking Stock 
A tracking stock is a special type of stock issued by a publicly held company to track the value
of one segment of that company. The stock allows the different segments of the company to be
valued differently by investors. 

Let's say a slow-growth company trading at a low price-earnings ratio (P/E ratio) happens to

have a fast growing business unit. The company might issue a tracking stock so the market can
value the new business separately from the old one and at a significantly higher P/E rating. 

Why would a firm issue a tracking stock rather than spinning-off or carving-out its fast growth
business for shareholders? The company retains control over the subsidiary; the two
businesses can continue to enjoy synergies and share marketing, administrative support
functions, a headquarters and so on. Finally, and most importantly, if the tracking stock climbs
in value, the parent company can use the tracking stock it owns to make acquisitions. 

Still, shareholders need to remember that tracking stocks are class B, meaning they don't grant
shareholders the same voting rights as those of the main stock. Each share of tracking stock
may have only a half or a quarter of a vote. In rare cases, holders of tracking stock have no
vote at all
Share Buy Back
Share buyback helps a company by giving a better use
of its funds than reinvesting these funds in the same
business at below average rates of return or going in
for unnecessary diversification or buying growth
through costly acquisition.

It leads to reduction in paid up capital and higher

earning and book value per share.

The market price of equity goes up

It strengthens promoters control and enhances equity

value of shareholders
Reasons for Buy-Back
 To improve shareholders value. Surplus funds of the company
are utilized, EPS improves.

 It provides a safeguard against hostile takeovers by increasing

promoters holding

 It enables corporate to shrink their equity base.

 It is a method of financial engineering.

 It improves intrinsic value of shares by reducing the level of

floating stocks
Financing of Buy-Back
Internal sources

Sufficient cash position

Selling of temporary investment with least

possible loss

Raising cash by issuing fixed deposits

Cash credit from commercial bank

Methods of Buyback
Tender Method

Open market purchase through stock exchanges

 Open market purchase through book building:

Repurchase price can be calculated as follows
P = (S*M)/(S-N)

Where
P = Equilibrium purchase price
M = current market price of shares
S = No. of shares outstanding
N = No. of Shares to be repurchased.
 Impact of buyback on shareholding pattern

Company Share % Company B Share %

A s s
Promoters 40 40 Foreign 50 50
group shareholder
Widely 30 30 Indian 50 50
scattered company
Financial 30 30
institution
Total 100 100 100 100
There is a buyback from the two companies to their respective shareholders.
25 shares are offered by public shareholders of company A and 20 shares are
offered by Indian shareholders of Company B. the other shareholders are not
accepting the buyback. The resulting shareholding pattern would be as under .

Company Shares % Company Shares %

A B
Promoters 40 53.3 Foreign 50 62.5
group sharehold
er
Widely 5 6.7 Indian 30 37.5
scattered company
Financial 30 40
institution
Total 75 100 80 100
Particulars Before buy back After buy back

Paid up equity share 1,00,00,000 60,00,000

capital(Rs 10 each)

No. of equity shares 10,00,000 6,00,000

PAT 60,00,000 60,00,000

Dividend paid 15,00,000 15,00,000

EPS 6 10

Dividend payout ratio 25% 25%

Particulars Before buy back After buy back

Dividend per share 1.50 2.50

P/E Ratio of the industry 12 12

Theoretical market price of 72 120

shares (EPS *P/E ratio)
Market capitalization 720 lakh 720 lakh
Benefits:
 Firms whose profitability was below their industry average
enjoy greater share price growth after shares are
repurchased than firms whose profitability was above their
industry average.

 Firms whose sales growth was below their industry average

enjoy greater share price growth after shares are
repurchased than firms whose profitability was above their
industry average.

 Profitable and growing firms that repurchase share provide

a clear indication to investor about the strength of the
company.
Drawbacks
This enables unscrupulous promoters to use
company’s money to raise their personal stakes.

It opens up possibility for share price manipulation

It could divert away company’s fund from product