LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Corporate Restructuring, Mergers & Acquisitions An Overview

Pankaj Varshney
pankaj@lbsim.ac.in

What is Corporate Restructuring?

Mathieu (1996) : articulated actions undertaken by firms to restore competitiveness that has eroded substantially. These measures are taken in response to major changes in the firms environment, esp. final demand, competition , and technology Rock and Rock (1990): corporate restructuring can encompass a broad range of transactions but generally alludes to substantial changes in the business portfolio and /or financial structure. Restructuring radically alters a firms structure , asset-mix and/or organization so as to enhance firms value
Mathieu,N. (1996). Industrial Restructuring, World Bank Experience, Future Challenges, The World Bank, Washington. Rock, M., & Rock,R.H. (eds) (1990). Corporate Restructuring: A Guide to creating the Premium Value Company,
CRMA-An Overview McGraw-Hill, New York, pp.1-6.

Dr. Pankaj Varshney

LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

What is Corporate Restructuring?

Corporate Restructuring is a broad term, which refers to significant re-orientation or realignment of investments (Assets), and /or financing (Liabilities) structure of a company, through a conscious management action with as view to drastically alter the quality and quantity of its future cash flows.

CRMA-An Overview

Corporate Restructuring

Corporate Restructuring involves: any change in business capacity or portfolio which is carried out in an inorganic way
Tata Motors acquisition of Jaguar Land Rover from Ford, through Jaguar Land Rover Limited Launch of Tata Sumo & Indica by Tata Motors - leading to an expansion of business portfolio through an organic route would not be considered as corporate restructuring Grasims acquisition of Larsen & Toubros (L&T) cement division through UltraTech Cement Limited Demerger of L&Ts cement business into UltraTech Cement Limited - reduction of its business portfolio.
CRMA-An Overview

Dr. Pankaj Varshney

LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Corporate Restructuring

Corporate Restructuring involves: any change in the capital structure that is not part of its ordinary course of business
Within a targeted or planned range if the debt/equity ratio fluctuates, such changes in the capital structure do not amount to capital restructuring. Borrowing of a significant amount of term loan or an issue of 3/5 year NCDs do not qualify to be called corporate restructuring . An initial public issue, or a follow-on public issue or buy-back of equity shares would permanently alter the capital structure of a company, and thus, would amount to corporate restructuring.
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CRMA-An Overview

Corporate Restructuring

Corporate Restructuring involves: any change in the ownership of the company or control over its management
Merger of two or more 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 a company All these would qualify to be called exercises in corporate restructuring.
CRMA-An Overview

Dr. Pankaj Varshney

LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Corporate Restructuring
External Restructuring
1. Asset based Restructuring
Acquisitions (of Divisions /Co.) Mergers (or Amalgamations) Divestures (of Divisions /Co.) Demergers (Spin-offs/Spilt-ups/ Equity Carve-outs) Joint Venture/ Strategic Alliances

Internal Restructuring
1. Portfolio Restructuring
Cost Reduction by way of:
Closure of units Redundancy Programme

2. Organisational Restructuring
Decentralisation Divisionalisation Delayering Matrix Structures

2. Financial Restructuring
Leveraged Buyouts Share Buybacks Debt-Equity Swap

3. Change in Ownership Structure

Privatisation / Disinvestments Targeted Share Issues (Preferential Allotments) Delisting of Shares
CRMA-An Overview

Mergers
Merger is combination of 2 or more companies into 1 company. Most frequently used form of corporate restructuring. Primarily a strategy of inorganic growth. May take the following forms: Absorption Consolidation

CRMA-An Overview

Dr. Pankaj Varshney

LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Absorption
Combination of all the assets and liabilities (and businesses, on a going concern basis) of two (or more) companies such that one of them survives. Combination of 2 or more companies into an existing company. All except one company lose their identity.

Absorption of Tata Fertilisers by Tata Chemicals Indias largest private sector corporate entity Reliance Industries Limited (RIL) is a result of many mega mergers of group companies into RIL.
CRMA-An Overview

Consolidation
Creation of an altogether new company owning assets, liabilities, and businesses (on going concern basis) of two or more companies, both/all of which cease to exist. Combination of 2 or more companies into a new company. All companies are dissolved and a new company is formed.

Hindustan Computers, Hindustan Instruments, Indian Software Co., Indian Reprographics consolidated to form HCL.
CRMA-An Overview

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Dr. Pankaj Varshney

LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Types of Mergers
Horizontal Merger: Involves firms operating and competing in the same line of business activity. Forming a large firm may have the benefit of economies of scale. Possible negative effect Monopoly power.
Merger of New Bank of India with Punjab National Bank.

Vertical Merger: Involves firms operating in different stages of the production process.
Merger of Reliance Industries with Reliance Petroleum.

Conglomerate Merger: Involves firms engaged in unrelated types of business activities.

CRMA-An Overview

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Amalgamation
Amalgamating company or transferor company: In the process of absorption or consolidation, the company whose assets and liabilities are transferred to another company and which ceases to exist through the process of dissolution without winding up is called amalgamating or transferor company. Amalgamated company or transferee company: In the process of absorption or consolidation, the company which receives the assets and liabilities of other company or companies and continues to survive/exist is called an amalgamated company or transferee company.

CRMA-An Overview

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Dr. Pankaj Varshney

LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Motives for Mergers

Economies of Scale: Central to horizontal merger; Economies are generated from sharing of central services Corporate Office, Accounting, Top Mgt. Economies of Vertical Integration: Some companies try to gain control over the production process by expanding back toward the output of the raw material and forward to the ultimate consumer through merger with the supplier or customer. Complementary Resources: Many small firms are acquired by large firms that can provide the missing ingredients to the small firm.
CRMA-An Overview

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Motives for Mergers (Contd.) Unused Tax Shield: Sometimes a firm may have potential tax shields but not have the profits to take advantage, hence merger with a profitable unit. Surplus Funds: Firms with surplus cash and shortage of good investment opportunities often turn to mergers financed by cash as a way to redeploy their capital. Eliminating Inefficiencies: Firms with unexploited opportunities to cut cost and increase sales and earnings. Such firms are natural candidates for acquisition by other firms with better management.

CRMA-An Overview

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Dr. Pankaj Varshney

LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Acquisitions (Takeovers) Acquisitions (Takeover): Act of acquiring effective control over the assets or management of another company called target company, without the combination of companies. Acquiring effective control means right to control its management & policy decisions As companies are managed by BoD, it also means the right to appoint (and remove) majority of directors. Separate legal identities of the companies remain but there is a change in control or management. Hostile acquisition is called Takeover.
Tatas acquiring VSNL Sterlite acquiring BALCO CRMA-An Overview Daiichi Sankyo acquiring Ranbaxy
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Ways to acquire a control

By acquiring a substantial percentage of the voting capital of the target company. By acquiring voting rights of the target company through power of attorney or through a proxy voting arrangement. By acquiring control over an investment or holding company, that in turn holds controlling interest in the target company. By simply acquiring management control through a formal or informal understanding or agreement with the existing person (s) in control of the target company.

CRMA-An Overview

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Dr. Pankaj Varshney

LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

1. Acquisition of a target company through acquisition of its shares Most common method is to acquire i.e. purchase substantial voting capital (i.e. equity capital) of the target company. What percentage would be considered as adequate to qualify as controlling interest? Absolute control: an unfettered right to take any decision. However, in such a case, the company cannot become a listed company or continue to be listed company, if it was listed earlier. Practically Absolute Control: ability to get any and all resolutions passed in the general body meeting of the shareholders Most of the important decisions, such as further issue of capital other than a rights issue, buy-back of shares, reduction of capital, delisting of the company, etc., can be taken, only by passing a special resolution, (at least 75 per cent of the shareholders by value votes in favour of a special resolution)
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CRMA-An Overview

Acquisition
General control over a company Some decisions (approval of annual accounts, declaration of dividend, issue of bonus shares, appointment of directors, etc) require only a ordinary resolution (a simple majority of the members present and voting, either in person or through proxies at the general meeting). In this case, one does not need to acquire 51% of the voting capital to have a control over a company. Shareholding pattern needs to be evaluated.

CRMA-An Overview

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Dr. Pankaj Varshney

LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

2. Acquisition of a target company through power of attorney

This is not a commonly used way of effecting acquisition of a company. It could be used only as a short-term tactic, probably as a precursor to the substantial acquisition of shares from existing promoters or a faction of the existing promoters, who, pending the conclusion of Memorandum of Understanding (MOU) to sell their shares to the acquirer, may allow him to vote on their behalf on certain key resolutions.

CRMA-An Overview

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3. Through acquisition of holding company controlling the target company

Mr. X
Mr X sells X Investment Pvt Ltd to ABC Ltd.

ABC Limited

100% 10%
X Investment Pvt. limited

40%

XYZ Limited
CRMA-An Overview 20

Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

4. Acquisition of a target company through formal or informal agreement

Mr X enters into an MoU with Mr. A.

Mr. X

Mr. A

46%

XYZ Limited
CRMA-An Overview 21

Some acquisitions
Acquisition of Corus by Tata Steel Acquisition of Spice Communication by Idea Cellular Acquisition of Ranbaxy by Daiichi Sankyo Acquisition of Hutchison Essar by Vodafone Acquisition of Sahara Airlines by Jet Airways Acquisition of Deccan Airways by Kingfisher Airlines Acquisition of Copper Tires (US) by Apollo Tyres (India)

CRMA-An Overview

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Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Divestiture
Sale of all or substantially all the assets of a company or any of its divisions for cash but not against equity. All assets or majority of assets (fixed assets, CWIP, CA, Investments) are sold off as one lump, hence also called slump sale under Income Tax Act. Selling co. pays off the related liabilities from the sale proceeds. However, specific liabilities like Current liabilities may be bought by the transferee company Divestiture is usually adopted to mobilize resources for the core business by selling-off non-core businesses.
CRMA-An Overview

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Divestiture
Pre-Divestiture Company X
Division A Division B

Company X has three divisions A, B & C

Division C

Post-Divestiture Company X
Division Division A C

Assets of division B are sold for cash, while Company X retains division A & C.

Division B

CRMA-An Overview

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Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Demerger
Assets & liabilities of a division (s) are detached from the parent company, housed in a new independent company against which shares are issued by the new company. Consideration is by issue of shares and not in cash. Demerged company Demerged company means the company whose assets, liabilities, and business(es) are being transferred in the process of demerger to another company in case of either spin-off or split-up. It is also called transferor company. Resulting company Resulting company(ies) means the company or companies to which assets, liabilities, loans and business(es) are being transferred in the process of demerger.
CRMA-An Overview 25

Demerger
Demerger of Non-IT business from IT business of Wipro Limited: Wipro Consumer Care & Lighting (including Furniture business), Wipro Infrastructure Engineering (Hydraulics & Water businesses), and Medical Diagnostic Product & Services business demerged into a separate company Wipro Enterprises Ltd Modes: Spin-off Split-up

CRMA-An Overview

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Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Demerger - Spin-offs
A spin-off is a new, independent company created by detaching part of a parent companys assets and operations. Shares in the new company are distributed on a pro-rata basis, to the parent companys shareholders. No cash changes hands, and the shareholders of the original parent company also become the shareholders of the newly spun company. Existing shareholders have the same proportion of ownership in the new entity as in the original company. Spin-off of Wipro Enterprises Limited from Wipro limited Spin-off of Ultra-tech Cements from L&T Spin-off of Dabur Pharma from Dabur India DCM Ltd. Spunoff into three separate companies DCM Shriram Consolidated, SIEL, DCM Shriram Industries.
CRMA-An Overview 27

Demerger - Spin-offs
Company X Company X has three divisions A, B & C
Division A Division B

Shares of Company Z are issued to shareholders of Company Y on prorata basis.

Division C

Company X Company Z
Division Division A C

Division B is spun-off into a separate company, while Company X retains division A & C.

Division B
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CRMA-An Overview

Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Rationale for Spin-off

Unlocking hidden value Establish a market valuation for undervalued assets and create a pure-play entity that is transparent and easier to value Undiversification Divest non-core businesses and sharpen strategic focus when direct sale to a strategic or financial buyer is either not compelling or not possible Motivating management Improve performance by better aligning management incentives with Spun-off Co's performance, creating direct accountability to public shareholders, and increasing transparency into management performance Eliminating dissynergies Reduce bureaucracy and give Spun-off Co management complete autonomy Anti-trust Break up a business in response to anti-trust concerns Corporate defense Divest "crown jewel" assets to make a hostile takeover of Parent Company less attractive
CRMA-An Overview 29

Demerger - Split-up
Split-up involves transfer of all or substantially all assets, liabilities, and businesses (on a going concern basis) of the company to two or more companies in which, again like spin-off, the shares in each of the new companies are allotted to the original shareholders of the company on a proportionate basis but unlike spinoff, the transferor company ceases to exist.

CRMA-An Overview

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Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Spilt-up
Company X has three divisions A, B & C Company X
Division A Division B

Each of Company Xs divisions are spun-off as separate companies

Division C

Shares of spun-off companies are issued to shareholders of erstwhile Company X on pro-rata basis. Company X does not exists after the Spilt-up.

Company A

Company B

Company C

Division A
CRMA-An Overview

Division B

Division C
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Equity Carve-outs
Equity carve-out is a hybrid of divestiture and spin-off. Shares in the new company are not given to existing shareholders but are sold in a public offering, hence also called IPO carve-out or subsidiary IPO. o In a carve-out, a company transfers all the assets & liabilities of one of its divisions to its 100 per cent subsidiary . o At the time of transfer, the shares are issued to the transferor company itself and not to its shareholders. o Later on, the parent company sells the shares in parts to outsiders - whether institutional investors by private placement or to retail investors by offer for sale. o In case of carve-out, the consideration for transfer of business to a new company eventually comes in the coffers of the transferor company. CRMA-An Overview 32

Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Equity Carve-outs
E.g.: Reliance Communications hived-off tower business to Reliance InfraTel and sold 5% stake in RITL to international investors. Typically, the parent continues to have an equity stake in the subsidiary and does not relinquish immediate control. Minority interest, usually less than 20 percent, is sold in an IPO. Sale of a minority stake, (15 or 20%), leaves the parent in control and may not reassure investors who worry about lack of focus or poor fit. Allows more incentive to perform, in the reduced size of operations, managers efforts will not go unnoticed. 33 CRMA-An Overview

Equity Carve-outs
Company X Company X has three divisions A, B & C
Division A Division B

Shares of Company Z are issued to the public

Division C

Company X Company Z
Division Division A C

Divisions B is spun-off into a separate company, while Company X retains division A & C.

Division B
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CRMA-An Overview

Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Privatization (Disinvestment)
Privatization (or disinvestment) is sale of shares by the government (the principal shareholder) in a government-owned company to private investors. Sale of equity stake by GoI in Oil India, NHPC, ONGC,MMTC etc. Motives for privatization: Increased efficiency: exposed to the discipline of competition Share ownership: Special terms for employees/ small investors (Maruti) Revenue for the government.
CRMA-An Overview

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Share Buyback
A company buys its own shares from its shareholders using its own resources. Buy-back of securities has been allowed since 1998 by incorporating sections 77A, 77AA and 77B Governed by SEBI (Buyback of Shares) Regulations Mode of rewarding the shareholders, besides being a method of capital restructuring. Modes of Share Repurchase: Open Market Repurchase Tender Offer Dutch Auction
CRMA-An Overview

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Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Share Buyback

Year 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Amount (Rs. crore) 1 300 1,297 2,154 1,011 52 3,600 363 295 2,004 4,218 824 4,295 13,765 1,694 159 36,032

No. of Issues 1 12 14 27 31 8 11 10 7 10 46 20 20 31 21 4 273

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Source: Prime Database,(as of 24/06/13)

CRMA-An Overview

2012-13 2013-14 (as on 31/05/13) Total

Reduction of Capital
Company is allowed to extinguish or reduce liability on any of its shares in respect of share capital not paid up or is allowed to cancel any paid-up share capital which is lost or is allowed to pay off any paid-up capital which is in excess of its requirements u/s 100 to 104 of the Companies Act, 1956
By extinguishing or reducing the liability in respect of share capital not paid-up By writing off or cancelling the capital which is lost By paying off or returning excess capital that is not required by the company

CRMA-An Overview

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Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Delisting
Delisting of a company refers to delisting of its equity shares from all stock exchanges where its equity shares are listed. Also referred to as Going Private Governed by SEBI (Delisting of Equity Shares) Regulations, 2009. Compulsory Voluntarily

CRMA-An Overview

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Examples of Delisting
Alfa Laval (India) Limited Atlas Copco (India) Ltd Astra Zeneca Pharma India Ltd BOC India Limited Binani Cement Ltd Blue Dart Express Limited Controls & Switchgear Contactors Ltd DSP Merrill Lynch Limited Flextronics Software Systems Ltd. Goodyear India Ltd GE Capital Transportation Financial

India Gypsum Ltd iGATE Global Solutions Limited Jindal Photo Ltd Nirma Limited Rayban Sun Optics India Ltd Saint-Gobain Sekurit India Limited Spencer & Company Ltd. SKF India Ltd UTV Software Communications Ltd Wimco ltd Wartsila India Ltd

CRMA-An Overview

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Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Why do companies Delist?

To reduce costs of maintaining large number of reports and having an expensive work force. To avoid sharing a lot of information in public domain. Promoters delist to make use of the level of freedom that unlisted companies enjoy.

CRMA-An Overview

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Joint Venture
Two or more companies (called joint venture partners) contribute to the equity capital of a new company (called joint venture) in pre-decided proportions. Normally, joint ventures are formed to pool the resources of the partners and carry out a business or a specific project beneficial to both the partners but which none of the partners wants to carry out under its own corporate entity .
Joint venture partners may otherwise be competitors but may be wanting to collaborate only for a specific project or business. Neither of the partners may be willing to dilute control on their business by accepting funding, especially equity funding, in their own balance sheet.
CRMA-An Overview 42

Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Joint Venture
The joint venture entity is manned by a separate management team. The joint venture may own its assets independently from its parent firms. Partner firms play an active role in the joint ventures strategic decisions. To ensure that management control of the common business or project is shared in the agreed proportion through charter of the joint venture company. To ensure that rewards of the common business or the project are shared in the predetermined ratio without the possibility of manipulation in favour of either side.
CRMA-An Overview 43

Some Joint Ventures

SBI Life : JV between State Bank of India (76%)and BNP Paribas Cardif (24%). Bharati-Walmart Private Limited: JV between Bharati Enterprises (India) and Walmart (USA). Maruti Suzuki (Before disinvestment) JV Between GoI & Suzuki Motors (Japan). Sony-Ericsson : JV between the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. Tata AIG, ICICI Lombard, etc.
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Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Why Joint Ventures?

For foreign partner Government restrictions Access to local distribution channels For local partner Access to new technology and processes Opportunity for larger chunk of revenue Pre-empt creation of JV with a rival

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Strategic Alliance
A strategic alliance is when two or more businesses join together for a set period of time. A strategic alliance is a partnership between firms whereby resources, capabilities, and core competences are combined to pursue mutual interests. The businesses, usually, are not in direct competition, but have similar products of services that are directed towards the same target audience. Strategic alliance is a primary form of co-operative strategy.
CRMA-An Overview 46

Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

01-Jul-2013

Features of Strategic Alliance

Generally, strategic alliances are arrangements between two or more entities that are created achieve mutual goals through collaboration. The two or more firms (partner) that unite to pursue upon a set of agreed goals. Each partner retains its business independence. The partner firms share the benefits of the alliance and control over the performance of assigned tasks. Usually non-equity, loosely structured relationship.
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Why form Strategic Alliances?

Gain a Means of Distribution in International Market: It may be beneficial for an exporter to ally with international partner, to understand the functioning and the international market network. Overcome Legal or Regulatory Barriers: In some countries it is mandatory to have local partners in order to conduct business. Thus, alliances offer suitable options. Diversification: It may be advantageous to enter into an alliance, as a business guide to minimize pitfalls in a new business territory.
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Dr. Pankaj Varshney

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LBSIM-PGDM(General)-Term-IV (Batch 2012-14)

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Some Strategic Alliances

Microsoft & Nokia : to develop Windows-based mobile handset. GSK & Dr Reddys Labs : to manufacture drugs under GSK brand name for emerging markets. Pfizer & Biocon: To market Biocons insulin biosimilar products in world markets. Starbucks & Barnes and Nobles : to provide in-house coffee shops, benefiting both retailers. Starbucks & United Airlines alliance has resulted in their coffee being offered on flights with the Starbucks logo on the cups.
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Dr. Pankaj Varshney

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