Merger & Acquisition

Corporate Restructuring

Corporate restructure means actions taken to expand or contract a firm's basic operations or fundamentally change in its asset or financial structure It refers to a broad array of activities that expand or contract a firms operations or substantially modify its financial structure or bring about a significant change in its organisational structure and internal functioning.

FORMS OF CORPORATE RESTRUCTURING

Expansion
Mergers & acquisition Tender offers Asset Acquisition Joint venture

Sell-offs
Spin- offs

Corporate Restructuring

Split-offs Split-ups Equity carve outs Corporate Control

Premium Buy-backs Standstill Agreements Proxy contests

Changes in Ownership Structure

Exchange offers Share Repurchase Going Private Leveraged Buy-outs

1. 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.

Expansion: 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 was 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

Expansion: Takeover/ Acquisition

A corporate action where an acquiring company attempts to acquiremakes a bid for an acquiree. 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.

Is a part of takeover/acquisition strategy

Example: Flextronics International giving an open market offers at Rs. 548 for 20% of paid-up capital in Hughes Software Systems.

Expansion: Asset Acquisition

It involves buying asset of another company. These assets may be tangible assets like manufacturing unit or intangible assets like brands. a

In such acquisitions, the acquirer company can limit its acquisitions to those parts of the firm that coincide with the acquirers needs

For example, Coca-Cola paid Rs.170 crore to Parle to acquire its soft drinks brands like Thums Up, Limca, Gold Spot, etc.

Expansion: 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.

Examples: Tata Motors entered into a joint venture with a South African company, Imperial Group, to market its pick-up vehicle in the region.

FORMS OF CORPORATE RESTRUCTURING

Expansion
Mergers & acquisition Tender offers Asset Acquisition Joint venture

Sell-offs
Spin- offs

Corporate Restructuring

Split-offs Split-ups Equity carve outs Corporate Control

Premium Buy-backs Standstill Agreements Proxy contests

Changes in Ownership Structure

Exchange offers Share Repurchase Going Private Leveraged Buy-outs

2. Sell-Offs / Contraction

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

Sell-Offs: Spin-Offs

Company distributes all the shares it owns in a subsidiary to its own shareholders implying creation of two separate public companies with same proportional equity ownership. 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.

Sell-Offs: 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.

Sell-Offs: Split Ups

A corporate action in which a single company splits into two or more separately run companies.
Shares of the original company are exchanged for shares in the new companies, with the exact distribution of shares depending on each situation. This is an effective way to break up a company into several independent companies. After a split-up, the original company ceases to exist.

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

Sell-Offs: Equity Carve out

When parent has substantial holding in a subsidiary - It sells part of that holding to the public. "Public" does not necessarily mean shareholders of the parent company. Thus the asset item "Subsidiary Investment" in the balance-sheet of the parent company is replaced with cash. Parent company keeps control of the subsidiary but gets cash.

FORMS OF CORPORATE RESTRUCTURING

Expansion
Mergers & acquisition Tender offers Asset Acquisition Joint venture

Sell-offs
Spin- offs

Corporate Restructuring

Split-offs Split-ups Equity carve outs Corporate Control

Premium Buy-backs Standstill Agreements Proxy contests

Changes in Ownership Structure

Exchange offers Share Repurchase Going Private Leveraged Buy-outs

3. Corporate control: Buy Back

It refers to buying back of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buyback shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake. A buyback is a method for company to invest in itself since they can't own themselves.

Corporate Control: Standstill Agreement

A contract that stalls or stops the process of a hostile takeover.

The target firm either offers to repurchase the shares held by the hostile bidder, usually at a large premium, or asks the bidder to limit its holdings. This act will stop the current attack and give the company time to take preventative measures against future takeovers.

Corporate Control: Proxy Contests

This strategy may accompany a hostile takeover. A proxy contest occurs when the acquiring company attempts to convince shareholders to use their proxy votes to install new management that is open to the takeover.

The technique allows the acquired to avoid paying a premium for the target

FORMS OF CORPORATE RESTRUCTURING

Expansion
Mergers & acquisition Tender offers Asset Acquisition Joint venture

Sell-offs
Spin- offs

Corporate Restructuring

Split-offs Split-ups Equity carve outs Corporate Control

Premium Buy-backs Standstill Agreements Proxy contests

Changes in Ownership Structure

Exchange offers Share Repurchase Going Private Leveraged Buy-outs

Leveraged Buyout

The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.