Financial Distress

Mergers & Acquisitions

International Financial Management
By
Ajinkya Yadav (19020348002)
Utkarsh Tanwar (19020348016)
Kapil Mishra (19020348021)
FINANCIAL
DISTRESS
 A situation where a firm’s operating
cash flows are not sufficient to satisfy
current obligations and the firm is
What is forced to take corrective action.

financial Financial distress may lead a firm to

distress ? default on a contract, and it may
involve financial restructuring
between the firm, its creditors, and
its equity investors.
Insolvency

 Stock-base insolvency; the value of the firm’s

assets is less than the value of the debt.

Solvent firm Insolvent firm

Debt Debt
Assets Equity
Assets
Equity Debt

Note the negative equity

Insolvency
 Flow-base insolvency occurs when the firms cash
flows are insufficient to cover contractually
required payments.

Cash
flow
shortfall Contractual
obligations
Firm cash flow

Time
 Firms with too high
leverage ratio
Why firms
suffer Firms with inferior
financial operating results
distress? Firms in a declining
industry
What Happens in Financial Distress?

 Financial distress does not usually result in the firm’s death.

 Firms deal with distress by
 Selling major assets.
 Merging with another firm.
 Reducing capital spending and research and development.
 Issuing new securities.
 Negotiating with banks and other creditors.
 Exchanging debt for equity.
 Filing for bankruptcy.
What Happens in Financial Distress
No financial
restructuring

49%

Financial Private
distress workout

47%
51%
Reorganize
Financial and emerge
restructuring
83%
53%
7% Merge with
Legal bankruptcy another firm

10%
Liquidation
Responses to Financial Distress

 Think of the two sides of the balance sheet.

 Asset Restructuring:
 Selling major assets.
 Merging with another firm.
 Reducing capital spending and R&D spending.
 Financial Restructuring:
 Issuing new securities.
 Negotiating with banks and other creditors.
 Exchanging debt for equity.
 Filing for bankruptcy.
Bankruptcy Liquidation and Reorganization
 Firms that cannot meet their obligations have two
choices: liquidation or reorganization.
 Liquidation means termination of the firm as a going
concern.
 It involves selling the assets of the firm for salvage value.
 The proceeds, net of transactions costs, are distributed to
creditors in order of priority.
 Reorganization is the option of keeping the firm a going
concern.
 Reorganization sometimes involves issuing new securities to
replace old ones.
Companies Act (1956 2013)

 Enacted with a view to meeting the present-day challenges of corporate

governance arising from stakeholders’ expectations.
 In a new era of corporate governance.
 Increasing the roles and responsibilities of the Board.
 Protecting shareholders' interests.
 Bringing in a disclosure based regime and
 Built in deterrence through self-regulation.
 Enhancing the duties and liabilities of directors.
 Imposition of stringent penal provisions in case of breach of any statutory
provisions.
Existing Laws Relating To Recovery Of
Debt & Revival of Borrowers
 CPC:A creditor may file a money recovery suit against a defaulting
debtor under the Civil Procedure Code, 1908 (CPC) with jurisdictional
Civil Court. However, owing to high backlog of cases and slow
adjudication process, it may take decades to obtain a decree against
the debtor through this route.
 SICA:The Board of Industrial & Financial Reconstruction (BIFR) was set
up under Sick Industrial Companies (Special Provisions) Act, 1985
(‘SICA’).
 SARFAESI Act Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002.
 Banks utilize this Act as an effective tool for bad loans (NPA) recovery
National Company Law Tribunal
Formed on 1 June 2016

 Headed by President who is a retired Chief Justice of High Court.

 Judicial member
 Technical members
 11benches @ 10 Stations (Ahmedabad, Allahbad, Bengaluru, Chandigarh, Chennai,
Guwahati, Hyderabad, Kolkatta, Mumbai & New Delhi
 Addressing NPA’s of Bank: Insolvency & Bankruptcy Code (IBC) to play major role in
resolution
 With the Government and RBI deciding to first tackle the top 50 large stressed assets
into the banking universe, corporate insolvency will emerge as credible solution of
bad assets
 On May 05, 2017 when the cabinet gave more power to RBI – The Apex body is now in
position to direct banks to initiate insolvency proceedings with respect to a specific
amount
IBC a misnomer
IBC = Insolvency & Bankruptcy Code, 2016
 It appears that this is a law to provide a company to be insolvent and
bankrupt
 Thereby indicating the death of the company, with no chance of revival or
rehabilitation
 And the remaining assets are distributed among the creditors, employees,
government dues and other stake-holders
 Actually, the IBC provides for an attempt to resolve the issues between the
creditors and the corporate debtor
 Detailed procedure for resolution process is laid down
 Only when the resolution process fails, then the company goes into
liquidation
 IBC is applicable to Corporates, LLPs, (Adjudicated Authority is NCLT) and
also individuals or Partnership firms (Adjudicated Authority is Debt Resolution
Tribunal)
Scheme of IBC for Corporates
 Application to NCLT by Financial Creditor, Operational Creditor or
Corporate Debtor
 Insolvency commencement date to start from date of admission of
application
 Interim Resolution Professional to be appointed within 14 days of admission
 IRP to invite claims by paper publication and constitute a committee of
creditors
 COC to confirm appointed IRP or apply for replacement to NCLT
 NCLT to its satisfaction ascertain all defaults within 7 days
 CIRP to be completed within 180 days from date of admission
 90 days extension may be granted if COC supports by 75% votes (maximu
possible resolution period 180 + 90 days)
 Initiate the liquidation process after the CIRP timeframe is over
Distribution of Assets on Liquidation
 Costs of CIRP and liquidation costs to be paid in full
 Debts to rank equally between and among the following
 Workmen dues for 24 months preceding the liquidation commencement date
 Debts owed to a secured creditor if such secured creditor has relinquish security as per
Section 52
 Wages and any unpaid dues owed to employees other than workmen for 12 month
preceding liquidation commencement date
 Financial debts owed to unsecured creditors
 Debts to rank equally between and among the following
 Any amount due to Central/State Government in respect of 2 years preceding the
liquidation date
 Debts owed to a secured creditors for any amount unpaid following enforcement of
security interest
 Any remaining debts and dues
 Preference shareholders, if any
 Equity shareholders or partners as the case may be
Vulture (not Venture) Capital

 “Vultures” are money managers that specialize in the

securities of distressed and defaulted companies.
 Distressed debt investors have target annual rates of
return of 20–25 percent.
 Although some years are better than others, the overall
annual rate of return has been about 12 percent—similar
to junk bonds but less than the stock market.
Private Workout or Bankruptcy: which
is Best?
 Both formal bankruptcy and private workouts involve exchanging new
financial claims for old financial claims.
 Usually senior debt is replaced with junior debt and debt is replaced
with equity.
 When they work, private workouts are better than a formal
bankruptcy.
 Complex capital structures and lack of information make private
workouts less likely.
Private Workout or Bankruptcy: Which
is Best?
 Advantages of Bankruptcy
1. New credit is available - "debtor in possession" or "DIP" debt.
2. Discontinued accrual of interest on pre-bankruptcy unsecured debt.
3. An automatic stay provision.
4. Tax advantages.
5. Requires only approval by 1/2 of creditors owning 2/3 of
outstanding debt.
 Disadvantages of Bankruptcy
1. A long and expensive process.
2. Judges are required to approve major business decisions.
3. Distraction to management.
4. “Hold out” by stockholders.
Prepackaged Bankruptcy

 Prepackaged Bankruptcy is a combination of a private

workout and legal bankruptcy.
 The firm and most of its creditors agree to private
reorganization outside the formal bankruptcy.
 After the private reorganization is put together
(prepackaged) the firm files a formal bankruptcy under.
 The main benefit is that it forces holdouts to accept a
bankruptcy reorganization.
 Offers many of the advantages of a formal bankruptcy,
but is more efficient.
Summary and Conclusions
 Financial distress is a situation where a firm’s operating
cash flow is not sufficient to cover contractual obligations.
 Financial restructuring can be accomplished with a private
workout or formal bankruptcy.
 Corporate bankruptcy involves liquidation or
reorganization.
 A hybrid of a private workout and formal bankruptcy is
prepackaged bankruptcy.
MERGERS
&
ACQUISITIONS
M&A

 With the belief that two companies together are more valuable than
when existing separately, individual companies often consolidate with
a target of achieving greater efficiency and market share through
merger and acquisition deals (M&A). Although the terms “merger”
and “acquisition” are often used interchangeably, they represent
different methods of company consolidation processes. A merger is a
combination of two companies to form a new company, while an
acquisition, called a hostile takeover, is the purchase of one company
by another, in which no new company is formed.
 Merger – A + B = C
 Acquisition – A + B = A
What is a MERGER ?

 Mergersis the combination of two companies to

form one new company.
 The combination of the two companies involves
a transfer of ownership.
 Both
companies surrender their stock and issue
new stock as a new company.
Types of mergers

 Horizontal Mergers
 Vertical Mergers
 Conglomerate Mergers
 Concentric/Cogeneric Mergers
HORIZONTAL MERGERS

 A Merger occurring between companies in thesame

industry
VERTICAL MERGERS

 When two companies produce same goods and services

for one specific product
CONGLOMERATE MERGERS

 A merger between firms involved in totally unrelated

business activity
CONCENTRIC / COGENERIC MERGERS

 The merger of firms which are into similar type of

business
What is an ACQUISITION ?

 When one company takes over another and

clearly established itself as a new owner, the
purchase is called an acquisition
Types of acquisitions

 Friendly Acquisitions
 Reverse Acquisitions
 Back Flip Acquisitions
 Hostile Acquisitions
FRIENDLY ACQUISITON

 Both the companies approve the acquisition under friendly

terms.
REVERSE ACQUISITON

 A private company takes over a public company

BACK FLIP ACQUISITON

 The purchasing company becomes a subsidiary of the

purchased company.
HOSTILE ACQUISITON

 The entire process is coercive (done by force)

Differences
MERGERS
 Fusion of two or more companies
voluntarily form a new company
 Purpose is to decrease competition
& increase operational efficiency
 Size of merging companies is more
or less same
ACQUISITIONS
 When one entity purchases the
business of other entity
 Purpose is instant growth
 Size of the acquiring company is
bigger than acquired company
MERGERS

WHY TO MERGE WHY NOT TO MERGE

 Increase market share  Corporate culture clash
 Economies of scale  Increased business
 Research and complexity
development benefits  Employees may resist
 Reducing competition change
ACQUISTION

WHY TO ACQUIRE WHY NOT TO ACQUIRE

 Increase market share  Inadequate –
 Diversification Inappropriate valuation
 Aggressive competition
 Inability to achieve
synergy going ahead
 Reducing competition
 Buying debt ??
Mergers & Acquisition

Motives
 Internal & External
economies of scale
 Elimination of competition
 Enjoying monopoly
 Technological
advancement
 Knowledge sharing
Benefits
 Greater value generation
 Cost efficiency
 Increased market share
 Higher competitiveness
TATA STEEL – CORUS ($12.2 Bn)

Details:
 30 Jan 2007
 Largest Indian Acquisition
 Tata Steel became 5th
Largest steel company
 100% stake in Corus by
paying INR 428 per share
VODAFONE-HUTCHISON ESSAR ($11.1 billion)

Details:
 11 Feb 2007
 2nd Largest Acquisition
 67% stake holding in Hutch
HINDALCO - NOVELIS ($6 billion)

Details:
 June 2008
 Aluminum & Copper
sector
 Subsequent to acquisition
of Novelis, Hindalco
entered the Fortune 500
league (Sales Revenue)
RANBAXY – DAIICHI SANKYO ($4.5 billion)

Details:
 June 2008
 Pharma sector
 Largest ever deal in the
Indian Pharma Industry
 Daiichi Sankyo acquired
more than 50% stake in
Ranbaxy to become the
15th largest drug maker
INTERNATIONAL
FINANCIAL
MANAGEMENT
  Art of managing money globally
 Main objective of International
Financial Management is to “MAXIMIZE
SHAREHOLDER WEALTH”
 IFM is a popular concept which
WHAT IS implicates management of finances in
an International Business
INTERNATIONAL environment, executing trade and
making money through exchange of
FINANCIAL foreign currency
MANAGEMENT ?  The International financial activities
help the organizations to connect with
international dealings with overseas
business partners – customers,
vendors, lenders. It is also used by
government and non-profit institutions
  IFM came into existence when
countries of the world started
opening doors for each other. This
phenomenon is well known by the
name of “LIBERALIZATION”
 Due to the open environment and
freedom to conduct business in any
HISTORY OF corner of the world, entrepreneurs
started looking for opportunities
IFM even outside their country
boundaries
 Apart from everything else, we
cannot forget the contribution of
financial innovations such as
currency derivatives; cross border
stock listings, multi-currency bonds
and international mutual funds.
 CONTENTS OF IFM

Foreign Sourcing
Exchange Capital in
Markets Global Markets

International
Financial Synthesis
Management

Managing Foreign
FOREX Investment
Exposure Decisions
  There are four major facts which
differentiate international financial
management from domestic financial
management,
Difference  1. Foreign Exchange (Fx): Its an
additional risk which a finance manager is
between required to cater to under IFM setting. Fx
refers to the fluctuating prices of
“International” currency which has the potential to
convert a profitable deal into a loss
making one
& “Domestic”  2. Political Risk: Political risk may

Financial include and change in economic

environment of the country e.g. Tariffs,
Contract Act, Trade Policies, Subsidies to
Management local and international players. It is
pertaining to the government of a
country which can anytime change the
rules of the game in an unexpected
manner
Difference  3. Market Imperfection: Having done a lot of
integration in the world economy, it has got a lot of
between differences across the countries in terms of
transportation cost, tax rates, infrastructure etc.
“International” Imperfect markets force a finance manager to strive for
& “Domestic” best opportunities across the countries.

Financial  4. Enhanced Opportunity Set: By doing business in

other than native countries, a business expands its
Management.. chances of reaping fruits of different taste. Not only
does it enhances the opportunity for the business but
CNTD also diversifies the overall risk of a business.
  Economic Interdependence
 It means that in today’s world, no nation exists in
economic isolation;
 All aspects of a nation’s economy-its industry, service
sectors, levels of income and employment, living
Importance of standard are linked to the economics of its trading
partners
IFM  All aspects of a nation’s economy-its industry, service
sectors, levels of income and employment, living
standard are linked to the economics of its trading
partners
 International competitive advantage – sourcing
externally to cut cost
  Capital Budgeting: What are the long term
international investments or projects should the
business take on?
Capital Structure: How do we pay for our assets, should
Decisions of IFM

we use local or foreign sourced debt or equity?
 Working Capital Management: How do we manage day
to day finances of the firm? How could you manage
foreign exchange risk?
SOURCES OF INTERNATIONAL FINANCE
MANAGEMENT
 There are many sources through which a company can increase its capital by
doing business in foreign countries through foreign companies,
 Licensing
 Franchising
 Subsidiaries & Acquisitions
 Strategic Alliances
 Exporting
 Global Financial System

GOVERNMENT SUPERVISORY
TREASURIES AUTHORITIES

ACCOUNTING
CENTRAL
STANDARD
BANKS
CURRENCIES BODIES

INTERNATIONAL EXCHANGE COMMERCIAL MULTINATIONAL

FINANCIAL RATES BANKS ENTERPRICES
INSTITUTIONS (MCE)

FINANCIAL
INVESTMENT MARKETS INSTITUTIONAL
BANKS INVESTORS

SOVEREIGN RATING
FUNDS AGENCIES
Licensing . . .

 License – means to give permission. A license may be

granted by a party “Licensor” to another party “Licensee”
as an element of an agreement between those parties
 A license may be issued by authorities, to allow an activity
that would otherwise be forbidden. It may require paying
a fee and/or proving a capability. The requirement may
also serve to keep the authorities informed on a type of
activity, and to give them the opportunity to set
conditions and limitations.
Franchising . . .

 Franchising is a practice of selling the right to use a firms

successful business model. For the franchisor, the franchise is an
alternative to building “chain stores” to distribute goods that
avoids the investments and liability of a chain. The franchisors
success depends on the success of the franchisee. The
franchisee is said to have a greater incentive than a direct
employee because he or she has a direct stake in the business.
 The franchisor is a supplier who allows an operator, or a
franchisee to use the suppliers trademark and distribute the
suppliers goods. In return, the operator/franchisee pays the
supplier/franchisor a fee
Subsidiaries & Acquisitions . . .

 A subsidiary is a company that is completely or partly owned by

another corporation that owns more than half of the subsidiary’s
stock, and which normally acts as a holding corporation which at
least partly or a parent corporation, wholly controls the
activities and policies of the daughter corporation.
 Mergers & Acquisitions are both the aspects of corporate
strategy, corporate finance and management dealing with the
buying, selling, dividing, and combining of different companies
and similar entities that can help an enterprise grow rapidly in
its sector or location, without creating a subsidiary, other child
entity or using a joint venture.
Conclusion

 Compared to national financial markets international

financial market have a different shape and analytics.
Proper management of international finances can help the
organization in achieving same efficiency and
effectiveness in all market.
 Without International Financial Management sustaining in
the market can be difficult.
 Thanks
Ajinkya Yadav
Utkarsh Tanwar
Kapil Mishra