Corporate restructuring

Corporate restructuring is the process of making major changes to a company's structure, ownership, assets, or
operations to improve performance, financial health, and long-term sustainability. It can involve mergers, acquisitions,
divestitures, debt restructuring, and operational adjustments based on the company's goals and challenges.

A merger is a legal process where two or more companies combine to form a new entity, with shareholders exchanging
their stocks for new shares in the merged company. It requires board and shareholder approval, often needing a
supermajority vote. An example is the Vodafone and Idea merger, which formed Vi.

Classifications of Mergers:

1. Horizontal Merger – Companies in the same industry merge to expand market share, reduce competition, and
improve efficiency.

2. Vertical Merger – Firms at different production or distribution stages merge to enhance supply chain efficiency
and cut costs.

3. Conglomerate Merger – Companies from different industries merge to diversify their portfolio and reduce risk.

4. Diagonal Merger – Firms from related but not directly connected industries merge to offer complementary
products or services.

Reasons for Business Combinations:

Companies merge to achieve synergies, creating greater benefits than operating separately. These synergies include:

1. Cost Synergies – Merging reduces costs through economies of scale, where higher production lowers per-unit
costs. It also eliminates redundant functions, optimizes the supply chain, and reduces administrative expenses.

2. Revenue Synergies – The combined company can boost revenue by cross-selling and bundling products,
expanding into new markets, introducing new services, improving pricing power, and strengthening brand
reputation.

3. Financial Synergies – Mergers can provide financial advantages such as tax benefits, lower borrowing costs,
increased liquidity, enhanced operational efficiency, and a stronger overall valuation.

limitation of merging

While mergers may offer numerous potential benefits, there are several limitations to this strategy that must be
considered

• Integration challenges
• Cultural differences
• Loss of key talent
• Regulatory challenges
• Unanticipated costs
• Failure to achieve synergies

Acquisition:

An acquisition is a business strategy where one company takes full or partial control of another by purchasing its assets
or shares. Companies use acquisitions to expand their market presence, gain technology, diversify product offerings,
and achieve cost synergies. Acquisitions can take different forms, including:
 1. Asset Purchase Acquisition – The acquiring company purchases selected assets of the target company while
leaving behind unwanted liabilities. This allows the buyer to gain valuable assets, such as technology,
intellectual property, or production facilities, without assuming the full obligations of the target company.

2. Share Purchase Acquisition – The acquiring company purchases a majority or all of the shares of the target
company, gaining full control over its operations, management, and decision-making. This type of acquisition
is also known as a stock acquisition and is common in corporate takeovers.

3. Hostile Takeover – Unlike a friendly acquisition, where both companies agree on the deal, a hostile takeover
occurs when the acquiring company attempts to gain control without the approval of the target company's
board of directors. This is often done through a tender offer, where the acquirer offers to buy shares from
shareholders at a premium price to gain a controlling interest.

4. Proxy Fight – Instead of directly buying shares, the acquiring company may try to influence the target
company's governance by persuading shareholders to vote for new board members or changes in corporate
policies. This method is used to gain indirect control over the company.

Takeover Defenses

A hostile takeover occurs when an acquirer tries to gain control of a company without board approval. Several
strategies can be used to defend against it:

1. Shark Repellent – Changing company bylaws to make takeovers harder, like requiring a supermajority vote for
mergers.

2. Golden Parachute – Offering large compensation packages to executives if they lose their jobs after an
acquisition, making takeovers costly.

3. Poison Put – Allowing bondholders to demand immediate debt repayment if ownership changes, increasing
acquisition costs.

4. White Knight – Inviting a friendly company to outbid the hostile acquirer.

5. Pac-Man Defense – The target company buys shares of the acquirer and attempts a counter-takeover.

6. Leveraged Recapitalization – Borrowing heavily to pay large dividends, making the company less attractive for
takeover.

7. Crown Jewel Defense – Selling key assets to reduce the company’s appeal to a hostile bidder.

8. Supermajority Merger Approval – Requiring more than a majority (e.g., 75%) of shareholders to approve a
merger.

9. Voting Rights Plan – Restricting voting rights for large shareholders unless approved by the board.

10. Fair Merger Price Provision – Ensuring non-controlling shareholders receive a fair price in a takeover.

Poison Pill Strategies

11. Flip-in Poison Pill – Allowing existing shareholders (except the hostile bidder) to buy discounted shares, diluting
the acquirer’s stake.

12. Flip-over Poison Pill – Letting shareholders buy shares in the acquiring company if a merger happens, diluting
the hostile bidder’s ownership.
Corporate Divestiture & Related Strategies

Divestiture is the process of selling or disposing of a company's assets, businesses, or subsidiaries. Companies
undertake divestitures due to strategic restructuring, financial challenges, or regulatory requirements. Several forms
of divestiture include:

1. Corporate Liquidation – The complete sale of a company’s assets, followed by dissolution. This happens when
a company is unable to pay its debts or when shareholders decide the company’s assets are worth more in
liquidation than in continued operations.

2. Partial Sale of Assets – Selling specific assets instead of the entire company. This helps companies raise cash
to pay off debts or reinvest in other areas. If an asset’s net present value (NPV) is negative, selling it can be
financially beneficial.

3. Spinoff – A company creates a new, independent entity by separating a business unit. Existing shareholders
receive shares in the new company, making them owners of both the parent and spinoff entities. This allows
the new company to focus on its core business independently.

4. Equity Carve-Out – Unlike a spinoff, the parent company sells shares of a subsidiary through an initial public
offering (IPO) rather than distributing them to shareholders. The parent company retains control while the
subsidiary receives capital from the stock sale, making it a method of equity financing.

5. Tracking Stock – A special stock type that reflects the financial performance of a specific business unit within
a larger company. Investors can invest in a particular division without owning shares in the entire company,
allowing for separate financial management and reporting.

6. Split-Up – A company is divided into multiple independent entities. Each resulting company operates
separately, often to enhance strategic focus and unlock the value of distinct business segments.

7. Going Private – The process of converting a publicly traded company into a private one by repurchasing its
shares and delisting from stock exchanges. This is often done to avoid public scrutiny, enhance long-term
decision-making, or restructure operations more efficiently.

Leveraged Buyouts (LBOs)

Leveraged Buyout (LBO) is a method where a company or division is acquired using a significant amount of borrowed
funds, with the assets of the target company serving as collateral. LBOs are often used to take a company private,
restructure operations, or allow management to assume ownership.

• Management Buyout (MBO) – A type of LBO where the company’s existing management team purchases the
business, usually because the parent company wants to divest the division.

• LBO Requirements – For an LBO to be successful, the company must have stable cash flows, minimal pre-
buyout debt, and valuable assets that can serve as collateral for the debt financing.

Business valuation

Business valuation is the process of determining the economic value of a business or company. It is an essential activity
in any corporate transaction or restructuring; it allows buyers and sellers to understand what the business is worth and
what a reasonable purchase or sale price would be.