Overview of M&A

Why Corporates go for Restructuring?

▪ To increase the competitive strength both domestically and globally
▪ To improve the core competencies
▪ For debt equity restructuring to reduce high interest obligations
▪ To cope up with the funds constraints or utilisations of excess funds
▪ To reduce time and cost overruns
▪ For downsizing and reducing the number of organizational layers for increasing the
operational efficiency
▪ For growth and entry into new markets
▪ For corporate tax benefits
▪ For automatic approval for FDI in companies
▪ For new industrial licensing policy or govt policy decisions
▪ To enhance shareholders value or to improve the share price of the company
▪ For decreasing economies of scale
▪ To come out of unwanted diversification committed earlier
▪ For transferring the facility dominated business into corporate entity
▪ Underutilization of excess capacities or to achieve operational efficiency

Forms of corporate restructuring:

Corporate restructuring is divided into two broad categories:
1. Operational restructuring
2. Financial restructuring

Operational restructuring
Refers to outright or partial purchase or sale of companies or product lines or downsizing by
closing unprofitable, non-strategic facilities.

Financial restructuring
Refers to the actions taken by the firm to change its debt and equity structure

Expansion:
✓ Mergers and acquisitions
✓ Tender offers
✓ Asset acquisition
✓ Joint ventures

Contraction:
✓ Spin-offs
✓ Split-offs
✓ Divestitures
✓ Equity carve-outs
✓ Assets sale

Corporate control:

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 ✓ Anti-takeover defences
✓ Share repurchases
✓ Exchange offers
✓ Proxy contests

Change in ownership structures:

✓ Leveraged buyout
✓ Junk bonds
✓ Going private
✓ ESOPS and MLPS

Expansion:
• Results in an increase in the size of the firm. It takes place in the form of a merger,
acquisition, tender offer or a joint venture

Mergers:
• As a combination of two or more companies into a single company. A merger can take
place either as an amalgamation or absorption
• Types of mergers:
✓ Vertical mergers
✓ Horizontal mergers
✓ Circular mergers
✓ Conglomeratic mergers

Vertical merger:
Refers to integration of companies having supplementary relationships- either production or
distribution of products or services

Horizontal merger:
Involves the uniting of two or more firms in the same field

Circular merger:
Involves bringing together of products or services that are unrelated but marketed through the
same channels, allowing shared dealerships. For ex. Merger of McLeod Russel (a tea co) with
Eveready industries (batteries)

Conglometric merger:
Refers to unification of different kinds of business under one flagship company

Amalgamation:
This type of merger involves fusion of two or more companies. Two companies lose their
individual identity and a new company comes into being. This form is generally applied to
combinations of firms of equal size.
Example of amalgamation: The merger of Brooke Bond India Ltd with Lipton India Ltd
resulted in the formation of new company Brooke Bond Lipton India Ltd.

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Absorption:
Merger involves fusion of small company with a large company. After the merger the smaller
company ceases to exist.
Example: Merger of HDFC bank and Times bank. Times bank ceased to exist while HDFC
bank continues.

Tender offer:
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
Example: India cement giving an open offer for shares of Rassi cements

Asset acquisition:
Asset acquisitions involve buying the assets of another company. These assets may be tangible
assets like a manufacturing unit or intangible assets like brands. In such acquisitions, the
acquirer company can limit its acquisitions to those parts of the firm that coincide with the
acquirer’s needs.

Asset acquisition (example): Acquisition of the cement division of Tata steel by Lafarge of
France. Lafarge acquired only 1.7 million tonne cement plant and its related assets from tata
steel. The assets being purchased may be intangible in nature. For example, Coco-Cola paid
Rs. 170 crore to Parle to acquire its soft drinks brands like Thumps Up, Limca, Gold spot etc.,
HLL brought the brands of Lakme.

Joint venture:
Two companies enter into an agreement to provide certain resources towards the achievement
of a particular common business goal.
It involves intersection of only a small fraction of the activities of the companies involved.
Usually for a limited duration.
Venture partners share returns as per the pre-arranged formula.
Usually, MNCs use this strategy to enter foreign market
Example: DCM group and Daewoo motors entered into JV with MFG automobiles in India.

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

Spin-offs:
A spin –off is a transaction in which a company distributes on a pro rata basis all of the shares
it owns in a subsidiary to its own shareholders.
Stockholders’ proportional ownership of shares is the same in the new legal subsidiary as well
as the parent company.
New entity has its own mgt and is run independently from the parent company.
Spin-off does not result in an infusion of cash to parent company.
Example: Kotak Mahindra capital finance ltd formed a subsidiary called Kotak Mahindra
capital corporation by spinning off its investment division

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Split-offs:
A new company is created to take over the operations of an existing division unit.
A portion of the existing shareholders receive stock in a subsidiary (new company) in exchange
for parent company stock.

What is the logic of split –off?

The equity base of the parent co. Is reduced reflecting the downsizing of the firm.
Shareholding of the new entity does not reflect the shareholding of the parent firm.
Split-off does not result in any cashflow to the parent firm.
The entire firm is broken up in series of spin-offs, so that the parent co.no longer exits and only
the new offsprings survive

What does split –up involve?

Creation of new class of stock for each of the parent’s operating subsidiaries.
Paying current shareholders, a dividend of each class of stock.
And dissolving the parent co.
Stockholders in the new co. May be different shareholders in the parent co. may exchange their
stock for stock in one or more of the spin-offs.

Restructuring of Apseb -
Apseb was split-up in 1999 as part of power reforms.
The power generation business and the transmission and distribution business were transferred
to two separate companies called Apgenco and Aptransco respectively
Apseb ceased to exist as result of split-up.

Divestiture:
It is a sale of a portion of the firm to an outside party

What does it result to?

Infusion of cash to the parent.
May choose to sell an undervalued operation that
May choose to sell an undervalued operation that it determines to be non-strategic or unrelated
to the core business
Use the proceeds of the sale to fund investments in potentially higher return opportunities.
It is form of expansion on the part of the buying company.

Equity carve-out:
It involves the sale of a portion of the firm through an equity offering to outsiders

What does it result to?

New shares of equity are sold to outsiders who give them ownership of a portionof the
previously existing firm.
A new legal entity is created.
The equityholders
A new legal entity is created.

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The equityholders in the new entity need not be the same as the equityholders in the original
seller

Asset sale:
It involves the sale of tangible or intangible assets of a company to generate cash.

What does it result to?

It becomes a corporate shell with cash or
Securities as its sole assets.
The firm may distribute the cash to its stock holders as liquidating dividend
And go out of existence.
The firm may also continue to do business and
Use its liquid assets to purchase other assets or companies

Corporate control:
Firms can also restructure without necessarily acquiring new firms on divesting existing
corporations.
Corporate control refers to the third group of corporate restructuring activities, which involves
obtaining control over the mgt of the firm.
Control is the process by which managers influence other members of the organisation to
implement the organisational strategies.

What are the various techniques of obtaining corporate control?

• Takeover defences:
With the high level of hostile takeover activity in the recent years, takeover defence, both pre-
bid and post –bid have been resorted to by the companies.
Pre-bid defences, also called preventive defences are employed to prevent a sudden,
unexpected hostile bid from gaining control of the company.
When preventive takeover defences are not successful in fending of an unwanted bid, the target
implements post-bid or active defences.
Takeover defences intend to change the corporate control position of the promoters.

• Share repurchases:
This involves the company buying its own shares back from the markets.

What is the impact of it on the company?

This leads to reduction in the equity capital of the company.
Strengthens the promoters controlling position by increasing his stake in the equity of the
company.
Reduces the no. of shares that could be purchased by potential acquirer.
Example: Sterlite industries had proposed to buyback of its share through the open market to
acquire a maximum of 25 percent of the equity.

• Exchange offers:
It provides one or more classes of securities, the right or option to exchange part or all of their
holdings for the different class of securities of the firm.

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What does exchange offer involve?
Involves new securities of greater market value than the pre-exchange offers announcement
mv.
Exchanging debt for common stock- which increases leverage or
Exchange common stock for debt which decreases leverage.
Helps company change its capital structure

• Proxy contests:
An attempt by single shareholder or group of shareholders to take control or bring about other
changes in the company through the use of the proxy mechanism of corporate voting

What is the impact of proxy contests?

A bidder may attempt to use his or her voting rights and garner the support from other
shareholders to expel the incumbent board or mgt.

Changes in the ownership structure:

This represents the fourth group of restructuring activities which results in restructuring the
ownership of the firm.
A firm’s ownership structure affect, and is affected by other variables, and these variables also
influence the market value.
These variables include levels of the principal –agent conflict and information asymmetry and
their effects on other variables such as----firms operating strategy, dividend policy and capital
structure.

Various techniques of changing the ownership structure:

✓ Leverage buyout
Leverage buyout is financing technique where debt is used in the acquisition of a company.
What is the idea of leverage buyout?
To convert from a publicly owned to privately –owned co.
A management buyout is LBO in which managers of the firm to be taken private are also equity
investor.

✓ Going private:
Refers to the transformation of public corporation into privately held firm. It involves purchase
of the entire equity interest in a previously public corporation by a small group of investors

✓ ESOP (employee stock option plan):

A mechanism whereby a corporation can make tax deductible contributions of cash of stock
into a trust.

Why ESOP?
Assets are allocated to the employees and are not taxed until withdrawn by them.
As financing vehicle for acquisition of co through LBOs
As an anti-takeover defence.

✓ MLPS:

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Master limited partnership is a type of a limited partnership whose shares are publicly traded.
The ltd partnership interests are divided into units which trade as share of common stock.
Advantage of limited liability for limited partners.
This kind of structure is however not prevalent in India.