What is Corporate Restructuring

Corporate restructing is carried out in order to achieve

strategic or financial objectives.

The strategic objective could relate long term profitability
and market dominance.

The financial objective could be increase wealth of the
shareholder by changing the financial structure of the
company.


Forms of Restructuring Business Firms
Expansion
Modes/types of Expansion
Mergers
Amalgamation
Absorption
Tender Offer
Asset Acquisition
Joint Venture

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 is the type of merger that involves
fusion of two or more companies. After
amalgamation the two companies lose their
individual identity and a new company comes into
existence.
Absorption is that type of merger which involves
fusion of a small company with a large company.
After the merger the smaller company ceases to
exists.


Asset Acquisition- This involves buying the assets of
another company.

Tender Offer/Acquisition This involves making a
public offer for acquiring the shares of the target
company with a view to acquire management control in
that company.

Joint Venture- In a JV 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 and usually for a
limited duration.
Other modes of Expansion
Contraction
Types of Contraction
Contraction is a form of restructuring, which results in a
reduction in the size of the firm. Contraction may take the
following forms
Spin Offs
Divestitures
Equity Carve Out
Asset Sale

Spin offs
It 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. Hence the stockholders
proportional ownership of shares is the same in the new
legal subsidiary as well as the parent firm. 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.
Spin offs can be off two types- Split offs and Split ups

Divestiture
Divestiture involves sale of portion of the firm to an outside
party, resulting in an infusion of cash to the parent
company.
Equity Carve out
The act or process of a company making an IPO on one
of its subsidiaries without fully spinning off. During an
equity carve-out, the parent company becomes majority
shareholder and only offers a minority share to
the market. This gives the subsidiary a degree of
autonomy (such as its own board of directors) while still
retaining access to resources at the parent company.
Most of the time, an equity carve-out ultimately results in
the parent company fully spinning off the subsidiary. It is
also called a partial spin off.
Asset Sale
Asset Sale involves the sale of tangible or intangible
assets of a company to generate cash.

Corporate Control
Firms can also restructure without acquiring new firms or
divesting existing corporations. This involves obtaining
control over the management of firm. Corporate control
may change due to following:
Premium Buyback
Proxy Contests
Anti takeover Amendments


Premium Buybacks
Premium buybacks represents the repurchase of shares of
a large block holder at a premium (above the market price).
A voluntary contract is signed in which stockholder who
bought out agrees not to make further attempts to takeover
the company in future.
Anti takeover Amendments
Anti takeover amendments are changes in the corporate
bylaws to make an acquisition of the company more
difficult or more expensive. This is done by the regulators
like SEBI, Ministry of Corporate Affairs, Stock
Exchanges. Changes in the takeover bylaws, guidelines
or code may change the corporate control.
Change of Ownership Structure
The various techniques of changing the ownership
structure are as follows
Leverage Buyouts
Junk Bonds
Going Private
ESOPs and MLPs

Mergers
Types of Merger
1. Horizontal
2. Vertical
3. Conglomerate
Horizontal Merger
Horizontal mergers are those mergers where the companies
manufacturing similar kinds of commodities or running similar type of
businesses merge with each other.
It is combination of two competing firms
The principal objective behind this type of mergers is to achieve
economies of scale.
Flip side of horizontal merger is that they results in the creation of
large entities that cause ripple effects in the sector.
Controlled by competition acts
Example: volkswagen and Rolls Royce and Lamborghini and Ford
and Volvo

Vertical Merger
Vertical mergers refer to the combination of two entities at different
stages of the industrial or production process. For example, the
merger of a company engaged in the construction business with a
company engaged in production of brick or steel would lead to
vertical integration.
Moreover, vertical integration helps a company move towards
greater independence and self-sufficiency specially in inventory.
Forward integration
Backward integration
Merger reduce competition
Example Reliance Industry and Reliance Petrochemical
Conglomerate Merger
A conglomerate merger is a merger between two entities
in unrelated industries. The principal reason for a
conglomerate merger is utilization of financial resources,
enlargement of debt capacity, reduce risk through
diversification, and enhance the overall stability of the
acquirer.
Financial and managerial
Example Godrej and Tata
Accretive merger
Accretion implies value creation. Accretive merger
occurs when a company with a high P/E ratio purchases
with a low P/E ratio company . As a result the EPS of
the acquiring company increases. In an all stock deal, if
a company acquires a target with a lower P/E it must be
accretive to earnings because of synergy..
RIL and IPCA merger
Dilutive merger
Causes of Merger
Synergy: Synergy refers to the type of reactions that
occur when two factors combine to produce a greater
effect together than that which the sum of the two
operating independently could account for. Synergy
allows the combined firms to have a positive Net
Acquisition Value (NAV)

NAV = V
AB
- [V
A
+V
B
] P - E

Synergies are of two types Financial synergy and
operating synergy
HLL and TOMCO




Strategic Change: Mergers are done to rapidly adapt to
the changes in the external environment mainly in terms
of regulatory framework and technological changes.
Diversification: This means growth through the
combination of firms in unrelated businesses. By
diversification companies reduce the risk and reduces
instability of earnings.
Market Penetration: To gain access to new markets,
companies prefer to merge with a local established
company which knows the behavior of market and has
established customer base.

Merger Defense: M & A can be used by a company as a
defensive measure to resists takeover by another
company (Hostile takeover).
Surplus Cash: Cash rich companies have two options
either to distribute the surplus cash to its shareholder or
use it to acquire some other company.

Tax liability ACML absorb by Arvind Mills
Revival of sick industries
Increased Market Power
Stagnation
Takeovers
Takeover may be defined as a series of transactions
whereby a person, group of individual or a company
acquires control over the assets of a company either
directly by becoming the owner of the assets or indirectly
by obtaining control of the management of that company.
Takeover is a term which is interchangeably used with
Acquisition
Friendly takeovers are known as acquisition

Types of Takeover
Friendly Takeover
Hostile Takeovers
Bail Out Takeover
Modes of takeover
SEBI Takeover Regulation identifies two modes of
takeover:
1. Takeover Bid: Mandatory , partial,competitive
2. Tender Offer


AS 14:Accounting for Amalgamation
The popular meaning of amalgamation is the
dissolution of one or more companies and transfer of
business of dissolved entities to another entity.
However, AS 14 defines amalgamation of companies
and also prescribes the accounting treatment of such
transactions including valuations and purchase
consideration paid. Thus, it contributes to the regulatory
framework applicable to companies for purposes of
financial reporting and taxation.
AS 14 is applicable to amalgamations and does not
cover the transactions relating to acquisition of
controlling interest ( corporate takeovers)

Two forms
AS 14 identifies two methods of amalgamation :
Amalgamation in the nature of Merger
Amalgamation in the nature of Purchase.
Methods of accounting for amalgamations
In case of amalgamation in the nature of merger ,
Pooling of Interest Method of accounting is to be
followed for merger transactions
In case of amalgamation in the nature of Purchase ,
Purchase Method of accounting is is to be followed for
purchase transactions


Consideration
Discharge of purchase consideration in case of Merger
is mainly in the form of shares; cash may be paid only
for settling dues of fractional shares.
Discharge of purchase consideration in case of
Purchase is in the form of Shares, or other securities, or
cash


Disclosure
For all amalgamations, the following disclosures are
mandatory in the first year
Names, general nature of business of amalgamating
companies,
effective date of amalgamation for accounting purposes
Method of accounting used to reflect the amalgamation
Particulars of scheme statutorily sanctioned
However, for amalgamation of the nature of merger
where pooling of interest accounting method is
followed, additional disclosure requirements are to be
fulfilled.
Additional Disclosure in case of merger
For Pooling of interest, the following additional disclosures
should be made in the 1st Financial Statement
Description and Number of shares issued
% of equity shares exchanged to give effect to
amalgamation
Difference between consideration and value of net
identifiable assets acquired ( NAV) and the treatment
thereof
Additional disclosure in case of Purchase
In case of amalgamation in the nature of purchase, the
following additional disclosures should be made in the 1st
Financial Statement
Consideration for the amalgamation and a description of
the consideration paid or contingently payable; and
The amount of any difference between the consideration
and the value of net identifiable assets acquired and the
treatment thereof including the period of amortization of
any goodwill arising on amalgamation.
Amalgamation after the Balance Sheet Date
In case an amalgamation is effected after the Balance
Sheet date, but before the issuance of the financial
statements of either party, disclosure is made in
accordance with the AS 4, Contingencies and Event
Occurring after the Balance Sheet date, But the
amalgamation is not effected in the financial statements.
In certain circumstances, the amalgamation may also
provide additional information affecting the financial
statements themselves, for instance, by allowing the
going concern assumption to be maintained.
Hubris Hypothesis
This is an explanation why mergers may happen even if
the current market value of target firm reflects its true
economic value.
Takeovers are a result of the hubris hypothesis on part of
the buyers. They presume that their valuations are right
though the market valuation may be otherwise.
Demerger
Demerger is defined as a split or division.
It is separation of a large company into two or more
smaller organisations.
Demergers occur due to the desire to perform better,
strengthen efficiency, business interests.

Methods of Demerger
Demerger by agreement
Demerger under the scheme of arrangement
Demerger and Voluntary winding up
Reverse Merger
In reverse merger a healthy company mergers into a
financially weak company and the former is dissolved.
The healthy company looses its name and the sick
company retains its name.
Joint Venture
In a JV two or more companies join their hands to form a
separate independent organisation for strategic
purposes.
Such partnerships are typically focused on a specific
market objective.
Strategic Alliance
In this form of strategic partnership two or more
companies jointly share resources, capabilities or
distinctive competencies to achieve some business
goals. The main idea behind this is to minimize risk while
maximizing leverage.
Merger Failures
Excessive premium
Size Issues
Lack of research
Diversification
Previous Acquisition Experience
Poor Cultural Fits
Poor Organization Fit
Incomplete and Inadequate Due Diligence
Ego Clash
Faulty evaluation








Failure of Top Management to Follow-Up
Lack of Proper Communication
Expecting Results too quickly
Failure to Get Figures Audited