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1) What are the basic steps in Strategic Planning in Mergers?

Decisions involving mergers and reorganizations fall under the general category of strategic
planning. It is a behavior and a way of thinking that requires diverse inputs from all
segments of the organization. Strategic planning involves answering questions such as:
 What is the purpose of our organization?
 Who do we serve?
 What are our strengths, weaknesses, opportunities and threats?
 Where do we need to take this company?
 How do we plan to get there?

Viewing mergers and acquisitions within the context of strategic planning facilitates a
proactive rather than a reactive approach. It may also help the cooperative avoid tying up
too much time, energy, and effort in pursuing mergers at the expense of operations and
other types of opportunities. Some of the essential elements in strategic planning processes
of mergers and acquisitions are as listed here below.

1. Assessment of changes in the organization environment

2. Evaluation of company capacities and limitations
3. Assessment of expectations of stakeholders
4. Analysis of company, competitors, industry, domestic economy and
international economies
5. Formulation of the missions, goals and polices
6. Development of sensitivity to critical external environmental changes
7. Formulation of internal organizational performance measurements
8. Formulation of long range strategy programs
9. Formulation of mid-range programmes and short-run plans
10. Organization, funding and other methods to implement all of the proceeding
11. Information flow and feedback system for continued repetition of all essential
elements and for adjustment and changes at each stage
12. Review and evaluation of all the processes

The scope of mergers and acquisition set the tone for the nature of mergers and
acquisition activities and in turn affects the factors which have significant influence
over these activities. Proper identification of different phases and related activities
smoothen the process involved in merger.
2) Write Short Notes:
a. Spin Off

The creation of an independent company through the sale or distribution of new shares of an
existing business/division of a parent company is called Spin-off. It is a kind of de-merger
when an existing parent company transforms into two or more separately re-organized
different entities. The parent company distributes all the shares it owns in a controlled
subsidiary to its own shareholders on a pro-rata basis. In this process, the parent company
gains effect to making two of the one company. It may be in the form of subsidiary or a
separate company. There is no money transaction in spin-off. The transaction is treated as
stock dividend and tax free exchange. Both companies exist and carry on business. It does
not alter ownership proportion in any company. The newly created entity becomes an
independent company taking its own decision and developing its own policies and
strategies, which need not necessarily, be the same as those of the parent company. Spin-off
is necessary for a company having brand equity or for a multi-product company which
enters into collaboration with a foreign company. Businesses wishing to 'streamline' their
operations, often sell less productive or unrelated subsidiary businesses as spin-offs. The
spun-off companies are expected to be worth more as independent entities than as parts of a
larger business.

2) Write Short Notes:

b. Divestitures

Divestiture is a transaction through which a firm sells a portion of its assets or a division to
another company. It involves selling some of the assets or division for cash or securities to a
third party which is an outsider. These assets may be in the form of plant, division, product
line or a subsidiary. The divestiture process is a form of contraction for the selling
company and means of expansion for the purchasing company. For a business, divestiture is
the removal of assets from the books. Businesses divest by the selling of ownership stakes,
the closure of subsidiaries or by the bankruptcy of divisions. The buyers benefit due to low
acquisition cost of a completely established product line which is easy to combine in his
existing business and increase his profit and market share. The seller can concentrate after
divestiture more on profitable segments and consolidate its business activities. The motive
for divestiture is to generate cash for the expansion of other product lines, to get rid of
poorly performing operation, to streamline the corporate firm or to restructure the
company’s business consistent with its strategic goals. Divestiture enables the selling firm
to have more lean and focused operation. This in turn, helps the selling company to increase
its efficiency and profitability and also help to create more value for its shareholders.

The general opinion is that divestiture is the outcome of incapability of the parent company
to manage dissimilar assets or assets creating negative synergy. Some of the reasons for
divestitures are mentioned here below:
 Corporate attempt to adjust changing economic and political environment of the
 Strategy to enable others to exploit opportunity effectively to optimize return.
 To correct the previous investment decision where the company moved into the
operational field having no expertise or experience to run on profitable basis.
 To help finance the acquisition.
 To realize the capital gain from the assets acquired at the time when they were
under performing.
 To make financial and managerial resources available for developing other more
profitable opportunities.
 Selling not required or unconnected parts in the business due to:
 Poor fit of Division
 Reverse Synergy
 Poor Performance
 Capital Market Factor
 Cash flow factors
 Abandoning the core business

The divestiture decision can be considered similar to reverse capital budgeting decision. In
this case, the selling firm receives cash by divesting an asset or a division of the firm, and
these cash flows received are then compared with the present value of the cash flows after
tax sacrificed on account of parting of a division or asset. Following are the steps involved
in assessing whether the divestiture is profitable for the selling firm or not.
i. Computation of decrease in cash flow after tax (for year 1, 2 …n) due to sale of
ii. Multiply by appropriate cost of capital factor relevant to division.
iii. Computation of decrease in present value of the selling firm ( i x ii)
iv. Computation of present value of obligations related to the liabilities of the division
(assuming liabilities are also transferred with the sale of a division)
v. Present value lost due to sale of division (iii – iv)

The decision criteria regarding acceptance and rejection of divestiture decision is as

 Present value lost due to sale of division is less than the sale proceeds
obtained from it: Accept, that is, sell the division.
 Present value lost due to sale of division is more than the sale proceeds
obtained from it: Reject, that is, keep the division.
3) Discuss Master Limited Partnerships

Master Limited Partnerships (MLP) emerged during the late 1970s and early 1980s as a
means of asset securitization financing initially among real-estate based businesses.
Typically, several smaller partnerships were rolled into an MLP, with partners receiving
MLP units in exchange for their partnership interests. The format soon gained favor among
upstream oil and gas exploration and development companies and MLPs were eventually
adopted by a wide range of industries both in U.S. and in Canada, where the format is
known as the Royalty Trust. Today's MLPs are predominantly active in the energy, lumber,
and real-estate industries in the developed countries. MLPs are a type of limited partnership
in which the shares are publicly traded. The limited partnership interests are divided into
units which are traded as shares of common stock. Shares of ownership are referred to as
units. Unlike a corporation, a master limited partnership is considered to be the aggregate of
its partners rather than a separate entity.

There are two types of partners in this type of partnership. They are called as general
partners and limited partners. The general partner is the party responsible for managing the
business and bears unlimited liability. The general partner is typically the sponsor
corporation or one of its operating subsidiaries. General partner receives compensation that
is linked to the performance of the venture and is responsible for the operations of the
company and, in most cases, is liable for partnership debt.

The limited partner is the person or group (retail investors) that provides the capital to the
MLP and receives periodic income distributions from the MLP's cash flow. The limited
partners have no day-to-day management role in the partnership. It has the advantage of
limited liability for the limited partners. The transferability provides for continuity of life.
MLP is not treated as an entity; it is treated as partnership for which income is allocated
pro-rata to the partners. The advantage of MLPs is the combination of the tax benefits of a
limited partnership with the liquidity of a publicly traded company.

MLPs allow for pass-through income, meaning that they are not subject to corporate income
taxes. The partnership does not pay taxes from the profit. The money is only taxed when
unit holders receive distributions. The owners of an MLP are personally responsible for
paying taxes on their individual portions of the MLP's income, gains, losses and deductions.
This eliminates the "double taxation" generally applied to corporations (whereby the
corporation pays taxes on its income and the corporation's shareholders also pay taxes on
the corporation's dividends). That is, MLP is taxed as partnership avoids double taxation
and the business achieves a lower effective tax rate. The lower cost of capital resulting from
the reduced effective tax rate provides the partnership with a competitive advantage when
vying against corporations during competitive asset sales or bidding wars and can ultimately
provide a higher return to unit holders.

There are several types of MLPs.

 Roll Up MLP
Formed by the combination of two or more partnerships into one publicly traded
 Liquidation MLP
Formed by a complete liquidation of a corporation into an MLP.
 Acquisition MLP
Formed by an offering of MLP interest to the public with the proceeds used to
purchase assets.
 Roll Out MLPs
Formed by corporations contribution of operating assets in exchange for general
and limited partnership interest in MLP, followed by a public offerings of
limited partnership interest by the corporations of the MLP or both.
 Start Up MLP:
Formed by partnership that is initially privately held but later offers its interests
to the public in order to finance internal growth.