WHY CORPORATE RESTRUCTURING ???

Increased Competition Advent of a new and more efficient technology Emergence of new markets Emergence of new classes of consumers Demographic changes Business cycles

 However, not all the changes that a company undergoes would qualify to be termed as corporate restructuring.

Definition
Corporate restructuring can be defined as any change in the business capacity or portfolio that is carried out by an inorganic route
or Any change in the capital structure of a company that is not a part of its ordinary course of business or

Any change in the ownership of or control over the management of the company or a combination of any two or all of the above

I.

(a) Any change in the business capacity or portfolio carried out by inorganic route

Tata Motors launched Sumo and later, Indica- leading to an expansion of its business portfolio. However, these products were launched from Tata Motors own manufacturing capacity in through an organic route. Hence, it would not qualify as corporate restructuring Tata Motors acquisition of Jaguar Land Rover from Ford, through Jaguar Land Rover Limited is corporate restructuring Grasims acquisition of Larsen & Toubros (L&T) cement division through UltraTech Cement Limited is an example of corporate restructuring

(b) Change

in the business portfolio could also be in the nature of reduction of business handled by a company
In the case of Grasim and L&T, the demerger of L&Ts cement business into UltraTech Cement Limited was reduction of its business portfolio and thus, amounted to corporate restructuring of L&T.

II.

Any change in the capital structure of a company that is not in the ordinary course of its business
Capital structure refers to debt equity ratio, i.e. the proportion of debt and equity in the total capital of a company. This capital structure is never static and changes almost daily. Within a targeted or planned range if the debt/equity ratio fluctuates, such changes in the capital structure do not amount to capital restructuring. Borrowing of a significant amount of term loan or an issue of five year non-convertible debenture do not qualify to be called corporate restructuring . An initial public issue, or a follow-on public issue or buy-back of equity shares would permanently alter the capital structure of a company, and thus, would amount to corporate restructuring.

. III

Any change in the ownership of a company or control over its management a) b) c) d) e) Merger of two or more companies belonging to different promoters Demerger of a company into two or more with control of the resulting company passing on to other promoters Acquisition of a company Sell-off of a company or its substantial assets Delisting of a company

All these would qualify to be called exercises in corporate restructuring.

Not Termed as Corporate Restructuring

. Initial creation of a corporate structure Its various examples are: Incorporation of a limited company Conversion of a proprietary concern into a company Conversion of a partnership firm into a company Conversion of a private company into a public company

Change in the internal command structure or hierarchy The command structure of an organization or its hierarchy simply means the reporting relationships among the employees, managers, top management and their various functions. Functional organization Divisional organization Matrix organization

With businesses having become more complex along with the acceptance of newer concepts of organization building such as tutorship, mentorship, etc., the hierarchies have stopped strictly falling into one of the three types mentioned in the earlier slide. Any migration of an organization from functional to divisional or to matrix type or to any new or hybrid type or vice-versa would not be a case of corporate restructuring.

Change in the business process This is also called reengineering. Reengineering, properly, is the fundamental rethinking and redesign of business processes to achieve dramatic improvement in critical, contemporary measures of performance, such as cost, quality, service and speed. It refers to the radical redesigning of business processes and not to the ownership and control or to the capital structure of the organization. Reengineering is also outside the ambit of corporate restructuring.

Merger Consolidation Acquisition Divestiture Demerger (spin off/split up/split off) Carve Out Joint Venture Reduction of Capital Buy-back of Securities Delisting of Securities/Company

FORMS OF CORPORATE RESTRUCTURING

MERGER
It involves combination of all the assets, liabilities, loans, and businesses (on a going concern basis) of two (or more) companies such that one of them survives. Merger is primarily a strategy of inorganic growth.

CONSOLIDATION
It involves creation of an altogether new company owning assets, liabilities, loans and businesses (on going concern basis) of two or more companies, both/all of which cease to exist.

Amalgamation:
This term is used only in India. It is an umbrella term which includes both merger and consolidation. In India, legal requirements for either merger or consolidation are the same. They are stipulated in sections 390 to 394A and 396 and 396A of the Companies Act, 1956.

Amalgamating company or transferor company:

In the process of merger or consolidation, the company whose assets and liabilities are transferred to another company and which ceases to exist through the process of dissolution without winding up is called amalgamating or transferor company

Amalgamated company or transferee company In the process of merger or consolidation, that company which receives the assets and liabilities of other company or companies and continues to survive/exist is called an amalgamated company or transferee company.

ACQUISITION
Acquisition is an attempt or a process by which a company or an individual or a group of individuals acquires control over another company called target company. Acquiring control over a company means acquiring the right to control its management and policy decisions.

It also means the right to appoint (and remove) majority of the directors of a company. In acquisition, the target companys identity remains intact.

Ways to acquire a control over a company (a target company):

By acquiringthe voting capitala of the target ,i.e. purchasing substantial percentage of

company. By acquiring voting rights of the target company through power of attorney or through a proxy voting arrangement.

By acquiring controlwhether listed or over an investment or holding company,

unlisted, that in turn holds controlling interest in the target company.

By simply acquiring management control through a formal or informal understanding

or agreement with the existing person (s) in control of the target company.

DIVESTITURE
Divestiture means an out and out sale of all or substantially all assets of the company or any of its business undertaking/divisions, usually for cash (or for a combination of cash and debt) and not against equity shares. Divestiture means sale of assets, but not in a piecemeal manner. Accordingly, all assets, i.e., fixed assets, capital works progress, current assets and many a times even investments are sold as one lump and the consideration is also determined as one lump sum amount and not for each asset separately. Due to this reason, it is also called slump sale under the Income Tax Act, 1961

The consideration is normally payable in cash for two reasons: to pay off the liabilities and secured/unsecured loans. to bring cash into the company for pumping into remaining business or to start a new business.

No part of consideration is payable in the form of equity shares.

DEMERGER
Forms of Demerger: Spin-off Split-up Split-off

Spin-off Spin-off involves transfer of all or substantially all the assets, liabilities, loans and business (on a going concern basis) of one of the business divisions or undertakings to another company whose shares are allotted to the shareholders of the transferor company on a proportionate basis.

In spin-off, the transferor company continues

to carry on at least one of the businesses.

Split-up

Split-up involves transfer of all or substantially

all assets, liabilities, loans and businesses (on a going concern basis) of the company to two or more companies in which, again like spinoff, the shares in each of the new companies are allotted to the original shareholders of the company on a proportionate basis but unlike spin-off, the transferor company ceases to exist.

Spin-off and Split-up: Common Points In spin-off and split-up, there is no sale of
assets to another company. In spin-off and split-up, shareholders of the transferor company receive consideration for transfer of assets by the transferor company. In both the cases, consideration is always in the form of equity shares of the transferee company(ies) . Companies wanting to carry out demerger in

 In case of both, i.e., spin-off and split-up, the

shares of the resulting company, i.e., transferee company have to be issued to the shareholders of the transferor company in proportion to their shareholding in the transferor company. In case this is not done, not only the tax benefit under the Income Tax Act, 1961 will be lost, but the structure itself would not be called a spin-off or splitup. It will then be the case of a split-off.

 Spin-off and split-ups are normally resorted

to achieve focus in the respective businesses, especially if the businesses are unrelated (non-synergistic).

They are used to improve the price earning

ratio and consequently, the market capitalization by demerging not so profitable businesses into a separate company or companies.

 Demerged company Demerged company means the company whose assets, liabilities, loans and business(es) are being transferred in the process of demerger to another company in case of either spin-off or split-up. It is also called transferor company.

 Resulting company Resulting company(ies) means the company or companies to which assets, liabilities, loans and business(es) are being transferred in the process of demerger.

Carve-Out

It is a hybrid of divestiture and spin-off. In carve-out, a company transfers all the assets, liabilities, loans and business of one of its divisions/undertakings to its 100 per cent subsidiary . At the time of transfer, the shares are issued to the transferor company itself and not to its shareholders.

Later on, the company sells the shares in parts to outsiders - whether institutional investors by private placement or to retail investors by offer for sale. In case of carve-out, the consideration for transfer of business to a new company eventually comes in the coffers of the transferor company.

 Carve-outs are normally used to mobilize funds for core business or businesses of a company by realizing the value of non-core businesses. They are also used to carve out capital hungry businesses from the businesses requiring normal levels of capital so that further fund raising by equity dilution can be restricted to capital intensive businesses sparing the other businesses from equity dilution

Why do companies resort to M & A?

M & A is a powerful strategy of instantaneous quantum growth.

MERGERS & ACQUISITIONS OBJECTIVES

As a Growth Strategy Ansoffs Product Market Matrix
Present Products New Products

Present Markets

Market Penetratio n Market Developm ent

Product Developm ent Diversific ation

New Markets

Integrative Growth (a) Backward integration It consists of a company seeking ownership or increased control of its supply system. It could be organic or inorganic.

Example: Reliance Industries Limited is the most impressive example of backward integration. Starting with Vimal range of fabrics, RIL went backward into manufacture of polyester fiber and yarn, followed by intermediate chemicals, polymers, refinery and finally oil exploration. With this, RIL has become a fully integrated company across the entire value chain.

(b) Forward integration

It consists of a company seeking ownership or increased control of its distribution system. It could be organic or inorganic. Example: A refinery getting into petrol pumps (like RIL) or a film production house getting into distribution and subsequently, into running of cinema halls.

(c) Horizontal integration

It consists of a company seeking ownership or increased control of its competitor (s). This means acquisition. It, by its definition itself, is an inorganic growth strategy.

Diversification Growth
(a) Concentric diversification
It consists of a company seeking to add new products that have technological or marketing synergies with the existing products. These products would normally appeal to new classes of customers.

(b) Horizontal Diversification

It consists of a company seeking to add new products that could appeal to its present customers though, technically unrelated to its present product line. Example- The cosmetic company that has been manufacturing and marketing womens cosmetics, if this company enters womens garments business, it would be a case of horizontal diversification.

(c) Conglomerate Diversification

It consists of a company seeking to add new products for new classes of customers, with no relationship to the companys current technology, products or markets.

BCG (Boston Consulting Group) Matrix

Efficiency Theory
This theory explains M&A as being planned and executed to achieve synergies, thereby, adding to enterprise valuation. The rationale here is to create value not hitherto existing by pooling various resources of the acquirer and target companies.

Important points about Synergy

1. Revenue generating synergies are far more difficult to achieve than cost reduction synergies. 2. Many a times, even honestly estimated synergies actually fail to materialize. 3. Many a times the acquirers management ends up knowingly overestimating synergies in order to justify the hefty control premium it pays or proposes to pay for the acquisition.

Revenue generating synergyRevenue generating synergy can be described as the generation of much higher growth rate and turnover than the individual companies growth rates during independent operations

Cost reduction synergyIf the combined operations result in cost savings, in any of the areas viz., manufacturing, marketing, operations, manpower, corporate overheads, etc., it would be the case of cost reduction synergy.

There are five types of synergies:

Synergies

Revenue generating synergies

Cost reduction synergies

Manufacturing Synergy

Operations Synergy

Marketing Synergy

Financial Synergy

Tax Synergy

(a) Manufacturing Synergy It involves combining the core competencies of the acquirer company in different areas of manufacturing, technology, design and development, procurement, etc. Tata Motors acquisition of Daewoos commercial vehicle unit; Synergy: It gave Tata Motors an advantage of producing commercial vehicles in the 200400 bhp range.

Operations Synergy
It involves rationalizing the combined operations in such a manner that through sharing of facilities such as warehouses, transportation facilities, software and common services, etc., duplication is avoided and logistics are improved leading to quantum cost saving. Kingfisher Airlines acquired Deccan Airways Synergy: To achieve substantial savings through rationalization of routes, reduction in the combined number of flights on the same routes, sharing of commercial and ground handling staff, reduction in the combined number of airplanes in

Oriental Bank of Commerces (OBC) takeover of Global Trust Bank (GTB) Synergy: From OBCs strong branch network in the north and GTBs strong network and franchise in the western and southern part of India.

Marketing Synergy
It involves using either the common sales force or distribution channel or media to push the products and brands of both the acquirer and target companies at lower costs than the sum total of costs that they would incur in independent marketing operations. Involves leveraging on the brand equity of one of the two companies to push the sale of the second companys products. Can involve acquiring better pricing power on account of two companies coming together.

Financial Synergy
It involves combining both the acquirer and target companies balance sheets to achieve either a reduction in the weighted average cost of capital or a better gearing ratio or other improved financial parameters. In this, one has to effect the target companys merger with the acquirer company.

Tax Synergy
It involves merging a loss-making company with a profitable one so that the profitable company can get tax benefits by writing off accumulated losses of the loss-making company against the profits of the profit making company.

Why do companies exit ?

1. Exiting Non-profitable Business National Organic Chemicals Industries Limited (NOCIL), a one time cash-rich, blue chip company of Mafatlal Group, had to sell its petrochemicals and plastics businesses to Reliance Industries Limited (RIL) after it started incurring heavy losses around the turn of the century.

2. Exiting Non-synergistic or Non-core Business Larsen & Toubro (L&T) demerged its cement business from UltraTech Cement Limited. Thereafter, Grasim Limited, a flagship company of A.V. Birla Group, acquired control over UltraTech . One of the reasons why L&T sold its cement business to the Birla was to opt out of the non-core business.

 Generate Cash Flow for Other Business(es) India Cement sold 94.69 percent of its stake in Shri Vishnu Cement at an enterprise value of Rs. 385 crore. The objective behind this was to generate cash for retiring high-cost debts of India Cement and also for funding its expansion plans.

 Inability- Real or Perceived - to withstand Competition In 1998, Lakme Limited sold its brand and cosmetics business to Hindustan Unilever Limited (HUL). The main reason behind this was that Lakme management was finding it difficult to pump in huge money to support its brand in the face of advertisement blitzkrieg by MNCs, especially HUL.

 Inability to Achieve Further Growth Daksh e-Service was merged with IBM so that Daksh e-Service would get continuous jobs from IBM enabling it to grow faster and become the front runner in the outsourcing industry in India.