Corporate

Restructuring
What is Corporate Restructuring?

• Corporate Restructuring is the process of redesigning one or more

aspects of a company.
• The process of reorganizing a company may be implemented due to a
number of different factors, such as positioning the company to be
more competitive, surviving a currently adverse economic climate, or
acting on the self confidence of the corporation to move in an entirely
new direction.
 What is Corporate
Restructuring?
Any change in a company’s:
1. Capital structure,
2. Operations, or
3. Ownership
that is outside its ordinary course of
business.
So where is the value coming
from (why restructure)?
 Why Engage in
Corporate Restructuring?
• Sales enhancement and operating economies*
• Improved management
• Wealth transfers
• Tax reasons
• Leverage gains
• Management’s personal agenda
* Will be discussed in more detail in the following two slides.
Why Engage in
Corporate Restructuring?
• Growth
• •Diversification
• •Optimum utilization of capacities
• •Improved competencies
• •Cost reduction
• •Financial restructuring / support
• •Revival of weak or sick company
• •Widen market presence
• •Advantages of brand equity / goodwill / IP
 Sales Enhancement
and Operating Economies
• Sales enhancement can occur because of market
share gain, technological advancements to the
product table, and filling a gap in the product line.
• Operating economies can be achieved because of the
elimination of duplicate facilities or operations and
personnel.
• Synergy -- Economies realized in a merger where the
performance of the combined firm exceeds that of its
previously separate parts.
 Sales Enhancement
and Operating Economies

Economies of Scale -- The benefits of size in

which the average unit cost falls as volume
increases.
• Horizontal merger:
merger best chance for economies
• Vertical merger:
merger may lead to economies
• Conglomerate merger:
merger few operating economies
• Divestiture:
Divestiture reverse synergy may occur
GOVERNING PROVISION

SECTION 391-394 of Companies Act, 1956

Most liberal sections in the entire

Companies Act, 1956.
By way of SCHEME you can
propose & achieve whatever you want
Forms of Corporate Restructuring
Expansion

• Expansion is a form of restructuring, which results in an increase in

the size of the firm. It can take place in the form of a merger,
acquisition, tender offer, asset acquisition or a joint venture.
Mergers

• Merger is defined as a combination of two or more companies into a single

company
• Amalgamation is the type of merger that involves fusion of
two or more companies. After the amalgamation, the two
companies loose their individual identity and a new
company comes into existence. This form is generally
applied to combinations of firms of equal size.

A B AB
Brooke Bond Lipton Brooke Bond Lipton
India Ltd India Ltd India Ltd
Acquisition

• A corporate action where an acquiring company makes a bid for an

acquiree. If the target company is publicly traded, the acquiring
company will make an offer for the outstanding shares
• Absorption is a type of merger that involves fusion of a small company with a
large company. After the merger the smaller company ceases to exist.

A B A
Oriental Bank Of Global Trust Oriental Bank Of
Commerce Bank Commerce
Joint Venture

• Cooperation between two or more companies in which the

purpose is to achieve jointly a specified business goal.
• Upon the attainment of the goal, the joint venture is
terminated.
• A joint venture, which is typically limited to one project,
differs from a partnership that can work jointly on many
projects.
A B AB
Hero Motor Honda Hero Honda
Corp
 Tender Offer
• Tender offer is a corporate finance term denoting a type of
takeover bid.
• The tender offer is a public, open offer or invitation (usually
announced in a newspaper advertisement) by a prospective
acquirer to all stockholders of a publicly traded corporation (the
target corporation) to tender their stock for sale at a specified
price during a specified time, subject to the tendering of a
minimum and To induce the shareholders of the target company to
sell, the acquirer's offer price usually includes a premium over the
current market price of the target company's shares.

B C
D
Public Offer G
E
F
H
A I
J
K
 Example ---- Tender Offer
Flextronics International giving an open market offer at
Rs. 548 for 20% of paid up capital in Hughes Software
Systems.
AstraZenca Pharmaceuticals AB, a Swedish firm,
announced an open offer to acquire 8.4% stake in
AstraZenca Pharma India at a floor price of Rs. 825 per
share.
 Asset Acquisition
 A buyout strategy in which key assets of the target company are
purchased, rather than its shares.
 These assets may be tangible assets like a manufacturing unit or
intangible assets like brands.
 This is particularly popular in the case of bankrupt companies, who
might otherwise have valuable assets which could be of use to other
companies, but whose financing situation makes the company un-
attractive for buyers

A B A
 Examples ---- Asset Acquistion
 The acquisition of the cement division of Tata Steel by Laffarge of
France. Laffarge acquired only the 1.7 million tonne cement plant
and its related assets from Tata Steel.

 The asset being purchased may also be intangible in nature. For

example, Coca-Cola paid Rs.170 crore to Parle to acquire its soft
drinks brands like Thums Up, Limca, Gold Spot etc.

 Google acquired the Motorola for its new open source operating
system “Android” for the need of Motorola’s 17000 patents out
of which Google needs around 6000 patents.

 M3M India acquired DLF 28- Acre Plot in Gurgaon as non core
assets for Rs 440 Cr.
Forms of Corporate Restructuring
 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,
• Split off,
• Divestiture
• Equity carve-out.
 Spin-off
• A Company distributes all the shares it owns in a subsidiary to its own
shareholders implying creation of two separate public companies with same
proportional equity ownership. Sometimes, a division is set up as a separate
company. 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 parent company.
Shareholders of
Shareholders of
Company A also has
Company A
shares of Company B

A B
A B
Subsidiary
Company
of A
B
 Examples ----- Spin-off

• Air-India has formed a separate company named Air-India

Engineering Services Ltd., by spinning-off its engineering division.
• Guidant was spun out of Eli Lilly and Company in 1994, formed
from Lilly's Medical Devices and Diagnostics Division.
• Agilent Technologies spun out of Hewlett-Packard in 1999,
formed from HP's former test-and-measurement equipment
division.
• Cenovus Energy was spun out of Encana Corporation in 2009
• Shugart Associates was a spin-out of IBM.
 Split- off
• In a split off, a new company is created to takeover the operations of an existing
division or unit. A portion of existing shareholders receives stock in a subsidiary
(new company) in exchange for parent company stock Hence the shareholding
of the new entity does not reflect the shareholding of the parent firm. A split-off
does not result in any cash inflow to the parent company
Shareholders of
Shareholders of Company A
Company A
Shareholders Shareholders
of Company A of Company B

A D
New Company

A B
C D E F C E F D
Operations of Company
 Split-UP
• In a split-up the entire firm is broken up in series of spin-offs, so that the parent
company no longer exists and only the new off springs survive. A split-up
involves the creation of a new class of stock for each of the parent’s operating
subsidiaries, paying current shareholders a dividend of each new class of stock,
and then dissolving the parent company.
Shareholders of
Shareholders of Company A will get
Company A shares of

A A

B C D E
B C D E
Subsidiary Companies
Examples ------ Split-UP

• The Andhra Pradesh State Electricity Board (APSEB)

was split-up in 1999 as part of the Power Sector
reforms.
• The power generation business and the
transmission and distribution business has
transferred to two separate companies called
APGENCO and APTRANSCO respectively. APSEB
ceased to exist as a result of split-up.
 Divestitures
• A divestiture is a sale of a portion of the firm to an outside party, generally
resulting in an infusion of cash to the parent.
• A firm may choose to sell an undervalued operation that it determines to be
non-strategic or unrelated to the core business and to use the proceeds of the
sale to fund investments in potentially higher return opportunities.

Some Operations of
A
Op
era
A Cash
B tion
s of
A
Ope
rati
ons
 Equity Carve Out
• A parent has substantial holding in a subsidiary. It sells part of that holding to
the public. "Public" does not necessarily mean a shareholder of the parent
company. Thus the asset item "Subsidiary Investment" in the balance-sheet of
the parent company is replaced with cash. Parent company keeps control of the
subsidiary but gets cash.

A
Issues IPO of B 20% Investors
Shares of B

CCashA
B 20%
Shares of
Subsidiary Company
Company B
of A
Forms of Corporate Restructuring
Corporate Control

• Firms can also restructure without necessarily acquiring new firms or

divesting existing corporations.
• Corporate control involves obtaining control over the management
of the firm.
• Control is the process by which managers influence other members
of an organization to implement the organizational strategies
 Takeover Defenses
 Takeover defenses, both pre-bid and post-bid have been resorted to by the
companies.
 Pre Bid: This defense is also called preventive defense it is employed to prevent a
sudden, unexpected hostile bid from gaining control of the company.
 Post Bid: When preventive takeover defenses are not successful in fending off an
unwanted bid, the target implements post-bid or active defenses
 These takeover defenses intend to change the corporate control position of
the promoters.
Reliance Industries Limited
- A Unique Scheme of Arrangement-

PRE –ARRANGEMENT
SCENARIO
Reliance Industries Limited was
engaged in various businesses:
FACTS (i) Coal based power business;
(ii) Gas based power business;
(iii) Financial services business;
(iv) Tele-Communication business
 RIL… demerger

The family arrangement aims at

Segregation between the two Ambani Brothers
Provision for Specified Investors was made:
 Holdings of RIL and other companies in the control
of Mr. Mukesh Ambani were transferred to a
wholly owned subsidiary, Reliance Industrial
Investments and Holdings Limited (RIIHL) along
with a Private Trust (Petroleum Trust).
 RIIHL and Petroleum Trust were described as
“Specified Investors” which renounced their rights
in the scheme itself.
 RIL… demerger

As a result of demerger the shareholders of Reliance

Industries Ltd. other than “Specified Investors” got one
share each in the following four resulting companies
for each share held in RIL as on the record date:
 Reliance Energy Venture Ltd. (REVL)
 Reliance Communication Venture Ltd. (RCOVL)
 Reliance Capital Venture Ltd. (RCVL)
 Reliance Natural Resources Limited (RNRL)

The shares of all these resulting companies got listed

on the stock exchanges under the provisions of Cl
8.5.3.1 of the SEBI (DIP) Guidelines.
Benefits achieved……..

Particulars Amount Amount

(Rs.) (Rs.)
24th March 2006 20th December,
2007
Value of the shares held 100 shares @928
by a shareholder as on
record date (25th 92800
Jan,2006) (A)

Shares in RIL 100 (@708) 70800 (@2700) 270000

Shares in REL 100 (@38) 3800 (@1900) 90000

Shares in RCOL 100 (@290) 29000 (@706) 70600

Shares in RCL 100 (@24) 2400 (@2376) 237600

Shares in RNRL 100 (@23) 2300 (@163) 16300

Total 108300 684500

Net benefit 15500 576200