CORPORATE

RESTRUCTURING

•D EFINITION
•R EASONS FOR R ESTR U CTU R ING
•ACTIVITIES COVER ED U ND ER CR
•ACTIVITIES NOT COVER ED U ND ER CR
•FOR MS OF COR POR ATE R ESTR U CTU R ING
Corporate Restructuring-DEFINITION

 Any change in the business capacity or portfolio that

is carried out by an inorganic route.
 Any change in the capital structure of a company
that is not in the ordinary course of its business.
 Any change in the ownership of a company.
 Any change in the control over its management.
Change in the business capacity or
portfolio

 Meaning of inorganic route: Growth of business by

acquiring new business.
 Example :
Tata motors introduced SUMO and INDICA ...the
products of a new product portfolio CV and PV .
However, from own manufacturing capacity
..therefore, Organic Route.
Then JLR was acquired from Ford through its subsidiary
and hence ,was the Inorganic Route.
 NOTE: Reduction of business handled by a company
can also be called corporate restructuring . Like L&T
hived off its cement business into Ultra Tech Cement
Ltd.
 Change in the capital structure

 What is Capital Structure?

 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.
 Ordinary course of business means.....
 What is an ideal Debt Equity ratio?
Change in the ownership of a company

 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.
 Rationales

 To increase the competitive strength both

domestically and globally.
 For debt equity restructuring to reduce high interest
obligations.
 To cope up with the funds constraints or utilization
of excess funds.
 To enter new markets and grow.
 To achieve operational efficiencies.
 Rationales

 To reduce time and cost overruns.

 To enhance shareholder’s value or to improve the
share price of the company.
 For corporate tax benefits.
 For easy and faster means to abide by the industrial
licensing policy or govt. policy decisions.
 Activities not termed as Corporate
Restructuring

 Change in internal command structure

 Change in the business processes
 Downsizing
 Other Activities
 Can the following activities termed as restructuring?
 Conversion of a proprietary concern into a company. YES
 Conversion of a partnership firm into a company. YES
 https://www.krutinadvisors.com/restructuring-of-business-
conversion-partnership-firm-to-private-limited-company/
 Conversion of a private company into a public company.
 https://cleartax.in/s/convert-private-limited-to-public-limited
 Change in internal command structure

 What is the meaning of the command structure?

The reporting relationships amongst the employees ,
managers , top management and their various
functions OR reporting relationships between business
units or business divisions and between the corporate
management.(in case of multiple businesses)
 Any change in the reporting structure is not a case of
corporate restructuring .
 Forms of organizational hierarchy, functional ,
divisional and matrix organization.
 Change in the business processes

 Also, called Reengineering

 Reengineering refers to the radical redesign of
business processes to achieve dramatic improvement
in critical and contemporary measures of
performance such as cost , quality ,service and speed.
 However, this rarely leads to change in the capital
structure or ownership or control.
 Thus, this would not be a case for corporate
restructuring.
 DOWNSIZING

 It is a form of organizational change in which the

business organization cuts down
 Manpower
 CapitalExpenditure
 Recurring costs
 Reason for Downsizing
 Profitability under pressure
THANK YOU
 CORPORATE
RESTRUCTURING-FORMS
•M ER G ER
•CO N S O L I D ATI O N
•ACQ U I S I TI O N
•D I V ES TI TU R E
•D EM ER G ER
•CAR V E O U T
•J O I N T V EN TU R E
•R ED U CTI O N O F CAP I TAL
•BU Y BACK O F S ECU R I TI ES
•D EL I S TI N G O F S ECU R I TI ES
 MERGER

 Definition- It involves combination of all the assets ,

liabilities, loans and businesses of two or more companies
such that one of them survives. It is a strategy of inorganic
growth. (A+B=B OR A)
 Example: If A Ltd is to be merged with B Ltd , A Ltd will cease
to exist and B Ltd will survive carrying on the businesses of
both A Ltd and B Ltd.
Company Paid up K

A Ltd 10 Lac F.V Rs. 10 / Share

B Ltd 50 Lac F.V Rs. 10/ Share

Shareholder of A will be given 2 shares Shareholders of A Ltd will get..........

of B for every 5 shares held Equity K of B Ltd will be ...........
A Ltd will cease to exist
 MERGER

 Business of A Ltd will be conducted under B Ltd.

 All the assets and liabilities of A Ltd will be
transferred to B Ltd.
 Shares of A Ltd will get cancelled , A Ltd will cease to
exist.
 All the rights exercisable by A ltd against the third
parties will now be exercisable by B Ltd against them
and vice versa.
 Eg: RTIL was merged with My nylon and the name
was changed to RTIL , then RTIL was listed and the
name was changed to RIL.
 MERGER

 RTIL +Mynylon=RTIL
 Listed RTIL, name changed to RIL
 In 1987, RPL(Petrochemicals) was incorporated and
later merged with RIL.
 RPEL(Ethylene) and RPPL (propylene) was incorporated
, later merged into RIL.
 In 1993 ,RPL( Petroleum) was incorporated and later
merged with RIL
 IPCL was merged with RIL .
 Barring IPCL, all other mergers were group cos. ..It
happened through inorganic route for RIL .
 Consolidation

 Definition- It involves creation of an altogether

new company owning assets, liabilities, loans and
businesses of two or more companies, both or all of
which cease to exist. A+B=C
 A Ltd and B Ltd will cease to exist and C Ltd will
carry on the businesses of both A and B Ltd.
Company Paid Up Capital

A Ltd 10 Lac F.V Rs. 10 / Share

B Ltd 50 Lac F.V Rs. 10/ Share

A Ltd - 1 share(C) for every 2 shares Equity K of C Ltd will be ..............

B Ltd - 2 share (C) for every 5 shares Shareholder of A Ltd will get
Shareholder of B Ltd will get...................
 AMALGAMATION

 This term is used only in India.

 It is an umbrella term for both merger and
consolidation.
 Merger is the most common and the preferred of the
two.
 Reasons for the preference are:
 Preserve the identity of the company with the best brand.
 Take advantage of the corporate equity for all the businesses
combined.
 Consolidation is mostly used in an event of fierce competition
and fragmented industry.
 A market that consists of several small and mid sized cos.
 Key concepts

 Amalgamating company
• The company whose assets and liabilities are
transferred to another company.
• The company that ceases to exist.
• It is also called Transferor company.
 Amalgamated company
• The company that receives the assets and liabilities
of other company.
• The company that continues to exist.
• It is also called transferee company.
 Acquisition

 Acquisition is a process by which a company or an

individual or a group of individuals acquires control
over another company.
 The company to be controlled is called the target
company.
 The identity of the target company remains intact.
 Acquiring control over a company means acquiring
the right to appoint/remove the majority of the
directors of the company.
 Ways to acquire control

 Acquisition of a target company through acquisition

of its shares.
 Acquisition through power of attorney.
 Acquisition through acquisition of an investment or
holding company which is controlling the target co.
 Acquisition through formal or informal agreement.
 Acquisition through acquisition of its
shares (Case 1)

 A, B , C , D hold 10% equity stake each and are

promoters of XYZ Ltd.
 60% with public
 Mr. P acquires 6% from the market. And acquires A
and B’s stake from them. Also makes open offer to
public to acquire 20% more and succeeds.
 Consequently, Mr P declares himself as the promoter
and revamps the board of directors.
 C and D will most likely not remain promoters
though might continue to have representation on the
board.
 Acquisition through acquisition of its
shares (Case 2)

 Mr P acquires only 10% of A and makes an open offer

for 20% and succeeds partially and acquires only
15% in the open offer.
 His total stake is 6+10+15=31%
 A will cease to be a promoter , but B, C, D wont be
dislodged as promoters.
 Most likely, P will also become a promoter and
would share the board representation and say in the
management of the company.
 Acquisition through acquisition of its
shares (Case 3)

 P acquires 14% from the market and makes an open

offer for 30% shares .
 The offer fails and he is able to acquire only 3% .
 P’s stake is 17%.
 P will get only small representation in board. He will
not be declared a promoter .
 This is the case of unsuccessful acquisition.
 Acquisition of a target company through
power of attorney

 It is not a common way

 It is a short term tactic.
 It is a precursor to the substantial acquisition of
shares.
 Due to the conclusion of MoU, the existing
promoters may allow the acquirer to vote on their
behalf on certain key resolutions.
Acquisition of a target company thru of an investment
or holding co. which is controlling the target co.

 ABC Ltd is an unlisted company .

 100% equity shares held by Shah family.
 ABC Ltd invested 40% in XYZ Ltd.
 Shah Ltd invested 10% in XYZ Ltd directly.
 The mgt is controlled by ABC Ltd , therefore by Shah
family.
 Shah Family sells its stake in ABC Ltd to PQR Ltd.
 This is a case of indirect acquisition of XYZ Ltd by PQR
Ltd from Shah family.
 However, if XYZ Ltd is listed co. , PQR Ltd will have to
make an open offer to the public shareholders of XYZ
Ltd.
 Acquisition of a target company through
formal or informal agreement
 ABC Ltd is a listed software co.
 Mr X is its promoter as well as managing director.
 He approaches Mr. Z to help him run the business more
efficiently and offers equity stake.
 Mr Z agrees to help but declines the equity stake offer
and remuneration but puts a condition that all the key
decisions will be taken by him and Mr. X would vote on
the resolutions as per Z.
 This is the case of acquisition target Co. thru agreement .
 Mr Z has to make an open offer to the shareholders ,
though he neither acquired any shares nor is the
beneficiary of any kind.
 Acquisition

➢ Some of the significant acquisitions in Indian

context in recent past :

Acquisition of Corus by Tata Steel

Acquisition of Novelis by Hindalco
Acquisition of Spice Communication by Idea Cellular
Acquisition of Ranbaxy by Daiichi Sankyo
Acquisition of Hutchison Essar by Vodafone
Acquisition of Sahara Airlines by Jet Airways
Acquisition of Deccan Airways by Kingfisher Airlines
 Divestiture

 In divestiture, the company sells the assets of the

company usually for cash.
 All assets i.e. the fixed assets , Capital works in
progress, current assets and even investments are
sold.
 Normally, the loans are not taken over by the
purchaser , rather the transferor company pays off
the debt out of the consideration received in cash.
 Why Cash Deal ?
 To pay off the long term debt.
 To start a new business or to cash the remaining business of the
company or to start a new business.
 Why Divestiture?

 To mobilize resources for the core business.

 Consequently, the company achieves focus on its
core business.
 As a result , the price earning multiple and valuation
of the company in the stock market improves.
 Demerger

 Demerged Co.- It means the company whose assets ,

liabilities, loans are being transferred in the process.
 Resulting Co. –The co. to which the assets, liabilities,
loans etc are being transferred.
 DEMERGER

SPIN OFF

 It involves transfer of all the assets , liabilities , loans and business

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 this, a company distributes on a pro rata basis all of the shares it
owns in a subsidiary to its own shareholders.
 The new entity has its own management and is run independently
from the parent company.
 A spin off does not result in any infusion of cash to the parent
company.
 Eg: Air India formed a separate co. named Air India Engineering
Services by spinning off its engineering division.
 Shares in A also and In B also.
 DEMERGER

 Split-up
 It involves transfer of all the assets , liabilities , loans and businesses of the
company to two or more companies in which the shares in each of the
allotted cos. are allotted to the original shareholders of the company on a
proportionate basis.
 The entire firm is broken and the new off springs survive.
 The parent co. no longer exists.
 A split up involves the creation of a new class of stock for each of the
parent’s operating subsidiaries.
 Example: APSEB was split up into two separate co. APGENCO (power
generation) and APTRANSCO (transmission and distribution). APSEB
ceased to exist as a split up.
 Shares in B and C..No holding in A as ceases to exist.

 Key point- In spin off, the transferor company continues to carry on at least one of the
businesses whereas in Split –up the transferor company ceases to exist.
 DEMERGER

 Split Off- A new co. is created to takeover the

operations of an existing division.
 A portion of the existing shareholders receives stock in a
subsidiary in exchange for the parent company stock.
 Holding Co. shareholders are reqd. to exchange their shares
to get shares in the subsidiary.
 To create a distinction between the core business and the
new one .
 The equity base of the parent co. is reduced reflecting the
downsizing of the firm.
•
 DEMERGER

GE declared a corporate action to split-off its ownership of Synchrony

Financial (SYF) into a standalone company. Most people are familiar with
a spin-off, when a company divests a division/company and issues new
shares of an existing company they own. A familiar example is when
Pepsico spun off Yum brands (Kentucky Fried Chicken, Pizza Hut, and
Taco Bell) in 1997. In a spin-off, the existing shareholders do not relinquish
shares, but receive new shares of the spin-off company – so Pepsico
shareholders received new shares of Yum brands. In a split-off, the parent
company (GE) offers its shareholders the opportunity to exchange some of
their GE shares for shares of an existing company (SYF). Spin-Offs and
Split-Ups are very similar, but their taxation to the shareholder is different.
The final type of corporate action is a Split-Up whereby an existing
company is split into two or more companies. In the end, the parent
company does not exist. A very well-known split-up happened when the
U.S. government forced the split-up of the Bell System in 1982. The result
was the creation of the Baby Bells which were seven separate
telecommunication companies.
 Divestitures Vs Demerger

Divestitures Demerger
Sale of assets to another company Transfer of assets and also of liabilities
under a scheme of demerger.
Transferor co. receives consideration Shareholders of the transferor co.
receives consideration
Consideration is in the form of cash Consideration is in the form of equity
shares of the transferee company.
However, a demerger can be structured
where the shareholders are given the
preference shares , debt instruments or
cash.
 EQUITY CARVE OUT

 It is a hybrid of divestiture and Spin –off.

 The company transfers all its assets , liabilities ,
loans and business of one of its divisions to its 100%
subsidiary.
 Thus , at the time of transfer , the shares are issued
to the transferor company itself and not to the
shareholders.
 Carve outs are used to mobilize funds for core
business by realizing the value of the non core
business.
 Why Demerger?

 To achieve focus in the respective businesses.

 To improve the P/E and market cap ( by demerging
not so profitable business)
 To demerge the capital hungry businesses in order to
safeguard the other businesses from equity dilution.
 Decrease in ownership of the present shareholders
when new shares are issued .
NEW TERM
 JOINT VENTURE

 An arrangement in which two or more companies

contribute to the equity capital of a new company in
pre decided proportion.
 Generally joint venture partners are limited
companies . But one or all of them may or may not
be limited companies.
 JVs are formed to pool the resources for a business
or specific project beneficial to both the partners ,
but which none of the partners want to carry under
their corporate entity.
 Reasons to form JV

 The venture may be highly risky and therefore may

be want to restrict their exposure in the form of
contribution to equity capital of the joint venture.
 Neither of the JV partners might be willing to dilute
control on their businesses by accepting funding.
 JV partners might be competitors but wanting to
come together only for a special endeavour.
 To ensure reward sharing in a predetermined ratio.
 To ensure management control of the JV in a
predetermined ratio.
 Capital Reduction

 How and why for capital reduction?

 By reducing the liability in respect of share capital
not paid up.( Issue price to be paid in stages)
The project might have got over , and no more funds
are required.
 By writing off or cancelling the capital which is lost.
The co. might be showing accumulated losses on asset
side and paid up equity K at historical figures.
Though in reality a part of K might have been lost
due to business losses.
 By paying off or returning excess capital that is not
required by the company .
(Buy back of shares, Redemption of its preference
share capital or reduce the Face value of the shares, paying
huge one time dividend.)
 Why Capital reduction Vs Buy Back?

 Improve RoCE and RoE

 Boost its EPS and hence, Market cap
 If a co. wants to effect a larger buy-back, it will have
to follow the reduction of capital route.
 Shareholders may or may not participate in
buyback., however, the shareholders have approved
capital reduction , it becomes binding on all the
shareholders .
 Capital reduction is comparatively less restricted as
in case of Buy backs such as 25% , the Debt Equity to
be 2:1 post buy back etc.
 Benefits of Buyback

 It Indirectly increases the promoter’s stake in the

voting capital of the company.
 The Co. doesn't have to pay the dividend distribution
tax .
 It reduces the capital base, thereby, better RoCE and
RoE.
 Delisting

 A listed co. means a co. which has any of its

securities listed on any atleast one stock exchange.
 A delisted company means a company whose equity
shares have been delisted from all the stock
exchanges.
 Why listing?
 To raise funds from public
 Promoters need to encash the capital gains
 Listed co. status adds to credibility and thus easy access to debt.
 To build corporate brand and brand equity.
 Why Delisting?

 To order to curtail substantial costs incurred on

providing reports to investors such as shareholder
meeting reports, periodical info. etc
 Indirect costs of competent CS , CFO and finance
and secretarial dept.
 In order to keep the vital business strategies, plans,
profitability ratios, cost structure etc unknown to,
maintaining the competitive edge.
 Also, to have more freedom in running the business
of an unlisted co. vis a vis a listed co.
 Key terms

 RoCE = EBIT/Capital Employed

 where Capital Employed = Total Assets –Current Liabilities
 RoE = Net income/ Average shareholders’ equity
 where, shareholders equity= Share K +Retained Earnings

 Or Total assets –Total Liabilities

 Open Offer -It is a part of the takeover code as defined by the Securities
and Exchange Board of India (SEBI). When a company acquires up to
15 per cent stake in another listed entity, an open offer gets triggered.
This means the acquiring company must make an offer to existing
shareholders to buy an additional 20 per cent stake in the company.
And, it is typically kept open for about a month, from the date of
announcement. It is aimed at providing the shareholders an exit option,
as there may be a management change post-acquisition and investors
may perceive potential risks in the business.
 OPEN OFFER

 As per Regulation 3, the initial threshold limit provided

for open offer obligations which were 15% of the voting
rights within a company has increased to 25%. In
addition to this, if a party already holds at least a quarter
of the target's voting rights, a mandatory open offer will
be triggered if that party acquires more than 5% of the
target's voting rights in any financial year.
 Modification made on Open Offer Exemptions
 SEBI Takeover Regulations, 2011 provides for certain
trigger events wherein the Acquirer is required to give
an offer to the shareholders of the Company being
targeted to provide them with the exit opportunity.
 MANDATORY OPEN OFFER

 The SEBI Takeover Regulations, 2011 provides a

threshold for a binding open offer. The Regulations
make the provision that whenever an acquirer acquires
the shares more than the limit as mentioned in
Regulation 3 and 4 of the SEBI Regulations, 2011, then
the acquirer is required for a public announcement of
the offer to the shareholders of the target company.
In Nutshell
THANK YOU
 M&A- A Growth Strategy

•GR OWTH OPPOR TU NITIES – ITS CLAS S ES

•M & A- TO PU R SU E GR OWTH
•STR ATEGY M OD ELS AND APPR OACHES
 Ansoff’s Product Market Mix

PRESENT NEW
PRODUCTS PRODUCTS

PRESENT
MARKET PRODUCT
MARKETS PENETRATION DEVELOPMENT

MARKET
NEW MARKETS DEVELOPMENT DIVERSIFICATION
 INTENSIVE GROWTH

INTENSIVE
GROWTH

MARKET MARKET PRODUCT

PENETRATION DEVELOPMENT DEVELOPMENT
 MARKET PENETRATION

 EXISTING PRODUCTS
 EXISTING / PRESENT MARKETS
 INCREASED SALES
 COMPETITORS COEXIST
 TOOLS
 EXPANSION OF DEALER AND RETAILER NETWORK
 ATTRACTIVE DEALER AND CONSUMER INCENTIVE
SCHEMES
 HEAVY ADVERTISEMENT CAMPAIGNS
 MARKET DEVELOPMENT

 EXISTING PRODUCTS
 NEW MARKETS
 INCREASED SALES
 Regional company moves to exploit other regional
markets
 Domestic company moves to exploit the foreign markets
 EXAMPLE : Wagh bakri tea group , primarily a market
leader in Gujarat has entered Maharashtra, Rajasthan
and more recently has launched tea cafes in Delhi too.
 PRODUCT DEVELOPMENT

 New products
 Existing Markets
 Increased sales and thus , higher market share
Tools
Improved products
New features
Either replace the older products OR coexist with the older
products to cater to the various customers’ sections

Examples : TV , LCD , PLASMA

CARS
Microsoft Operating systems
 INTEGRATIVE GROWTH

INTEGRATIVE
GROWTH

BACKWARD FORWARD HORIZONTAL

INTEGRATION INTEGRATION INTEGRATION
 BACKWARD INTEGRATION

 Company seeking increased control of its supply

systems.
 It can be organic or inorganic growth strategy.
 There need not be a merger of the target company
with the acquirer company
 Example : RIL –Fabric to yarn and polyester fibre to
chemicals, to polymers...
 Tata Tea owns its own tea estate in southern parts of
India.
 HORIZONTAL INTEGRATION

 The company seeks ownership or increased control

of its competitor(s).
 It is a inorganic growth strategy.
 Example : Grasim acquired L&T’s cement business.
 FORWARD INTEGRATION

 Company seeking increased control over the

distribution system.
 It can be organic or inorganic growth strategy.
 Integration does not mean that there has to be a
merger of the target company with the acquirer
company . It is enough to acquire control of the
target company.
 Example: Raymond has set up its own retail shops .
 RIL ( An oil refinery ) has its own petrol pumps.
 Diversification Growth

Diversification
Growth

Concentric Horizontal Conglomerate

Diversification Diversification Diversification
 CONCENTRIC DIVERSIFICATION

 New product launches.

 Having technological or marketing synergies with
the existing products.
 Appeals to new customer segment
 Example : TATA launched SUMO and INDICA
 AVON primarily has been into manufacturing and
marketing of ladies cosmetics, if it launches the
men’s range also, it would account to Concentric
Diversification.
 HORIZONTAL DIVERSIFACTION

 New products
 Existing customers
 New products technically unrelated to existing
product portfolio
 Example
 If Avon enters into women’s garments business,
it would be a case of horizontal diversification.
CONGLOMERATE DIVERSIFICATION

 New products
 New customers
 No relationship between co.’s current technology,
products or markets.
 It can be achieved through organic or inorganic
route.
 Example:
 ITC Ltd – Product portfolio- Cigarettes, hotels,
paper , biscuits and flour.
 THE BCG MATRIX

BCG matrix Table

MARKET SHARE
HIGH LOW
INDUSTRY
SALE HIGH STARS QUESTION MARKS
GROWTH
LOW CASH COWS DOGS
 STARS

 Features
 High growth industry
 High market share

 High cash generation

 Best growth business opportunities

 Cash hungry to make huge capex to hold their dominant

position
 Relevant strategies
 Forward , backward and horizontal integration
 Market penetration, product development and market
development
 Concentric diversifications
 CASH COWS

 Features
 High market share
 Low growth industries

 Excess cash generation

 Growth is not the focus of strategy

 Relevant strategies

• PRODUCT DEVELOPMENT
• CONCENTRIC DIVERSIFICATION
 QUESTION MARKS

 Features
 Low relative market share
 High growth rate of the industry
 More cash req. than the cash generation
 Reasons:
• Wrong business model
• Low product quality
• Poor marketing
• Thus , failure of management

 Strategy
 To make them stars by following intensive growth strategies
such as
 To sell them
 DOGS

 Low relative market share

 Low growth industry
 Adversely affect the firm’s profitability
 Strategies
• Down sizing
• Cost reduction
• Reengineering
• However, strategy generally applicable to dogs is
divestiture or liquidation to generate cash for other
businesses.
 GRAND STRATEGY MATRIX

RAPID MARKET GROWTH

Market . Market . Penetration
Penetration Market Development
Market Product Development
Development Backward Integration
Product Forward Integration
Development Horizontal Integration
WEAK Divestiture Concentric STRONG
COMPETITIVE Liquidation Diversification COMPETITIVE
POSITION POSITION
Downsizing Horizontal Integration
Cost reduction Concentric
Reengineering Diversification
Divestiture Conglomerate
Liquidation Diversification
Joint Ventures
SLOW MARKET -GROWTH
 Industry/Product Life Cycle

 Product Life Cycle- Introduction , Growth ,

Maturity, Decline.
 Introduction
 New Product
 To fulfill existing demand catered by other product
 New Need to be catered
FEATURES
 Concept selling rather than Product selling

 Sales growth is very slow

 Normally initially substantial losses are incurred on account of
high product development and marketing expenses.
 Example:
 GROWTH STAGE

 Rapid market acceptance

 Substantial sales
 Substantial profit generation
 Existing players expand capacity
 New players are lured by high sales growth and
profits
 Thereby, substantial new capacity creation.
 Competitive pressure manageable
 Maturity Stage

 This stage has two sub stages:

 In the first stage , Positive sales growth but lower than
growth stage and declining .
 Industry level profits are the highest.
 Triggers dog eat dog competition.
IInd Sub Stage
 The total product sales for the industry STAGNATE.
 Competition intensifies in the second sub stage.
 Price war leads to lower margins .
 This leads to aggressive marketing and promotional
expenditure , thereby, hampering the profits further.
 Profits start declining and converge to zero.
 DECLINE STAGE

 Substitute products emerge

 Customer satisfaction at lower prices needs
 Product sale starts declining
 Products starts suffering losses.
 Product life cycle Vs Industry Life cycle

 In a single product companies , the product life cycle

represents industry life cycle.
 However, in the case of multiple products, different
products might be going through different product
stages, hence the industry stage cant be clearly
defined.
 Product Life cycle Vs Strategy

INTRODUCTION STAGE
➢ Launch of a new product requires market penetration
and market development.
➢ Product launch by an established firm , it would be easy
to reach the growth stage.
➢ Product has been launched by a new firm , it at times has
to sell out to large firms .
➢ The large firms seek concentric or conglomerate
diversification through the process of Acquisition.
➢ However, a group of new firms who have launched the
same new product can follow horizontal integration via
Mergers.
 Product Life Cycle Vs Strategy

GROWTH STAGE
➢ The acquisition strategy is more prominent in the
growth stage .
➢ WHY?
➢ Start finds it difficult to move to next growth level , due to
investment constraint
➢ The venture capital is also interested in en cashing the value by
exiting
➢ The promoters are willing to exit in order to make huge capital
gains.
➢ Eg : Hotmail was sold to Microsoft
➢ Bazee.com was sold
to e-Bay
➢ Recently FLIPKART.......
 Product Life Cycle VS Strategy

 MATURITY STAGE
➢ In this stage, the firm’s survival and growth is highly
dependant on cost and pricing advantage.
➢ In order to achieve this, the dominant firms adopt the
strategy of forward or backward integration either
organically or inorganically .
➢ The dominant players (Mkt share and profitability)
seek horizontal integration through the acquisition of
competitors.
➢ Eg: The acquisition of Arcelor steel by Mittal Steel-
Global steel industry.
➢
 Product Life Cycle VS Strategy

➢ The cash rich firms in this stage could follow either

concentric diversification either organically or
inorganically .
➢ Cash rich but not dominant in terms of mkt. share
can follow horizontal integration the through the
acquisition of a large but unprofitable firm
➢ Neither dominant nor cash rich , the only way out
is to downsize, cost reduction and reengineering to
turn them profitable . However, if this fails only
strategy left is to sell out.
 Product Life Cycle VS Strategy

 DECLINE STAGE
Cash-rich firms -
Conglomerate diversification through the acquisition
of firms in the growth industries.
Followed by phasing out of declining business either
through divestiture or liquidation
THANK YOU
 M&A- MOTIVES AND
SYNERGIES

•M O TI V ES O F M & A
•TY P ES O F S Y N ER G I ES O F M & A
 MERGER MOTIVES

Merger beneficial Merger beneficial

to shareholders of to the managers of Merger as a
the acquirer the acquirer process outcome
company company

EFFICIENCY THEORY
MONOPLY THEORY EMPIRE BUILDING PROCESS THEORY
RAIDER THEORY THEORY
VALUATION THEORY

Merger as a Macroeconomic phenomenon

DISTURBANCE THEORY
 MONOPOLY THEORY

 M&A as being planned ad executed to achieve

market share and market power .
 Monopoly theory works as follows
➢ Mkt. Leaders trying to consolidate their position further.
Eg: Mittal Steel acquired Arcelor
RIL acquired IPCL
➢ Profitable and cash-rich co. trying to gain market leadership
Eg: Tata Steel acquired Corus
Grasim acquired L&T’s cement division
➢ Market entry strategy
Eg: Vodafone acquired Hutchison Essar
Monster Worldwide acquired Jobsahead.com
Tata Tea acquired Tetley( capture global mkts instead of exporting)
 EFFICIENCY THEORY

 M&A as being planned and executed to achieve

synergies thereby adding to enterprise value .
 The rationale of M& A is to create value by pooling
various resources of the acquirer and target
companies.
 Valuation Theory

 Acquirer has better information about the valuation

of the target company .
 It estimates the real intrinsic value to be much
higher than the present market cap.
 Therefore , is ready to pay premium over the present
market price to acquire control over the target
company.
EFICIENT MARKET THEORY VS VALUATION
THEORY

 Efficient markets theory says markets are perfect and efficient

and thus determines the right valuation of any company.
 Thus Valuation theory is in contrast to EMH
 How and Why this happens ?
 There are information gaps and time lapse in information dissemination , so if
acquirer has access to such info. , he values the co. at a higher intrinsic value
than market cap.
 The acquirer may have same info. But different view on the basis of analysis ,
thus higher valuations.
 Target co. may have non operating and undervalued assets.
 Acquirer may be confident of leveraging the strong brand of the target
company.
 There is a time gap between economy recession end and the correct
valuations of the company and it is the right time to identify undervalued cos.
and acquire them
 RAIDER THEORY

 This theory states that the acquirer acquires controlling

stake in cash needy companies at much lower valuation
than potential valuation or present valuation
 The PE funds have no intent of running the companies.
 The PE funds intend to transfer the wealth from existing
shareholders to themselves.
 However, PE funds are able to do this only in case of
unlisted companies . As in case of listed companies, due
to SEBI regulations and guided formula for valuations ,
the PE funds are not able to buy below present
valuations.
 EMPIRE BUILDING THEORY

 There is a self motive of the managers for expanding

their own wealth rather than creating wealth for the
shareholders.
 CEO of larger companies are paid more , are
considered more capable and respectable vis a vis the
managers employees and CEOs of the smaller
companies.
 Therefore, at times the topmanagement of the
companies acquire just to grow in size inorder to build
their empires,without considering effect on the
shareholders wealth.
 M&A- Synergies

 There are five main types of synergies

 Manufacturing synergy
 Operations synergy

 Marketing synergy

 Financial synergy

 Tax synergy

 The synergies can be classified as

 Revenue generating
 Cost saving
 Manufacturing Synergy

 It involves combining the core competencies of the

acquirer and the target company in the areas of :
• Manufacturing
• Technology
• Design and development
• Procurement
• Rationale use of the combined manufacturing capacity
EXAMPLES:
• M&M(Design and development) acquired Jiangling Motors of
China( Low cost manufacturing capability)
• Diachi Sankyo(R&D strength )and Ranbaxy deal( efficient
manufacturing)
• TATA Motors acquired DAEWOOS Commercial Unit (producing CV
with higher than 200 bhp)
 Operations Synergy

 It involves rationalizing the combined operations in such

a manner that through sharing of facilities ,duplication
is avoided and logistics are improved in order to make
huge cost savings.
 Facilities such as warehouses , transportation facilities,
software and common services such as accounts, finance
, tax HR administration etc.
 Examples:
 OBC(Strong network in North) takeover of GTB(Strong network in
south and western India)
 Kingfisher acquired Deccan airlines(Reduction of flights on same
routes, reduction in the combined no. of airplanes in use)
 Jet airways acquired Sahara airlines ( Route rationalization , sharing
of ground staff)
 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 co. .
 It involves leveraging on the brand equity of one of the
two cos. to push the sales of the other company’s
products.
 Also, better pricing power can be acquired .
 Example:
➢ HLL( vast distribution network) acquired Lakme’s
brand and business ( strong brand equity).
➢ Dilip Piramal acquired Universal Luggage to use the
common distribution channel and sales force to push
sales.
 Financial Synergy

 It involves combining both the acquirer and target

co’s balance sheets to achieve either a reduction in
WACC or better gearing ratio.
 Under financial synergy, post acquisition , the target
company’s merger with the acquirer company is
required.
 The two balance sheets have to combine to realize
these synergies.
 Tax Synergy

 It involves merging a loss –making company with a

profitable one.
 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.
THANK YOU
 Takeover and Defence tactics

 Define takeover
 Friendly takeovers
 Hostile takeovers
 Global takeover practices
 Indian takeover practices
 Global defence tactics
 Tactic

 It means a trick , a ply , a device.

 When the acquirer and the promoters of the target
company are both willing partners in the acquisition
, no tactic is required .
 However, when the existing promoters are not
willing and the acquirer is determined to acquire ,
both the sides deploy tactics.
 A takeover is an act of taking control of something,
especially the buying out of one company by another.
 Takeovers

TAKEOVERS

FRIENDLY HOSTILE
TAKEOVER TAKEOVER
 FRIENDLY TAKEOVER

Friendly
Takeover

The target co. is The promoters of the

The target co is
open to any target company have
open to only one
acquirer who offers a negative list
specific acquirer. them a best deal

Example: Tata Steel’s acquisition of Corus. Though there was a

bidding between Tata and a Brazilian co. , the acquisition was still a
friendly one , since Corus was willing to sell out to Tata Steel
 Hostile takeover

 The promoters of the target company receives an

offer from a prospective acquirer whom they don’t
want to sell out.
 Some of the people in the target co. are against the
sell out .
 In case of the above mentioned scenarios , the
hostile takeover follows.
 Example : Mittal Steel’s acquisition of Arcelor , the
mgt of Arcelor was strongly opposed to the takeover
by Mittals and hence, Mittals had to resort to hostile
takeover .
 Takeover Tactics- Dawn Raid

 Broker acts on behalf of acquirer swoop down on stock exchange at

the time of its opening and buy all available shares before the target
co. comes to know of it.
 The acquirer can get a sizeable chunk in the dawn raid if the scrip is
highly liquid.
 As the investor becomes aware, the market price of the scrip shoots
up , and the acquirer cost to buy the shares in the market goes up.
 Also, the investor can hold back the quantity offered in the market ,
thereby, reducing the liquidity and making the dawn raid fail.
In India, according to the regulations , the acquirer is not allowed to
acquire more than 15% of the target company without making an
open offer.
Therefore in India, it is not possible to acquire controlling stake
through Dawn Raid
 Takeover Tactics- Bear Hug

 The acquirer makes a very attractive tender offer to

the management of the target company for the
latter’s shareholders and asks them to consider the
same offer.
 Although, the acquirer is prepared to make an hostile
takeover too, in case the target co. rejects the offer.
 If the target co. rejects the offer on small issues ,
there are chances that the institutional investors
favourably respond to the offer either through
privately negotiated deals or the subsequent hostile
open offer made by the acquirer.
 Saturday Night Special

 This is the same tactic as bear hug.

 However, it is made on the Friday or Saturday Night
i.e. the last working day of the week
 The idea is to give very little time to the target
company.
 It is also called the Godfather Offer.
 Tactics- Proxy Fight

 The acquirer convinces majority (in value)

shareholders to issue proxy rights in his favour .
 This enables the acquirer to remove the existing
directors from the board and appoint his own
nominees thereby, taking control of the target
company .
 Takeover Tactics In India

 Market accumulation followed by an open offer.

 Negotiated deal with financial institutions followed
by an open offer.
 Negotiated deal with a breakaway promoter faction
followed by an open offer.
 Direct offer to the shareholders of the target
company.
 DEFENCE TACTICS

 Crown Jewels Grey knight

 Blank cheque Golden Parachute
 Shark repellents
 Poison pill
 People Pill
 Scorched earth
 Pacman
 Green mail
 White Knight
 Crown Jewels

 The target company sells its highly profitable or

attractive business or division to make the takeover
bid less attractive to the raider.
 Also, no company will like to resort to selling its
profitable business unless forced to do so.
 Blank Cheque

 The target company makes a preferential allotment

to existing promoters or friendly shareholders to
increase the control of the promoter group.
 SEBI guidelines 2000, stipulates a pricing formula
based on the past 26 weeks prices. Consequently ,
the promoters have to pay the price close to the
Market Price.
 This makes such preferential allotment expensive for
the promoters.
 Shark Repellents

 The target company amends the MoA or Article of

association to make the takeover expensive or
impossible.
Example:
A co. may stipulate a certain min. Educational
qualification and / or experience for directors , so that an
acquirer finds it difficult to depute his people on board.
Or
The target co. might stipulate super majority( such as
90%) would be required to approve a merger.
However , such cases are rare and can’t be very effective
tactic.
 Poison Pill

 It refers to a strategy which upon a successful acquisition by the

acquirer creates negative financial results and leads to value
destruction.
 Forms of Poison Pill (I)
 The target co. may issue rights or warrants to the existing
shareholders entitling them to acquire large number of shares in
the event an acquirer’s stake in the company reaches a certain level
(suppose 30%).
 Such rights or warrants would be available only to the existing
shareholders .
 The acquisition price would be lucrative to the shareholders , so that
they certainly exercise their right. Thereby, diluting the acquirer’s
stake.
 This is also called shareholder’s rights plan.
 However, this is not possible in India due to regulations.
 Poison Pill

 Form (2)
 The target company may add to its charter a provision
that gives the current shareholder a right to sell their
shares to the acquirer at an increased price (Suppose
100% above the last 2/4 week’s avg. Price), if the
acquirer's stake reaches a certain limit say 30% .
 This wont stop the determined acquirer , but would
surely provide a high exit price to the existing
shareholders.
 However, this is not possible in India due to regulations .
 Poison Pill

 Form( 3)
 Under this , the company might have borrowed huge
amounts . However, the repayment terms might be
such that in case of a hostile takeover, the term loan
has to be repaid at a premium or would become
payable immediately .
 Poison Pill

 Form(4 )( Leveraged cash out)

 In this also, a huge amount is borrowed but to pay a huge
one time dividend to the shareholders.
 Form(5) Leveraged Recap/ Leveraged Recapitalization
The target company may buy back its own shares using
borrowed funds. This will lead to a dual effect
1) Increase in promoters stake
2) Negative effect on cash flows
This would the company less attractive to the acquirer ,
thus , may drop the plan of acquisition
 People Pill

 In this tactic, the current mgt team of the target co.

threatens to quit in mass in the event of a successful
hostile takeover.
This is difficult coz many of the employees at the
senior level might not be willing to quit due to their
own personal reasons.
 Thus, if the team leaves , the co. will be left without
experienced leadership following a takeover . This
may deter the acquirer from proceeding further.
 However, a no. of takeovers are a result of inefficient
leadership , in which the mgt is fired anyway.
 Scorched Earth

 It virtually destroys a company while it is being taken

over or when it is likely to face a hostile takeover.
 This could be achieved through extreme form of
poison pill or extreme form of crown jewel tactic.
 In India, this tactic can be used prior to an acquirer
making public announcement of an open offer .
However, if the announcement is made , the takeover
regulations do not permit this, till the open offer is
closed .
 Pacman

 The target company or its promoters start acquiring

sizeable holding in the acquirer/raider’s co.
threatening to acquire the raider itself.
 This tactic is also possible in India prior to the
acquirer hitting the trigger for open offer and making
the public announcement.
 Also, the target company needs to take care that it
does not trigger the open offer for the acquirer’s
company.
 Green Mail

 The target co. or the existing promoters arrange through

friendly investors to accumulate large stock of its shares
with a view to raise its market price . This makes the
takeover very expensive for the raider.
 At times a Green Mail is used to describe an arrangement
called target block repurchase with standstill
agreement.
 Under this, the exiting promoters of the target co. agree
to buyback the shares being accumulated by the raider at
a substantial premium. In return , the raider agrees not
to acquire any sizeable stake in the target co. for a
stipulated period of time or even forever.
 White Knight

 The target company or its existing promoters engage

another co. to act as white knight who actually takes
over the target company , thereby, hampering the bid
of the raider.
 This tactic is possible in India.
 Grey knight

 In this tactic, the services of a friendly company or a

group of investors are engaged to acquire the shares
of the raider co. to keep the raider busy defending
himself and is eventually forced to suspend the
hostility.
 Difference between PACMAN and GREY Knight
 Golden Parachute

 In this tactic, a contractual guarantee of a fairly large

sum of compensation is issued to the top or senior
executives of the target co. whose services are likely
to be terminated in case the takeover succeeds.
 This tactic is not a defensive tactic . It ensures that
the exiting top management is well taken care of in
case the takeover initiative becomes successful.
 Buy back as a takeover defence tactic

 In INDIA, a company cannot effect a buy back out of

borrowed funds.
 Buyback of shares can only be used as an effective
defence tactic in the situation where the target
company is cash rich to make a buy back but the
promoters are not adequately cash rich to make an
open offer to consolidate their holding.
THANK YOU
Motives of Target Companies

M ERGER M OTIVES
ID ENTIFY IN G OPPORTU NIT I ES IN M &A
 Merger Motives

 Competition elimination
 Horizontal integration eliminate direct competitors and
consolidate the industry .
 How consolidation ?
 H.M of firms in the same business line
 H.M of firms in the same geographical location
 H.M of firms of close substitute products
 As the players reduce, the merged entity enjoys the monopoly
status.
 Vertical merger creates foreclosure of rivals by blocking supplier
or distributor for competitors.
 The suppliers may force the firm( vertical backward integration )
to buy all its inputs from them.
 Merger Motives and Create Monopoly

 In a vertical merger , competition may be blocked by

tying as well .
 In tying , the customers are required to buy all inputs
with the one they want from the supplier.
 In tying , the supplier agrees to sell its customer one
product (tying item) only if the customer buys
remaining items from the supplier.
 Merger Motives

Gain Market Access -For expansion in new markets

 Geographical expansion involves better understanding of market , as
the local target is operating in the market.
 Out bound deals help companies expand in new markets , new
geographical locations and hence garner new revenues through new
customers .
 Acquirers get a readymade market
 Acquirers get a readymade product and distribution system at one
place .
 Adds new brands, products and business lines to the existing one
 Acquirer can cross sell and take advantage of multiple brands and
product portfolio.
 Geographical expansion thus , leads to higher capacity utilization and
more technical efficiency gains
 MERGER MOTIVES

BENEFIT from EFFICIENCY Gains in the Form

of Synergy
 Horizontal merger results in the elimination of
competitor. Acquisition leads to large scale
consolidation in the industry .
 There is monopoly creation as competition is
eliminated and acquirers dominate the pricing and
distribution enhances.
 The cost savings also accrue from economies of scale
and economies of scope.
 MERGER MOTIVES

Economies of Scale
 It is derived by larger production output leading to
reduced fixed costs and variable production costs.
 The merged entity gains from combining their
complementary and supplementary resources,
technology know how, skills and administrative
abilities.
 Elimination of duplicate, overlapping and redundant
resources saves time , effort and money thus overall
costs.
 MERGER MOTIVES

ECONOMIES OF SCOPE
 The cost of production for the combined portfolio of
brands and products reduces post merger.
 The combined entity has a widely diversified bouquet of
brands and product offerings with lesser cost associated
with their production, marketing and distribution.
 Post merger , the cross selling happens across the client
base of both the companies.
 After adjusting for cannibalization the cross selling of
brands and products across the two markets helps in
enhancing revenues and reducing distribution costs.
 Merger Motives

 Cannibalization: In marketing
strategy, cannibalization refers to a reduction
in sales volume, sales revenue, or market share of one
product as a result of the introduction of a
new product by the same producer.
 Difference btw Economies of scale and Economies of
Scope
Economies of scale for a firm involve reductions in the
average cost (cost per unit) arising from increasing
the scale of production for a single product type,
whereas Economies of scope involve lowering the
average cost by producing more types of products.
 Merger Motives

Vertical Mergers also create efficiency gains

 Backward vertical integration helps in streamlining
the procurement process , thereby reducing the cost
of inputs and backward supply chain.
 Forward vertical mergers happen when firms
purchase entity involved with the distribution of the
end product and services.
 This helps the acquirer to reduce the distribution
cost and enjoy efficiency gains.
 Merger Motives

Satisfy the self ego of managers( Hubris

Hypothesis)
 Hubris implies that the acquirer lands up paying too much
for the acquisition of the target .
 It is linked to the ego and overconfidence of the acquirer.
 The overvaluation and over bidding leads to wealth transfer
from acquirer to target shareholders .
 Managers pay huge premium due to their overconfidence
and rigidity .
 Post merger , the whole company pays the price and loses
on value in the long run due to the overpayment.
 MERGER MOTIVES

Benefit from Undervaluation

M&A is pursued when the target company is undervalued.
The undervalued is in the context of :
a) Fundamental value of the target company’s assets-
Such companies may be termed as sick or poor in performance.
b) Market Share price- A stock may lose more than 50% of its
value and remain at its new low price consistently, may be due to
investor’s distrust , loss of market confidence, or erosion of
brand value.
The cost of integration should not be more than the benefit of
undervaluation . The acquisition premium is generally not paid
when the target is bought with undervaluation as motive .
 MERGER MOTIVES

DIVERSIFY ACROSS INDUSTRIES

 M&A is pursued across unrelated businesses and sectors
when the acquirer intends to diversify and becomes a
conglomerate.
 Diversification happens as the acquirer and target are on
unrelated businesses , and post merger the acquirer
diversifies into businesses that have low correlation .
 Consequently , the businesses are able to reduce the
business risk of fluctuating operating profit.
 The fluctuation in the operating profit of the acquirer
reduces as the M&A adds unrelated businesses and
becomes stable.
 MERGER MOTIVES

GAIN ACCESS TO R&D and TECHNOLOGY KNOW-

HOW
 Firms with lucrative R&D investment are tempting targets
 Acquiring a company , high on R&D assures control over
future innovation market.
 R&D intensive industries would call for more M&A.
 M&A grants direct control over R&D and hence more
dominance in the market.
Examples:
 Microsoft has pursued small entrepreneurial ventures based
on R&D and innovation like forethought which developed now
known as power point
 P&G acquired innovation-based firm Gillette
THANK YOU
Leveraged Buyout
 LBO

 It is an acquisition of a company by an acquirer, financed

predominantly by debt.
 When an external entity buys a target firm with high debt
amount, it is termed as a typical LBO.
 An LBO can be executed both by a corporate entity and
PE investors.
 In case of PE players , the investment is for shorter
duration , unlike a corporate entity which buys a target
firm for perpetuity.
 An LBO is an acquisition of asset , company , and
business division of a target firm using high proportion
of debt for making the consideration payment
 LBO EVALUATION

 The PE investors assess the return on their

investment for the given definitive period .
 The most common metrics are:
• IRR
• Cash Return
 IRR

 It is the financial break even point

 It is the discount rate at which NPV of all cash flows
is...........
 IRR, primarily measures the return on equity
invested by the investor
 Factors affecting IRR
 Total Consideration paid
 Debt and Equity portion of financing
 Holding period return
 Exit multiple of investor
 Stability , steadiness and growth in cash flows of target.
 Adjusted Present Value Method

 In a LBO , when the target is valued with DCF , then

the discount factor is determined by Adjusted
Present Value approach instead of WACC.
 Why?
 Because , the capital structure is continuously changing as
debts are repaid over the initial years.
 APV is used for valuation when a given firm has a changing
capital structure.
 LBO Valuation

 IRR APPROACH
 LBO MODEL
 APV MODEL
 APV

 STEPS
 Calculate NPV of a firm as if it is all equity financed
 Calculate the present value of the benefit of debt financing , that is
, tax shield.
 The NPV of a firm is calculated with discount rate
 The present Value of tax shield is calculated at the Kd
 The value of firm is the NPV of the firm plus the present value of
tax shield.
 The APV model separates the value of the company
into two components:
 The value of operations as if the company was all equity financed.
 The value of tax shields , which comes due to debt in capital
structure pg:388