INTRODUCTION AND CONCEPTS 1. Introduction 2. Corporate Restructuring ~ Meaning 3. Historical Background 4, Need and Scope of Corporate Restructuring 5. Objectives of Corporate Restructuring 6. Types of Restructuring Planning, Formulation and Execution of Various Restructuring Strategies “Type of Corporate Restriscturing Strategies 9. Expanding Role of Professionals Questions i EEUU1, INTRODUCTION Business environment is very dynamic in nature. It keeps on changin continuously. Both, internal as well as external, environment plays a Vital role jn shaping an organisation. With changing environment, the organisation also Needs to be changed in order to survive. Thus arises the need for restructuring the organisation. Corporate Restructuring may be a one-time exercise for an organization but it may have a perpetual influence on the business and other concerned agencies due to its numerous considerations and immense advantages, Such type of activities can prove to be advantageous for an organisation if carrie out with proper due diligence. Corporate restructuring is a tool for obtaining synergy, dynamism and perpetuality, Corporate restructuring is an expression, by which a company can consolidate its business operations and reinforce its position for accomplishing its short-term and long-term corporate objectives - synergetic, dynamic and continuing as a competitive and successful entity. Corporate Restructuring is defined as the procedure that is involved in changing the organization of a business. Corporate Restructuring includes making dramatic changes to business by cutting out or integration of departments. It Suggests rearranging the business for increased: proficiency and profitability, In other words, it is a comprehensive process, by which.a company can consolidate its business operations and strengthen its position. for achieving corporate Objectives-synergies and continuing as a competitive and successful entity. 2. CORPORATE RESTRUCTURING - MEANING Corporate restructuring is the proces in; business model, management team or financial struchire to address challenges and increase shareholder value. Corporate restructuring is an inorganic growth strategy. oe, ~~ Corporate restructuring is changing business model. This is done in order to pgrade with the changing business environment. Corporate restructuring also implies changing management team, As a part o Professionalism, it has been seen that the inefficient team is replaced by the efficient management in order to regain the market position of the business. In, order to expand the business by entering into new markets or developing new products, organisation requires funds. Thus in order to fulfil its appetite of growth financial restructuring plays a vital role. Restructuring means to give a new structure, to re build, or to rearrange. Corporate restructuring thus implies rearranging the business for increased efficiency and profitability. It is a comprehensive process by which company can consolidate its. business operations and strength its position for achieving corporate objectives, synergies, and continuing as competitive and sticcessful entity. : 7 Depending upon the requirements of a company it is possible to restructure its business, - financial and organisational transactions in different forms. Restructuring is a method of changing organisational culture in order to achieve of significantly changing a company'sstrategic goals of the organisation. Thus corporate restructuring can be in itself be a tool of strategic management whereby long term goals are kept in mind. Restructuring helps company to achieve its long term as well as short term objectives by increasing market share, brand power and synergies. Corporate restructuring through Acquisition, mergers, amalgamation, takeovers has become integral strategy today. Organic strategy may take years to set business in motion put inorganic strategies helps to enter into market in running position. 3, HISTORICAL BACKGROUND A. US PERSPECTIVE - ‘Waves in Merger and Acquisition : Merger and Acquisition has been around for a very long time. It is no longer a new concept that just introduced in business world. It has ‘started making its presence felt as early as the Jatter part of 1800s and increasing competitiveness in global business was largely instrumental in its wide spread application. Period _ Wave Type 1893 to 1904 | First Horizontal Mergers 1919 to 1929 Second Vertical Mergers 1955 to 1970 Third Diversified. Conglomerate Merger 1974 to 1989 Fourth Co-generic mergers; ‘Hostile takeovers; Corporate Raiding 1993 to 2000 Fifth Cross-border mergers, mega-mergers 2003 to 2008 le Sixth Globalisation, Shareholder Activism, Private Equity, LBO 2011 onwards Seventh Generic/balanced * The evolution of merger and acquisition is broken down in six waves. First Wave : (1893-1904) © The first wave came to be known as “Great Merger Movement” in US particularly the manufactuting sector. This- wave laid emphasis on manufacturing sector. fe © Horizontal mergers were the base of these wave: © Being horizontal merger, large business dealing in the same products and services came together for gaining economies of scale. @ The main objective of businesses in this wave was to set up monopoly and market dominance, thus trying to curb competition.Second Wave : (1919 - 1929) As the first wave strongly favored market dominance and monopoly, it led Governments to interfere and make stringent laws to curb such anti- competitive agreements. Thus business laid emphasis on vertical mergers, Vertical mergers are. more efficiently oriented rather than increasing revenue. . The main objective of vertical merger in this wave was to reduce cost and improve overall efficiency. Vertical merger benefited organisations in supply and logistics which in itself helped in reduction of cost and uninterrupted flow of goods and services. Monopoly of first wave was replaced by oligopoly. This wave ended during the current depression and crash in 1929. Third Wave : (1955 - 1970) The third wave paved the way to expansion and diversification. For large corporate players expansion and diversification by the way of conglomerate mergers was more advantageous than horizontal and vertical merger. Conglomerate merger and acquisition belongs to various fields of business, often unrelated to each other. The third wave came to an end on crash of share prices by the oil crises. Fourth wave : (1974 - 1989) The fourth wave led to arrival of corporate raiders, hostile takeovers and congeneric merger. Takeover and acquisition led to the’ activity of controlling companies by acquiring shares Hostile takeover means where wishes even consent of the owners, shareholders, or management not considered. Congeneric Merger - between two business or companies that belong to same industry or related industries that allowed them to have synergy but not involved making the same project. . End of fourth wave came in 1989, when the banks ended up lending too much, too often that they were unable to sustain t heir capital structures. Fifth Wave : (1993 - 2000) The companies fought with each other for maximum deals in order to gain larger economies of scale. The result of above was the creation of multinational companies and conglomerates which have become massive. Foreign investors began starting in US market.© Cross-border mergers i.e. control acquired by the foreign investors emerged as never before. © They involves two couitries with the rules of Home country prevailing over the acquisition and control of acquired or merged company in the host market. This was seen by many business as the perfect opportunity to enter markets in other countries and establish dominance on international and global scale. Sixth Wave : (2003 - 2008) © Sixth wave ‘was featured by Globalisation private equity and shareholders activism © Shareholders activism led to awareness among shareholders regarding exercising their right over management. @ Leveraged buy-outs also become prevalent where acquiring company borrows money in order to meet cost of acquiring it target company, allowing them to do merger and acquisition without need to commit large amount of capital. This act of borrowing or obtaining. © Because of Globalisation more and more companies even the larger companies were ready to merger and acquisition for expanding business. © Cross-border-mergers trend that was in fifth wave continued in six wave. © Government support was more readily available and growth of private equity funds also. © In December 2007 the subprime mortgage cxisis in'the U.S. which coincided with recession of US economy, end of the six wave. Seventh Wave : (2011 Onwards) © Situation were not Otoo good for merger and acquisition offer the end of sixth wave still all hope is not lost, as merger and acquisition activity seemed to start stirring in 2011. © The seventh wave would be for the emerging economies like India, China, Brazil. In this wave BRICS nations (Brazil, Russia, India, China and South Africa) are taking to the forefront of merger and acquisition activity. © Huge efforts are being taken by these nations to establish their stand at global level. . B. INDIAN PERSPECTIVE Mergers and acquisitions were not uncommon in the post independence period, particularly after 1947 and before 1991. Much of the mergers and acquisitions occurred in the industries like banking and insurance, jute, cotton textiles and sugar.In the period between 1951 to 1974, various governmental! regulations were introduced for controlling operations of larger private players. These affected the growth strategies adopted by corporations. Among the various regulations few were; Industries Development and Regulation Act, 1951 Import Control Order, 1957 - 58 o Monopolies and Restrictive Trade Practices Act, 1969 Foreign Exchange Regulation Act, 1973 But still there were various conglomerate mergers as horizontal mergers led to concentration of economic power. In many of the cases Government encouraged merger and acquisitions. One such were sick units. The National Textile Corporation took over a large number of sick textile units. . But prior to 1991, India was a highly regulated economy. Economy has closed economy as factors such as demand and supply were not allowed to have full fledged liberty to rule the market, Due to restricted Government policies and rigid regulatory framework, the scope and mode of corporate restructuring were very difficult and limited. The main hurdle for corporates to merge and amalgamate was lengthy procedure laid down by MRTP Act, 1969. Accordingly it was a tiresome procedure to come out with such corporate restructuring. Opening up of the economy started with the industrial policy 1991 where continuity and:change was emphasised and main trust was-on relaxation in industrial licensing, foreign investment, transfer of foreign technology etc., with the economic liberalisation, globalisation and opening up economies the Indian corporate sector started restructuring to meet the opportunities and challenges of competition. Thus we can say that LPG paved way to a strong corporate restructuring in India. On setting up of World trade organisations (WTO) in 1995, there have been easy and free flow of technology, capital and expertise across the globe. WIO “geared the speed for globalization in India. A restructuring wave is sweeping the corporate sector the world overtaking within its fold both big and small entities, comprising old economy business, conglomerates and new economy companies and even the infrastructure and service sector. Various sectors ranging from Banking to oil exploration, telecommunication to power generation, petrochemicals to aviation companies, are coming and joining hands together gaining synergy. With the increasing competition and the economy heading towards globalisation, the corporate restructuring activities are expected to occur of much Jarger scale than at any time in the past. Corporate restructuring play a major role in enabling enterprises to achieve economies of scale, global competitiveness, right size and a host of other benefits including cost of operations and administration. Industries like E-commerce and biotechnology have been exploding and old industries are being transferred.4, NEED AND SCOPE OF CORPORATE RESTRUCTURING 1) Redirecting organisation's activities | 2) Cash deployment .3) Risk reduction 4) Development of core competencies | 5) Competitive advantage al competencies |.) Economies of scale 8) Revival and rehabilitation ))-Reduction in cost of capital ca Sa Ele a S\ 5 g ¢ 5 g 2 a @ & 3 = In order to achieve certain pre-determined objectives at corporate level, business activities are arranged completely. Such arrangement is known as corporate restructuring. Need and scope of Corporate Restructuring are : 1. Redirecting Organisation’s Activities Corporate restructuring redirects the organization activities as a whole. With various methods of corporate restructuring like mergers, amalgamation or takeover the organization is restructured into a new way. 2. Cash Deployment Idle cash leads to waste. Such idle cash needs to be deployed so as to gain _ good returns. Corporate restricting is a tool for deploying idle cash into a profitable venture and reap the benefits. As when organizations wants to grow instantly, inorganic growth becomes priority. 3. Risk Reduction Depending upon a sinble business may be risky for an organization. Keepin; in mind_the_ volatility of the environment it is better to’ have an_a diversified portfolio. This can be achieved by corporate restricting 4. Development of Core Competencies Restructuring doesn’t only mean mergers and amalgamations but also means demerger. In order to focus on core business, organization structure may be changed by divestment or by demerger, =, 5. Competitive Advantage Strategic business assets accumulated by a business like natural monopolies, goodwill, licensing can be utilized, to enjoy competitive advantage. This shall lead to bring an edge over competitors. —_—_—6. Global Competencies Global competition drives people t big.and fac ralleng: 8: In order jg become competitive globally, cost cutting and yalue addition a desicously needed. This can be achieved by restructu . 7. Economies of Scale 8. . Revival and Rehabilitation There are instances where a unit ic. sick unit making losses, Closure of such unit may not be beneficial to stakeholders. Thus the way to it can be rehabilitation of such sick units. Through restructuring, the losses of sick unit can be adjusted with the profits of health companies, . ye ee 9. Reduction in Cost of Capital Capital restructuring can be done by appropriate mix.of Hoan and equity funds to reduce the cost of sei cing and improve returri on capital employed. | 10. Constant Supply Corporate restricting helps in acquiring cons access to scientific research and technologie: survive in the very competitive environment. Supply of raw materials and ments. These again proves to Case of Merger of Lipton India Limited with Broke Bond Limited 1. In 1931, Unilever set up its first Indian subsidiaty, Hindustan, Vanaspati Manufacturing Company, followed by Lever Brothers India Limited (1933) and United Traders Limited (1935). These three companies merged to form HUL in November 1956; - The liberalisation of the Indian economy, started in 1991, clearly marked an. inflexion in HUL's and the Group's growth curve. Removal of the regulatory framework allowed. the company to explore every single product and opportunity segment, without any constraints on production capacity. ; 3. The 1990s also witnessed a string of crucial mergers, acquisitions and alliances on the Foods and Beverages front, In 1992, the erstwhile Brooke Bond acquired Kothari General Foods, with significant interests in Instant Coffee. In 1993, it acquired the Kissan business from the UB Group and the Dollops Ice-cream business from Cadbury India. 4. Two companies i.e. Tea’'Estates India Limited and Doom Doom India Limited got merged with Brooke Bond Limited wef. January 1, 1993: Also there was merger of Lipton India Limited’ with Brooke Bond India Limited w.e.f. July 01, 1993. a The company’s name was changed from Brooke Bond India Limited to Brooke Bond Lipton India Limited w.e.f. March 1994,The restructuring of Unilever PLC’s coffee, tea and food business was completed in year 1993 when Brooke Bond Lipton India Limited emerged. Reasons for merger by Lipton India Limited with Brooke Bond India Limited 1, Economies of large scale of operation 2. Getting synergy 3. Having a balanced portfolio 4, Complementary linkages OBJECTIVES OF CORPORATE RESTRUCTURING AX Positioning the business to be more competitive. \2° Surviving in advance economic Climate. .3¢ Taking the business in entirely new direction. AX Restructuring of debt. .5¢ Rehabilitation of business. .6/ Inviting new partners or private equity. LT Succession planning. y8~ Settling some disputes or arrangements. v9" Division of assets among promoters. 6. TYPES OF RESTRUCTURING nancial _Jeclinological Restruc 1. Financial Restructuring | ret {Financial restructuring is the organizing of a business assets and Jiabilit , [Financial restructuring has been done for improving poor financi ance u"Jand facing external competition and to gain from emerging market opportunities] ___ Einancial restructuring deals with restructuring of capital base and raising finance, °°“ for new projects) Einancial restructuring helps a firm to revive from the situation of financial distress without going into liquidation) Reagan mae2. Technological Restructuring, Technological restructuring means the ‘stage of technological development New and advi chnologies have been introduced to the organizations in order to improve luctivity and performance. tp Pees: 3. Organizational Restructuring Organizational performance depends on the efficiency of their personnel. New skills and capabilities are required to meet organizational goals and objectives, Organizational restructuring increases the efficiency and effectiveness of the organization. 7. PLANNING, FORMULATION AND EXECUTION OF VARIOUs| RESTRUCTURING STRATEGIES : : 1. According to Lawrence R. Jauch and William F. Glueck : A strategy is a unified , comprehensive and. integrated plan that relates the strategic advantages of the firm to the challenges of the environment. It is designed to ensure that the basic objectives of the enterprise are achieved through its proper execution by the organization. - 2. In corporate restructuring strategies, data collected from various individuals and groups is unified. It is comprehensive as both, internal as well as external data, is considered for strategy formulation. Successful formulation and implementation of the strategy requires integrated efforts of all departments in the organization. 3. Planning the type of restructuring requires detailéd business study, . expected business demand, available resources, utilized/idle portion of resources, competitor analysis, environmental impact etc., The bottom line is that the right restructuring strategy provides optimum synergy for the organizations involved in the restructuring process. Thus, it becomes very essential to have a concrete plan as it is non-recurring exercise. 4, Strategy formulation requires: Knowing the vision and mission Setting objectives and analyzing the gap Framing of alternative strategies Analyzing of alternatives Choosing the most appropriate strategy 5. Mere planning and formulation of corporate restructuring strategy is not enough. It requires a concrete execution: Execution of strategies requires identification of activities, grouping of these activities as per department, organizing and allocation of resources,Thus employing corporate restructuring strategies is a decision making process, which passes through various stages or steps. ‘Evaluating strategic alternatives Focusing on strategic alternatives Consideration of. decision factors Strategic choice 6. Restructuring requires consideration of various aspects before, during and after reconstruction. Following are the various aspects : . Legal & Procedural issues Valuation and funding . Accounting aspects . Taxation and stamp duty aspects Hone Pp . Human and cultutal aspects - F. Competition Aspects 8. TYPE OF CORPORATE RESTRUCTURING STRATEGIES Corporate Restructuring means any change in the business capacity or portfolio that is carried out by inorganic route or any change in the capital structure of a company that is not in the ordinary course of its business or any change in the ownership of a company or coritrol over its management or a combination of any two or all of the above. } | I | | | | t | Types of Corporate Restructuring @ Mergers / Amalgamation © Acquisition and Takeover Demerger Reduction of capital Joint venture Buy back of securities Strategic alliance Franchising Divestment‘Joint venture Buy back of Reduction of securities capital Strategie alliance Demerger Acquisition and Takeover “Franchising Types of Corporate restructuring strategies Mergers / ‘Amalgamation AS Merger/ Amalgamation A merger is a combii of two or more businesses into one business. Laws in India use the term ‘amalgamation’ for merger. Amalgamation is the merger of one or more companies with another or the merger of two or more companies to forma new company, in “such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company. ——— = 3s Merger through Absorption a combination of two or more.companies into.an ‘existing. i xcept one lose their identity in such a merger. For example, absorption of Tata Fértilisers Ltd (TFL) by Tata Chemicals Ltd. (TCL). © Merger through Consolidation : A consolidation is a combination of two 9t.more companies into_a ‘new company’. In this form of, merger, all companies are legally dis and a new entity. is created. Here, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares. For “example, merger_of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd. a Acquisitions and Takeovers . An acquisition may be defined as an act of acquiring effective control by one company over _assets_or management of another company without any combination of companies. Thus, in an acquisition two or more companies may remain independent, separate legal entities, but there may be a change in control of the companies. It is also known as takeover. Friendly takeover ; In this type, one company takes over the management of the target company with the permission of the board. —Hostile takeover : In this type, one company takes over the management of the target_company without its knowledge and against the wish of their management. Toa ee 3. Demerger Demerger is a form of corporate restructuring in which an entity’s business operations are segregated into one or more components. = 7 operations are segregatec ane of more components. Demerger can take three forms : © Spin-off © Splitoff AC Reduction of Capital Reduction of Capital is a process by which a company is allowed to extinguish or reduce liability on any of its shares in respect of share capital not paid up, or is allowed to cancel any_paid-up.share capital which is post or is allowed to pay-off any paid ~up capital which is in excess of its requirements. : 5 Joint Venture Joint Venture is an arrangement in which two or more companies contribute to the equity capital of a new company in pre-decided proportion. For e.g. Maruti Suzuki. & Project based joint venture : The joint venture entered into by the companies in order to achieve a.specific task Functional based Joint venture : The joint’ venture entered into by the companies in order to achieve mutual benefit macteve mune lone 6 Buy back of Securities When a company is holding excess cash, which it does not require in the medium term (say three to five years); it-is prudent for the ‘com pany to return this excess cash to its shareholders. Buy-back of securities is one of the methods used to return the excess cash to its shareholders. JE Strategic Alliance Any agreement between two or more parties to collaborate with each other, in, order to achieve certain cheese while continuing to remain “independent organizations is called stratagic alliance PrSene-eeCEeeREEE 3 Franchising Franchising is to be defined as an arrangement wherein one party (franchiser) allows another party (franchisee) the right to use its i business systems and procedure, to produce and market the goods or “services along with certain specifications. The franchise generally pays e franchise fee plus a % of sales revenue in terms of royalty and gains9% Disinvestment It is the act of the organization or company or government for selling 4 liquidating an asset or subsidiary, this is known as “divestiture”. J 9. EXPANDING ROLE OF PROFESSIONALS As restructuring requires consideration of various aspects before, durin, an after reconstruction, need of professionals arises in each and every step and With every aspect. These professionals and experts play. an important role at each sta, re It is difficult to imagine a successful completion of corporate restructuring Without obtaining expertise from various fields. When a company planning and formulating restricting strategies, there are several legal & procedural issues to sought out. Non-compliance of any laws ma cost company to pay huge penal actions. Thus its wise to take advice of legal experts, - In order to get business properly valued, valuation and funding procedure has to be done prudently. Team of valuers has to be appointed in order to get the valuation done in systematic manner. Mergers and acquisitions tend to impact the accounting position of the entities. Team of professional like chartered accountants has to be approached. Mergers of healthy company with a sick company give arises o absorption of losses and also gives certain taxation benefits. Taxation and stamp duty aspects are to handled cautiously. Also HR professionals are required as mergers and acquisitions also affect the human and cultural aspects. More importantly, cross border mergers leads to huge cultural differences which has o be solved as early as possible. : Thus professionals like company secretaries, chartered accountants, legal experts have a crucial role to play-in restructuring process.