Corporate Restructuring
Meaning
Corporate restructuring refers to the changes in ownership,
business mix, assets mix and alliances with a view to enhance the
shareholder value.
Hence, corporate restructuring may involve
ownership restructuring, business restructuring and assets
restructuring.
Forms of Corporate Restructuring
1) Merger or Amalgamation
Merger or amalgamation may take two forms:
• Absorption
• Consolidation
In merger, there is complete amalgamation of the assets and liabilities as
well as shareholders’ interests and businesses of the merging companies.
There is yet another mode of merger. Here one company may purchase
another company without giving proportionate ownership to the
shareholders’ of the acquired company or without continuing the business
of the acquired company.
Forms of Corporate Restructuring (cont..)
Forms of Merger
(1) Horizontal Merger
Acquisition of a company in the same industry in which the acquiring
firm competes increases a firm’s market power by exploiting
(2) Vertical Merger
Acquisition of a supplier or distributor of one or more of the
firm’s goods or services
(3) Conglomerate Merger
Acquisition by any company of unrelated industry
Forms of Corporate Restructuring (cont..)
Acquisition may be defined as an act of acquiring effective
control over assets or management of a company by another
company without any combination of businesses or
companies.
A substantial acquisition occurs when an acquiring firm
acquires substantial quantity of shares or voting rights of the
target company.
Forms of Corporate Restructuring (cont..)
Takeover – The term takeover is understood to connote hostility. When
an acquisition is a ‘forced’ or ‘unwilling’ acquisition, it is called a takeover.
A holding company is a company that holds more than half of the
nominal value of the equity capital of another company, called a
subsidiary company, or controls the composition of its Board of
Directors. Both holding and subsidiary companies retain their separate
legal entities and maintain their separate books of accounts.
Motives of Corporate Restructuring
Limit competition.
Utilise under-utilised market power.
Overcome the problem of slow growth and profitability
in one’s own industry.
Achieve diversification.
Gain economies of scale and increase income with
proportionately less investment.
Establish a transnational bridgehead without excessive
start-up costs to gain access to a foreign market
Motives of Corporate Restructuring (Cont..)
Utilise under-utilised resources– and
physical
human and managerial skills.
Displace existing management.
Circumvent government regulations.
Reap speculative gains attendant new security
upon
issue or change in P/E ratio.
and
Create an image of strategic
opportunism, empire building and to amass vast
aggressiveness
economic powers of the company.
Legal Procedures for merger and acquisition
Permission for merger
Information to the stock exchange
Approval of board of directors
Application in the High Court
Shareholders’ and creditors’ meetings
Sanction by the High Court
Filing of the Court order
Transfer of assets and liabilities
10 Payment by cash or securities
Legal Process of Merger &
Acquisition
Process (Cont…)
Approval of Board of
Approval of Merger Information to stock Directors
Exchange
Sanction by High Court Shareholders & Creditors Application in High Court
meeting
Process (Cont…)
Filing of Court Order Transfer of Assets & Payment By cash or
Liabilities Securities
Divestiture
A divestment involves the sale of a company’s
assets, or product lines, or divisions or brand to
the outsiders.
It is reverse of acquisition.
Motives:
Strategic change
Selling cash cows
Disposal of unprofitable businesses
Consolidation
Unlocking value
Strategic Alliance
“A strategic alliance is a voluntary, formal arrangement
between two or more parties to pool resources to achieve a
common set of objectives that meet critical needs while
remaining independent entities.”
Example -
Joint Ventures
A joint venture (JV) is a business agreement in which
parties agree to develop, for a finite time, a new entity
and new assets by contributing equity. They exercise
control over the enterprise and consequently
share
revenues, expenses and
assets PRUDENTIAL GROUP
ICICI GROUP INDIA
Sell-off
When a company sells a part of its business to a third party, it is
called sell-off.
It is a usual practice of a large number of companies to sell-
off to divest unprofitable or less profitable businesses to avoid
further drain on its resources.
Sometimes the company might sell its profitable but non-core
businesses to ease its liquidity problems.
Spin-off
When a company creates a new company from
the existing single entity, it is called a spin-off.
The spin-off company would usually be created as
a subsidiary.
Hence, there is no change in ownership.
After the spin-off, shareholders hold shares in
two different companies.
Employee Stock Ownership
An employee stock ownership plan (ESOP) is an employee-
owner scheme that provides a company's workforce with an
ownership interest in the company. In an ESOP, companies
provide their employees with stock ownership, often at no cost
to the employees. Shares are given to employees and may be
held in an ESOP trust until the employee retires or leaves the
company. The shares are then sold.
E.g. First company introduce ESOP is Inforsys.
Leverage Buy-out (LBO)
A leveraged buy-out (LBO) is an acquisition of a company in which
the acquisition is substantially financed through debt. When the
managers buy their company from its owners employing debt, the
leveraged buy-out is called management buy-out (MBO).
The following firms are generally the targets for LBOs:
High growth, high market share firms
High profit potential firms
High liquidity and high debt capacity firms
Low operating risk firms
The evaluation of LBO transactions involves the same analysis as for
mergers and acquisitions. The DCF approach is used to value an LBO.
