Corporate Restructuring

What is Corporate restructuring

 When a company wants to grow or survive in a competitive environment, it needs to

restructure itself and focus on its competitive advantage.
 Corporate Restructuring means re-arranging business of a company for increasing its
efficiency and profitability. Restructuring is a method of changing the
organizational structure in order to achieve the strategic goals of the organization. It
involves dramatic changes in an organization.
 The strategy adopted shall depend on the purpose or organizational goals and hence a
different strategy shall apply to different companies. Corporate Restructuring aims at
different things at different times for different companies and the single common
objective in every restructuring exercise is to eliminate the disadvantages and combine
the advantages.
Synergy

2+2=5

 Benefits of restructuring
 Increase in Market Share – Merger facilitates increase in market share of the merged company. Such rise
in market share is achieved by providing an additional goods and services as needed by clients. Horizontal
merger is the key to increasing market share. (E.g. Idea and Vodafone).
 Reduced Competition – Horizontal merger results in reduction in competition. Competition is one of the
most common and strong reasons for mergers and acquisitions. (HP and Compaq).
 Large size – Companies use mergers and acquisitions to grow in size and become a dominant force, as
compared to its competitors. Generally, organic growth strategy takes years to achieve large size. However,
mergers and acquisitions (i.e. inorganic growth) can achieve this within few months. (E.g. Sun
Pharmaceutical and Ranbaxy Pharmaceutical).
 Economies of scale – Mergers result in enhanced economies of scale, due to which there is reduction in cost
per unit. An increase in total output of a product reduces the fixed cost per unit.
 Tax benefits – Companies also use mergers and amalgamations for tax purposes. Especially, where there is
merger between profit making and loss-making company. Major income tax benefit arises from set-off and
carry forward provision u/s 72A of the Income-tax Act, 1961.
Contd…

 New Technology – Companies need to focus on technological developments and their business
applications. Acquisition of smaller companies helps enterprises to control unique technologies
and develop a competitive edge. (E.g. Dell and EMC).
 Strong brand – Creation of a brand is a long process; hence companies prefer to acquire an
established brand and capitalize on it to earn huge profits. (E.g. Tata Motors and Jaguar).
 Domination – Companies engage in mergers and acquisitions to become a dominant player or
market leader in their respective sector. However, such dominance shall be subject to
regulations of the Competition Act, 2002. (E.g. Oracle and I-Flex Technologies).
 Diversification – Amalgamation with companies involved into unrelated business areas leads
to diversification. It facilitates the smoothening of business cycles effect on the company due to
multiplicity of businesses, thereby reducing risk. (E.g. Reliance Industries & Network TV18)
 Revival of Sick Company – Today, the Insolvency and Bankruptcy Code, 2016 has created
additional avenue of acquisition through the Corporate Insolvency Resolution Process.
Ways of corporate restructuring

 Merging of two or more companies.

 Purchasing assets of another company.
 Acquisition of equity shares of another firm resulting in change of ownership
 Financial re-engineering
 Buying-back of shares
 Issuing different types of debts to meet the need for fixed and working capital
 Infusing foreign debts and equity
Types of corporate restructuring

 Merger.
 Demerger.
 Reverse Merger.
 Disinvestment.
 Takeovers/Acquisition.
 Joint Venture.
 Strategic alliance.
 Franchising
 LBO
Merger
 Mergers are a way for companies to expand their reach, expand into new segments, or
gain market share.
 A merger is the voluntary fusion of two companies on broadly equal terms into one new
legal entity.
 The five major types of mergers are conglomerate, congeneric, market extension,
horizontal, and vertical.
 The firms that agree to merge are roughly equal in terms of size, customers, and scale
of operations. For this reason, the term "merger of equals" is sometimes used.
Acquisitions, unlike mergers, or generally not voluntary and involve one company
actively purchasing another.
 Mergers are most commonly done to gain market share, reduce costs of operations,
expand to new territories, unite common products, grow revenues, and increase profits
—all of which should benefit the firms' shareholders. After a merger, shares of the new
company are distributed to existing shareholders of both original businesses.
Types of Merger

 Conglomerate

 Congeneric

 Market Extension

 Horizontal

 Vertical
Acquisition/Takeover

 An acquisition is a business combination that occurs when one company buys most
or all of another company's shares.
 If a firm buys more than 50% of a target company's shares, it effectively gains control
of that company.
 An acquisition is often friendly, while a takeover can be hostile; a merger creates a
brand new entity from two separate companies.
 Acquisitions are often carried out with the help of an investment bank, as they are
complex arrangements with legal and tax ramifications.
 Acquisitions are closely related to mergers and takeovers.
Purpose of Acquisition

 As a Way to Enter a Foreign Market.

 As a Growth Strategy.

 To Reduce Excess Capacity and Decrease Competition.

 To Gain New Technology.

Merger VS Acquisition

Sr. Merger Acquisition

1 Merger occurs when two sepa- Acquisition refers to the pur-
rate entities, come together to chase of one entity by another
create a new, joint organiza- entity
tion in which both are partners

2 One or more companies are No company is dissolved and no

dissolved and new company new company is created, i.e.
maybe created both continue
3 In merger, two companies con- In acquisition, one company
solidate into a single entity takes over all total operational
with a new ownership and management control of another
management structure. company
Demerger

 A de-merger is when a company splits off one or more divisions to operate independently or be sold off.
 A de-merger may take place for several reasons, including focusing on a company's core operations and
spinning off less relevant business units, to raise capital, or to discourage a hostile takeover.
 The most common type of de-merger, the spin-off, results in the parent company retaining an equity
stake in the new company.

Spin-Offs
 One of the most common ways for a de-merger to be executed is a "spinoff," in which a parent company
receives an equity stake in a new company equal to their loss of equity in the original company. At that
point, shares are bought and sold independently, and investors have the option of buying shares of the
unit they believe will be the most profitable. A partial de-merger is when the parent company retains a
partial stake in a de-merged company.
Reverse merger

 A reverse merger is an attractive strategic option for managers of private companies

to gain public company status.
 It is a less time-consuming and less costly alternative to the conventional initial
public offerings (IPOs).
 Public company management enjoy greater flexibility in terms of financing
alternatives, and the company's investors enjoy greater liquidity.
 Public companies face additional compliance burdens and must ensure that
sufficient time and energy continues to be devoted to running and growing the
business.
 A successful reverse merger can increase the value of a company's stock and its
liquidity.
Disinvestment

 Disinvestment is when governments or organizations sell or liquidate assets or

subsidiaries.

 Disinvestments can take the form of divestment or a reduction of capital

expenditures (CapEx).’

 Disinvestment is carried out for a variety of reasons, such as strategic, political, or

environmental.
Joint Venture

 A joint venture (JV) is a business arrangement in which two or more parties agree to
pool their resources for the purpose of accomplishing a specific task. This task can be
a new project or any other business activity.
 It is a less time-consuming and less costly alternative to the conventional initial
public offerings (IPOs).
 In a joint venture (JV), two or more businesses decide to combine their resources in
order to fulfill an enumerated goal.
 They are a partnership in the colloquial sense of the word but can take on any legal
structure.
 A common use of JVs is to partner up with a local business to enter a foreign market.
To Leverage Resources
 A JV can take advantage of the combined resources of both companies to achieve the goal
of the venture. One company might have a well-established manufacturing process, while
the other company might have superior distribution channels.
To Reduce Costs
 By using economies of scale, both companies in the JV can leverage their production at a
lower per-unit cost than they would separately. This is particularly appropriate with
technology advances that are costly to implement. Other cost savings as a result of a JV
can include sharing advertising or labor costs.
To Combine Expertise
 Two companies or parties forming a JV might each have different backgrounds, skill sets,
or expertise. When these are combined through a JV, each company can benefit from the
other’s talent.
To Enter Foreign Markets
 Another common use of JVs is to partner with a local business to enter a foreign market. A
company that wants to expand its distribution network to new countries can enter into a JV
agreement to supply products to a local business, thus benefiting from an already existing
distribution network. Some countries have restrictions on foreigners entering their market,
making a JV with a local entity almost the only way to do business in the country.
Strategy alliances

 A strategic alliance is a partnership between two businesses to achieve mutual goals and growth, while still
retaining independence. Such partnerships are usually long-term in nature, with each business bringing its
expertise and resources to the table.
 But not all alliances are considered “strategic.” There are five accepted criteria to check whether or not a
potential partnership is strategic for your business. Meeting even one of these criteria can qualify as a
strategic alliance:
1. The partnership is essential to the achievement of the main business objective. In other words, engaging or
not-engaging in the alliance will significantly impact whether or not the objective is successfully met.
2. The partnership is indispensable in creating or maintaining any business aspect that functions as a competitive
advantage.
3. The partnership cements the ability to overcome competitor threats.
4. The partnership builds, supports, or maintains strategic decision-making.
5. The partnership significantly reduces risk.
Contd..
Franchising

 A franchise is a type of license that grants a franchisee access to a franchisor's proprietary

business knowledge, processes, and trademarks, thus allowing the franchisee to sell a product or
service under the franchisor's business name. In exchange for acquiring a franchise, the franchisee
usually pays the franchisor an initial start-up fee and annual licensing fees.
 A franchise is a business whereby the owner licenses its operations—along with its products,
branding, and knowledge—in exchange for a franchise fee.
 The franchisor is the business that grants licenses to franchisees.
 The Franchise Rule requires franchisors to disclosure key operating information to prospective
franchisees.
 Ongoing royalties paid to franchisors vary by industry and can range between 4.6% and 12.5%.
 A franchise contract is temporary, akin to a lease or rental of a business. It does not signify
business ownership by the franchisee. Depending on the contract, franchise agreements typically
last between five and 30 years, with serious penalties if a franchisee violates or prematurely
terminates the contract.
LBO
 A leveraged buyout (LBO) is one company's acquisition of another company using a significant
amount of borrowed money (leverage) to meet the cost of acquisition. The assets of the company
being acquired are often used as collateral for the loans, along with the assets of the acquiring
company. The use of debt, which normally has a lower cost of capital than equity, serves to reduce
the overall cost of financing the acquisition. The cost of debt is lower because interest payments
often reduce corporate income tax liability, whereas dividend payments normally do not. This
reduced cost of financing allows greater gains to accrue to the equity, and, as a result, the debt
serves as a lever to increase the returns to the equity.
 The term LBO is usually employed when a financial sponsor acquires a company. However, many
corporate transactions are partially funded by bank debt, thus effectively also representing an LBO.
LBOs can have many different forms such as management buyout (MBO), management buy-in
(MBI), secondary buyout and tertiary buyout, among others, and can occur in growth situations,
restructuring situations, and insolvencies. LBOs mostly occur in private companies, but can also be
employed with public companies (in a so-called PtP transaction – public-to-private).
 As financial sponsors increase their returns by employing a very high leverage (i.e., a high
ratio of debt to equity), they have an incentive to employ as much debt as possible to finance an
acquisition. This has, in many cases, led to situations in which companies were "over-leveraged",
meaning that they did not generate sufficient cash flows to service their debt, which in turn led to
insolvency or to debt-to-equity swaps in which the equity owners lose control over the business to
the lenders.
Regulatory consideration

 Due Diligence.
 Deal Structure.
 Representations and Warranties
 Non-Competes and Non-Solicits
 Target Indemnification
 Joint and Several Liability
 Closing Conditions
Due Diligence

 Due diligence is top of every corporate M&A attorney’s to-do list. Covering all aspects
of the target company, from its operations through to its intellectual property, a good
legal counsel - equipped with strong due diligence technology - will be aware of the
intricacies involved and what to look out for.
 Due diligence is often where outstanding legal teams differentiate themselves from the
rest, adding significant value to the transaction with their attention to detail and ability
to identify important details amidst typically huge piles of information and of course, to
flag issues that could lead to litigation.
Deal Structure

 The term ‘deal structure’ tends to make people think of financial structures, earn outs
and divisions between cash and equity.
 The reality is, a deal structure is as much legal as it is financial.
 For example, whatever structure is agreed to in the deal, important legal issues need to
be considered, including shareholder approval, the tax consequences of the structure
agreed to, transferability of liability, third-party contractual consent requirements, and
foreign regulatory issues (if applicable).
 Deciding whether to buy the company or just its assets (thus, not taking on any of its
liabilities) is another consideration that corporate M&A lawyers will advise on.
Representations and Warranties
 It is now standard for acquirers to include several representations and warranties in the terms of
their transaction.
 These typically aim to avoid the threat of litigation for the acquiring firm in issues such as
• compliance,
• tax,
• authority,
• capitalization,
• and material contracts.
 This is no small matter - generally, breaches in any of these representations and warranties can
result in indemnification claims from the acquirer - destroying value in the deal.
 This can be a complex gray area, where even the most honest target company owner may leave
themselves vulnerable on issues that they might not always have full awareness of.
 Lawyers on the sell side will often try to push back against many of the representations and
warranties on this basis.
Non-Competes and Non-Solicits

 Non-competes and non-solicits are important legal clauses in practically all

transactions, particularly in the services industries.
 Suppose, for example, that a technology firm acquires a technology startup with some
of Silicon Valley’s most talented software engineers.
 Without a non-compete, what’s to stop the team members of this company jumping
ship and beginning a copycat company straight after the sale of their startup?
 Restrictions here should be reasonable in their time and scope, and include some
consideration.
Target Indemnification

 Target indemnification are hotly contested clauses in the closing conditions of M&A
transactions.
 Again, these are essentially clauses which seek to protect the acquiring company on the
downside.
 Say, in the case of fraud or or material misrepresentation on the part of the seller, the
acquirer could include an indemnification clause that annuls the transaction and/or
forces the seller to pay back a pre-agreed amount up to the value of the closing price.
Closing Conditions

 The conditions set out in the definitive agreement are themselves subject to closing
conditions. As the name suggests, these are conditions that must be met in order for the
transaction to close.
 These tend to be the same across transactions and typically include board approval for
the deal, the absence of any material changes to the company’s trading conditions, and
of course, shareholder approval.
 In the case of shareholder approval, acquirer’s often seek shareholder approval in
excess of 80%, to avoid the complications that arise with hostile acquisitions (such as
appraisal claims, for example).
Joint and Several Liability

 Joint or several liability is an extension of the target indemnification issue.

 It asks: Which of the target’s shareholders does indemnification apply to, and to what
extent. In the case of joint liability, each of the target’s shareholders is fully liable for
any future damages.
 In the case of several liability, each of the target’s shareholders can be liable only to the
extent that they are seen to have contributed to the damages (for example, the CFO
would be responsible for misstatements in the company’s financial results, but not the
CTO).
M&A Process/Acquisition code
Contd..

 Develop an acquisition strategy – Developing a good acquisition strategy

revolves around the acquirer having a clear idea of what they expect to gain
from making the acquisition – what their business purpose is for acquiring the
target company (e.g., expand product lines or gain access to new markets).
 Set the M&A search criteria – Determining the key criteria for identifying
potential target companies (e.g., profit margins, geographic location, or
customer base).
 Search for potential acquisition targets – The acquirer uses their identified
search criteria to look for and then evaluate potential target companies.
 Begin acquisition planning – The acquirer makes contact with one or more
companies that meet its search criteria and appear to offer good value; the
purpose of initial conversations is to get more information and to see how
amenable to a merger or acquisition the target company is.
Contd..

 Perform valuation analysis – Assuming initial contact and conversations go well,

the acquirer asks the target company to provide substantial information (current
financials, etc.) that will enable the acquirer to further evaluate the target, both as a
business on its own and as a suitable acquisition target.
 Negotiations – After producing several valuation models of the target company,
the acquirer should have sufficient information to enable it to construct a
reasonable offer; Once the initial offer has been presented, the two companies can
negotiate terms in more detail.
 M&A due diligence – Due diligence is an exhaustive process that begins when the
offer has been accepted; due diligence aims to confirm or correct the acquirer’s
assessment of the value of the target company by conducting a detailed
examination and analysis of every aspect of the target company’s operations – its
financial metrics, assets and liabilities, customers, human resources, etc.
Contd..

 Purchase and sale contract – Assuming due diligence is completed with

no major problems or concerns arising, the next step forward is executing a
final contract for sale; the parties make a final decision on the type of
purchase agreement, whether it is to be an asset purchase or share
purchase.
 Financing strategy for the acquisition – The acquirer will, of course, have
explored financing options for the deal earlier, but the details of financing
typically come together after the purchase and sale agreement has been
signed.
 Closing and integration of the acquisition – The acquisition deal closes,
and management teams of the target and acquirer work together on the
process of merging the two firms.
Code of Acquisition