Subject Name : Corporate Finance
Unit 4
Corporate
Restructuring
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Introductio
n
Organic growth
through the internal attaining
sources accelerated growth
without change in acquiring new
the corporate entity businesses
Inorganic growth
capital restructuring change in the
or business corporate entity
restructuring.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
ANING OF CORPORATE RESTRUCTURING
• It is a change in the business strategy of an organization resulting in diversification, closing
parts of the business, etc, to increase its long-term profitability.
• Corporate restructuring can involve making dramatic changes to a business by cutting out
or merging departments. It implies rearranging the business for increased efficiency 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 competitive and successful entity.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
• Any change in a company’s:
• business model
• management team or
• Financial/ capital structure
That is outside its ordinary course of business to address challenges and increase
shareholder value.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
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.
The various Motives for undertaking a Corporate Restructuring
exercise are as follows:
(i) to focus on core strengths, operational synergy and efficient allocation of managerial
capabilities and infrastructure.
(ii) consolidation and economies of scale by expansion and diversion to exploit
extended domestic and global markets.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Motives of Corporate Restructuring (cont.)
(iii) revival and rehabilitation of a sick unit by adjusting losses of the sick unit with
profits of a healthy company.
(iv) acquiring constant supply of raw materials and access to scientific research and
technological developments.
(v) capital restructuring by appropriate mix of loan and equity funds to reduce the
cost of servicing and improve return on capital employed.
(vi) Improve corporate performance to bring it at par with competitors by adopting
the radical changes brought out by information technology.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Various types/ forms of corporate restructuring strategies
include:
• the combination of two or more companies which
Merger can be merged together either by way of
amalgamation or absorption
• the entity's business operations are segregated into
Demerger
one or more components.
• opportunity for the unlisted companies to become
Reverse Mergers public listed company, without opting for Initial
Public offer (IPO).
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Various types/ forms of corporate restructuring strategies
include:
• Disinvestment means the action of an organization or
Disinvestment government selling or liquidating an asset or subsidiary. It is
also known as "divestiture".
• Takeover means an acquirer takes over the control of the target
Takeover/Acquisition company. It is also known as acquisition. Normally this type of
acquisition is undertaken to achieve market supremacy.
• A joint venture is an entity formed by two or more companies
to undertake financial activity together. The parties agree to
Joint Venture (JV)
contribute equity to form a new entity and share the revenues,
expenses, and control of the company.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Various types/ forms of corporate restructuring strategies
include:
• Any agreement between two or more parties to collaborate with each
Strategic Alliance other, in order to achieve certain objectives while continuing to remain
independent organizations is called strategic alliance.
• Franchising may be defined as an arrangement where one party
(franchiser) grants another party (franchisee) the right to use trade name
Franchising
as well as certain business systems and process, to produce and market
goods or services according to certain specifications.
• Slump sale means the transfer of one or more undertaking as a result of
the sale of lump sum consideration without values being assigned to the
Slump sale individual assets and liabilities in such sales. If a company sells or disposes
of the whole or substantially the whole of its undertaking for a
predetermined lump sum consideration, then it results in a slump sale.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Conten
t
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Joint venture
A joint venture is an entity formed by two or more companies to undertake financial activity
together. The parties agree to contribute equity to form a new entity and share the
revenues, expenses, and control of the company.
•Equity-based Joint Venture company: When the parties establish a new legal entity with a
mutual consent agreement, it is known as an equity-based Joint Venture where they share
the profit/loss and take part in the management. Example: Vistara, Air Asia, India, etc.
•Contractual Joint Venture: In this type of Joint Venture, the parties do not establish a new
entity or company but rather work individually without claiming ownership. This practice is
most common in India. Examples are Brahmos Aerospace, PNB Metlife, and ICICI Lombard.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Tata Starbucks Private Limited,
formerly known as Tata
Starbucks Limited, is a 50:50
joint venture company, owned
by Tata Consumer Products and
Starbucks Corporation, that
owns and manages Starbucks
outlets in India. The outlets are
branded Starbucks "A Tata
Alliance". India.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Bharti AXA General Insurance Co Ltd is a JV between
India’s leading business group Bharti Enterprises
and an insurance major from France, AXA.
This leading insurer in India's initial operations. The
company is licensed by (IRDAI) the Insurance
Regulatory and Development Authority of India.
Bharti AXA offers a comprehensive range of
insurance products ranging from vehicle, health,
travel, home and education, among others. Bharti-
AXA General Insurance is among the pioneers of JV
in India’s insurance sector.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
ICICI Bank has two successful joint ventures
to offer a variety of insurance and
investment products to customers in India
and Indian citizens residing in various parts
of the world.
1. ICICI Prudential Life Insurance
Company Ltd is a joint venture between ICICI
Bank and UK-based Prudential Corporation
Holdings Limited.
2. ICICI Lombard is a joint venture between
ICICI Bank and Fairfax Financial Holdings Ltd
of Canada.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
AirAsia India is a joint venture
between Malaysia
based AirAsia Berhad and Tata
Sons. The airline ranks as the
fourth largest Low-Cost Carrier
(LCC) in India. AirAsia India is also
the second JV in the airline
industry of Tata Sons.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Sell off and spin off
• In a spin-off a certain asset (a unit, division, or subsidiary) of a firm is split off from the parent firm
into a separate publicly traded company.
• Shares of this new independent firm are distributed to the existing shareholders of the parent firm
on a pro rata basis.
• Usually, a spin-off has no tax consequences for the divesting firm which treats the newly created
shares as a stock dividend to its existing shareholders.
On the other hand, in a sell-off a certain asset of the divesting firm is sold off for cash or
securities to another firm or entity. Sale proceeds are taxable to the parent firm which may
use them for other corporate purposes or distribute to its shareholders.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
eBay and PayPal in mid-2015
eBay, an e-commerce company, decided it was in the best
interests of all stakeholders for the two companies to operate
separately.
Previously, PayPal — the financial payment processing company
— had been acquired by eBay and had been a subsidiary since.
In 2015, it was announced that eBay’s board of directors had
approved the move for the separation of eBay and PayPal into
two independent, publicly-traded companies.
As part of the distribution, eBay’s shareholders received one common share of PayPal for
each share of eBay as of the date ending July 8, 2015, the set record date for the
distribution.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Divestitures
Partial or full disposal of a business entity through exchange, closure, sale, or bankruptcy is
termed divestiture or Divestment. A divestiture occurs when the management of an entity
decides to stop operating a unit as it is not contributing towards profit. Growth strategies
often lead to the divestment of business units.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Spin-Offs :
• A business strategy wherein a company’s division or unit is separated and made into
an independent company. E bay and Paypal
• When a company splits-up into one or more independent companies, and
Splits : consequently, the parent company is dissolved or ceases to exist. Larsen & Toubro
(L&T)splits into L & T Infotech.
• A corporate approach wherein the company sells a portion of its wholly-owned
Equity Carve Out: subsidiary through initial public offerings or IPOs and still retains full management and
control. GE carve out its Healty Care Division.
• Disinvestment can also be defined as the action of an organisation (or government)
selling or liquidating an asset or subsidiary. It is also referred to as ‘divestment’ or
Disinvestment:
‘divestiture.’
• In most contexts, disinvestment typically refers to sale from the government, partly or
fully, of a government-owned enterprise.
• Government of India - BPCL
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
LBO and MBO
A buyout is the acquisition of a controlling interest in a company and is used
synonymously with the term acquisition.
If the stake is bought by the firm’s management, it is known as a management buyout,
while if high levels of debt are used to fund the buyout, it is called a leveraged buyout.
Buyouts often occur when a company is going private.
Management buyouts are transactions where the management team is
actively involved in the partial or full acquisition of the company they
currently manage.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Structure of MBO
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
How to finance an LBO (Mode of Purchase in LBO)
The equity portion of an The senior debt is a loan Mezzanine financing is a
Mezzanine Debt
Senior Debt
Equity
LBO is the amount of taken out by the hybrid of debt and
money that the investor holding company with equity financing that
contributes to the deal, one or more banks to gives the lender the
usually in the form of buy the target right to convert the debt
cash or shares. company. to an equity interest in
The lender is granted a the company in case
first lien claim on the of default, generally,
company’s property, after venture capital
plant, or equipment in companies and other
the event that the senior lenders are paid.
company fails to fulfill In terms of risk, it exists
its repayment between senior debt
obligations. and equity.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Motives behind MBO
A management buyout may occur for a number of reasons, including:
To give management more control over a company and its resources
To allow the old ownership to exit the business, but ensure it remains in the hands of people who
are connected to it
To let managers who already know their business lead and direct it themselves
To attempt to rescue a company in distress
To allow managers access to the financial benefits they can reap as owners rather than as
employees, and to net investors a potential high return
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Example of LBO and MBO
The Tata Tea and Tetley leveraged buyout (LBO) case is a notable example of an Indian company
acquiring a major foreign brand.
In 2000, Tata Tea acquired Tetley for £271 million ($432 million), making it one of the largest cross-
border acquisitions by an Indian company at the time.
The deal was structured as a leveraged buyout, where Tata Tea used significant debt to finance the
acquisition.
An example of a management buyout (MBO) in India is the case of Tata Motors and its acquisition of
Jaguar Land Rover (JLR).
In 2008, Tata Motors acquired Jaguar Land Rover from Ford for $2.3 billion.
Although not a typical management buyout where the existing management team acquires the
company, this deal had significant involvement from the existing JLR management team post-
acquisition. the acquiring company heavily relied on the incumbent management to drive success post-
acquisition, aligning with some MBO principles.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Demerger
A demerger is a corporate restructuring process in which a company separates one or more of its
business units or subsidiaries into a new, independent entity.
A demerger involves splitting a company into two or more distinct entities. The original company
retains some of its operations while transferring others to the newly created company or companies.
This is often done to focus on core activities, improve efficiency, unlock shareholder value, or comply
with regulatory requirements.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Characteristics
Separation of Businesses: The primary characteristic is the separation of distinct
business operations into standalone entities.
Shareholder Value: Shareholders of the original company receive shares in the newly
formed entity, preserving their investment value.
Operational Focus: Each new entity can focus on its core business without the
distractions of the other operations.
Legal and Financial Independence: Post-demerger, the new entities operate
independently in terms of legal, financial, and managerial aspects.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Structure
Identification of Business Units: The company identifies the specific business units or subsidiaries to be
demerged.
Valuation and Agreement: A valuation is conducted to determine the financial worth of the business units,
followed by a legal agreement detailing the terms of the demerger.
Shareholder Approval: The demerger proposal is presented to the shareholders for approval.
Regulatory Approval: Necessary regulatory approvals are obtained from relevant authorities.
Transfer of Assets and Liabilities: The assets, liabilities, and employees associated with the business units are
transferred to the new entities.
Issuance of Shares: Shares in the new entities are issued to the shareholders of the original company in
proportion to their existing holdings.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Tax Implications
Capital Gains Tax: The transfer of assets and liabilities during a demerger is typically subject to
capital gains tax. However, many jurisdictions provide tax relief if certain conditions are met, such
as continuity of ownership.
Stamp Duty: The transfer of assets may attract stamp duty, though exemptions or reductions may
be available.
Corporate Tax: The newly formed entities are subject to corporate tax on their operations,
independent of the original company.
Dividend Distribution Tax: If the demerger results in the distribution of dividends, it may be subject
to dividend distribution tax, depending on local tax laws.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
Subject Name : Corporate Finance
Example
Hindustan Unilever and Unilever Tea Business Demerger:
In 2021, Hindustan Unilever Limited (HUL), a subsidiary of Unilever, announced the demerger of its tea business. The
key points of this demerger include:
Reason: The decision was made to focus on high-growth areas and allow the tea business to grow independently.
Structure: The tea business was transferred to a new entity, HUL Tea Company, with its own management and
operational structure.
Shareholder Impact: HUL shareholders received shares in the new tea company, aligning their investments with the
separate entities.
Tax Implications: The demerger was structured to minimize tax liabilities, leveraging provisions for tax-neutral
demergers under Indian tax laws. The Hindustan Unilever tea business demerger is a practical example showcasing
how a large conglomerate can streamline its operations and create focused, independent entities through a demerger
process.
MBA IV SEM – Dr. Bhanu Kanthed
UNIT No 4, Unit Name - Corporate Restructuring
