Corporate restructuring

submitted to : Dr . Sandeep kumar

submitted by : Minakshi
roll no :210115
M.com first year (2sem)
 content

 Meaning of corporate restructuring

 Process of corporate restructuring
 Types of corporate restructuring strategies
 Amalgamation
 Leverage buy-out
 Management buy-out financial restructuring
 Share split
 Consolidation
 Cancellation of paid up capital
 Corporate failures and liquidations
 Corporate Restructuring

 Corporate restructuring is a corporate action taken to significantly

modify the structure or the operations of the company .This usually
happens when a company is facing significant problems and is in
financial jeopardy . Often , the restructuring is referred to the ways
to reduce the size of the company and make it small.
 Restructuring process

 Developing a restructuring plan and timeline

 Frequent and consistent communication
 Employee feedback and involvement
 Regular follow-up
Types of corporate restructuring
strategies
Various types of corporate restructuring strategies includes:
1. Merger
2. Demerger
3. Reverse mergers
4. Disinvestment
5. Takeovers
6. Joint venture
7. Strategic alliance
8. franchising
 merger
 Merger is the combination of two or more
companies which can be merged together either
by way of amalgamation or absorption. The
combining of two or more companies , is generally
by offering the stock-holders of one company
securities in the acquiring company in exchange
for the surrender of their stock mergers may be:
 (a) Horizontal merger

 It is a merger of two or more companies that

compete in the same industry . It is a merger with
a direct competitor and hence expands as the
firm’s operations in the same industry . Horizontal
mergers are designed to achieve economies of
scale and result in reduce the number of
competitors in the industry.
 Example : Facebook’s acquisition of Instagram in
2012 for reported $1 billion .
 (b) Vertical merger

 It is a merger which takes place upon the combination of two

companies which are operating in the same industry but at
different stages of production or distribution system . If a
company takes over its supplier/producers of raw material,
then it may result in backward integration of its activities .On
the other hand, forward integration may result if a company
decides to take over the retailer or consumer company.
 Example: a textile company merging with a cotton yarn
manufacturer is an example of a vertical merger. It helps the
textile company have control over its raw material cotton yarn
. Similarly , an automobiles company or an automobile battery
manufacturer.
 (c) co-generic merger

 It is the type of merger , where two companies are in the same or

related industries but do not offer the same product , but related
products and may share similar distribution channels , providing
synergies for the merger. The potential benefit form these mergers is
high because these transactions offer opportunities to diversify
around a common case of strategic resources .
 An example of a congeneric merger is when banking giant Citicorp
merged with financial services company travelers group in 1998.
1. in a deal valued at $ 70 billion , the two companies joined forces to
create citigroup inc.
2. While both companies were in the financial services industry , they
had different product lines.
(d) Conglomerate merger

 These mergers involve firms engaged in unrelated type of

activities , i.e., the business of two companies are not related
to each other horizontally nor vertically . In a pure
conglomerate , there are no important common factors
between the companies in production , marketing ,research and
development and technology. Conglomerate mergers are merger
of different kinds of businesses under are flagship company.
 Example of a conglomerate merger was the merger between
the walt Disney company and the American broadcasting
company . Because a conglomerate merger is one between two
strategically unrelated firms, it is unlikely that the economic
benefits will be generated for the target or the bidder.
 2. demerger

 It is a form of corporate restructuring in which the entity’s

business operations are segregated into one or more
components. A demerger is often done to help each of
segments operate more smoothly , as they can focus on a
more specific task after demerger.
 Example : Dabur India demerger which comprised of the
FMCG business included personal care , ayurvedic and
healthcare products. They have a pharmaceutical wing
which includes allopathic , oncology and other drugs. The
main reason for this demerger was to establish a global
presence in the pharmaceutical industry.
 3. Reverse merger
 Reverse merger is the opportunity for the unlisted companies to
become public listed company , without opting for initial public
offer(IPO).in this process , the private company acquires the
majority shares of public company , with its own name .
 Example: an example of reverse merger in India is when Godrej
soaps which was profitable company with a turnover of Rs. 437
crore underwent a reverse merger with a loss –making Gujarat
Godrej innovative chemical limited with a turnover of Rs . 60
crore .The resulting company was named as Godrej soaps
limited.
 4. disinvestment

 Disinvestment means the action of an organization or

government selling or liquidating an asset or subsidiary. It
is also known as “divestiture” .
 Example: Bhajpa Indian Aluminium company , Hindustan
zink Indian petroleum corporation ltd in strategic
disinvestment.
5. Takeover and acquisition

 Takeover means an acquirer takes over the control of the target

company .It is also known as acquisition. Normally this type of
acquisition is undertaken to achieve market supremacy . It may
be friendly or hostile takeover.
 Example: Arcelor Mittal, the biggest merger valued at $38.3
billion was also one that was the most hostile.
* Vodafone idea merger , reuters reported the Vodafone idea
merger to be valued at $ 23 billion .
* Walmart acquisition of flipkart
* Tata and corus steel.
* Vodafone hutch-essar.
 6. Joint venture (JV)

 A joint venture is an entity formed by two or more companies to

undertake financial activities together . The parties agree to contribute
equity to form a new entity and share the revenues , expenses ,and
control of the company . It may be project based joint venture or
functional based joint venture .
(a) Project based joint venture : The joint venture entered into by the
companies in order to achieve a specific task is known as project – based
JV.
(b) Functional based joint venture : The joint venture entered into by
the companies in order to achieve mutual benefit is known as functional
based JV.
* example : sony and arixen is the best example of joint venture , because
they joined hands to produce smartphone and gajitas. After few years sony
acquire arixen mobiles .
 7. Strategic alliance
 Any agreement between two or more parties to collaborate with each other ,in order
to achieve certain objectives while continuing to remain independent organizations is
called strategic alliance.
 Example :Maruti and Suzuki
google and luxattica

8. Franchising
Franchising may be defined as an arrangement where one party grants another
party(franchisee) the right to use trade name as well as certain business system and
process , to produce and market goods and services according to certain specifications .
The franchisee usually pays a one – time franchisee fee plus a percentage of sales revenue
as royalty and gains .
Example : Dominos
kFC
pizza hut , subway, burger king
 amalgamation
 An amalgamation is a combination of two or more
companies into new entity . Amalgamation is distinct from
a merger because neither company involved survives as a
legal entity . Instead , a completely new entity is formed
to house the combined assets and liabilities of both
companies.

MARUTI MOTORS SUZUKI MARUTI SUZUKI

In India In japan India
 Leverage buy out

 A leverage buyout is a restructuring of the capitalization

and ownership of a company . The term leveraged refers
to the use of debt as the primary method of financing the
restructuring . The buyout portion refers to fact that the
method is often used to transform a publicly held
company into one that is privately held . There are a
number of reasons why this type of transaction might take
place . These include cost savings ,managerial incentives
,decreasing the total numbers of owners ,tax benefits
,flexibility ,and control .
 example

 In 2019 , Patanjali acquired Ruchi soya ,which is listed on

stock exchange ,through an insolvency process for Rs
4,350 crore. Ruchi soya primarily operates in the business
of processing of oilseeds, refining of crude edible oil for
use as cooking oil, manufacturing of soya products and
value-added products.
 Management buyout

 Introduction : A management buy-out is the acquisition of a business

by its core management term usually in coordination with an external
party such ass a credited lender or a private equity firm .
 By leveraging the existing experience and knowledge of management
, the MBO is a viable option for owners to monetize their ownership
while ensuring stability within the firm post-sale.
 The MBO is different form a management buy-in (MBI) where an
outside manager or executive team purchase a majority stake in a
target company and replace existing management .
 EXAMPLE
 one prime example of a management buyout is
when Michael Dell , the founder of dell . The
computer company , paid $ 25 billion in 2013 as
part of a management buyout (MBO) of the
company he originally founded , taking it private ,
so he could exert more control over the direction
of the company .
 consolidation

 Consolidation in technical analysis refers to an assets oscillating between

a well –defined pattern of trading levels . Consolidation is generally
interpreted as market indecisiveness , which ends when the asset’s price
moves above or below the trading pattern . A consolidation pattern could
be broken for several reasons , such as the release of materially
important news or the triggering of succession of limit orders .
 In financial accounting , consolidation is defined as a set of statement
that presents a parent and subsidiary company as one company.
 another example is the merger of centurion bank of Punjab with HDFC
bank in 2008 . It is also provided massive scale economies and improved
distribution network of branches .
 Kotak bank’s buyout of ING VYASA bank , ICICI buyout of bank of
Rajasthan ltd are few more example of consolidation that happened
recently.
Consolidation of financial statement

 AS 21 come into effect of accounting periods commencing on or after 1 april ,

i.e., for year ending 31 march 2002 . The act is applicable to all the
enterprises that prepare consolidated financial statement . It is mandatory
for listed companies and banking companies .
 As per AS 21 , the consolidated financial statements would include:
1. profit and loss A/C
2. balance sheet
3. notes of accounts except typical notes
4 . Segment reporting
 Share splits

 Share or stock split is the process of splitting shares with high face value into
shares of a lower face value.
 It’s like getting a Rs.20 notes changed for two Rs . 10 notes.
 A corporation whose stock is performing well may choose to split its shares,
distributing additional shares to the existing shareholders.
 This requires approval form the board of directors and shareholders.
 Eg . ABC ltd has 10000 shares of RS . 100 per common stock outstanding with
a current market price of RS. 150 per share . The board of directors declares
the following stock split:
1. Each common shareholders will receive 5 shares held . This is called a 5-for-1
stock split . As a result 50,000shares (10,000 shares *5 ) will be outstanding.
 Share splits

 The par of each share of common stock will be reduced to RS. 20 ( RS.
100/5)

reasons for share splits

- Companies splits their stocks to be more affordable and liquid from
retail
Investor’s point of view.
- More buyers and sellers will trade the shares.
Significance of share splits

* It is improving market liquidity

* it is important to generate greater investor interest .
* Post split price is also an important consideration in the
financial market place for investor attention with other
high quality securities .
* Long term investor will get an opportunity
Cancellation of share capital

 There are some shares which are not taken by any person
and diminish that amount of share capital by the number
of shares so cancelled.
other cancellations
(a) share forfeiture : a company may cancel shares that
have been forfeited under the terms on which they were
Issued . Subject to receving shareholders approval(sec.
258D)
Cancellation of share capital

 (b)redeemable preference shares : A company may reduce capital

through of redeemable preference shares, which may be done out of the
proceeds of a new issue of shares made for the purpose of the redemption
(secs.254J and 258E).

 (c)Other situations : These relate ,for example, to an unlimited

company (which can reduce capital in anyway it chooses), “lost” capital (no
longer represented by assets), and extinguishment of uncalled liability on
partly –paid shares.
Corporate failure

 the term corporate failure entails discontinuation of company’s operations

leading to inability to reap sufficient profit or revenue to pay the business
expenses . It happens due to poor management , incompetence , and bad
marketing strategies .
 Symptoms of corporate failure
1. Low profitability
2. High gearing
3. Low liquidity
the company’s financial trends may represent these symptoms , which are
related to one another . First of all , the company encounters a downfall in its
profit , which is reflected in the profitability ratios, such as profit margin ,
return on capital employed and return on net assets.
Causes of corporate failure

 Economic distress: economic downturn is one of the major causes

of corporate failures, across many businesses. The decline in the
economy may lead to the reduction in the activities , which adversely
affects the performance of many firms in the economy .
 Mismanagement: mismanagement implies improper management
control over the working of the employees and other business
activities .it refers to lack of managerial skills and experience , in
term of strategic capability , leadership , teamwork , coordination ,
foresightedness , ect. Resulting in the failure of the enterprise.
Causes of corporate failure

 Technological causes: with the advancement in the technology , new

modes of doing business has been introduced , which is better than the
traditional ones. If an industry fails to employ the latest information and
production technology , then the chance of failure of the firm may increase.
 Working capital problems : when the company is going through
financial distress, it may face liquidity shortages. Due to the insufficiency of
funds the organization fails to carry out the day to day operations of the
organization properly and week liquidity becomes evident.
 Fraudulent management : corporate collapse is also mainly caused by
the fraud of the management . There are instances when managers re
influenced by personal greed, due to which they use unfair means such as
falsification in the financial statements and accounting reports of the
company.