Corporate Restructuring

By:
Chandan Kumar Nayak: 09BS0000591
Chintan Shah: 09BS0000616
Debashis Behera: 09BS0000640
Deepak Jha: 09BS0000664
Payal Desai: 09BS0000682
Nisha Rani: 09BS0001458
 Flow of Presentation
 Introduction
Economic rationale of Corporate
Restructuring.
Types of Mergers.
Debt Restructuring.
Expansions And Tender Offer.
Sell Offs , Spin Offs and Divestiture.
Legal aspects and accounting aspects.
Conclusion
What is Corporate Restructuring??
Corporate restructuring is the process of redesigning
one or more aspects of a company. The process of
reorganizing a company may be implemented due to a
number of different factors, such as positioning the
company to be more competitive, survive a currently
adverse economic climate, or poise the corporation to
move in an entirely new direction. Here are some
examples of why corporate restructuring may take
place and what it can mean for the company.
 Economic Rationale of Corporate
Restructuring
Types of Corporate
Restructuring

Integration of Restructuring of Existing

Companies with or without
Existing Companies split-up of Balance Sheet

Through Transfer of Through Transfer of

Assets Equity
• Mergers (Amalgamation) •Acquisition
Absorption, •Takeover
Consolidation
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 Economic Rationale of Corporate
Restructuring
 Expansion: Mergers, Acquisitions, Takeovers, Tender offer,

Joint Venture
 Contraction: Sell offs, Spin offs, Split offs, Split ups,

Divestitures, Equity Carve outs

 Corporate Control: Takeover Defenses, Share Repurchases,

Exchange Offers, Proxy Contests

 Changes in Ownership Structures: Leveraged Buyout,

Going Private, ESOPs, MLPs (Master Limited Partnerships)

 Reasons for Mergers
 Strategic benefit: competition, entry, risk and cost reduction

 Complementary resources: e.g. Technology and Marketing

 Tax benefits: accumulated losses, unabsorbed depreciation,

government incentives, sales and excise duty benefits

 Utilization of surplus funds

 Managerial effectiveness

 Diversification

 Lower financing costs

 Earnings growth etc.

 Types of Mergers
Horizontal Mergers.

Vertical Mergers.

Conglomerate Mergers.

Concentric Mergers.
 Horizontal Mergers
A Type of Merger occurred when two companies
competing in the same line of Business Activities.
The Effect on the Market Would be Either Large or a little
to No Effects.
Number of firms in an industry will be reduced due to
Horizontal Mergers and this may lead firms to Earn huge
monopoly profits.
 Horizontal mergers are regulated by government for their
negative effect on competition.
 Vertical Mergers
A Merger between two companies producing different
goods or services for one Specific Finished Products.
It refer to a situation where a product manufacturer
merges with the supplier of Inputs or Raw Materials.
Also Known as “Vertical Foreclosure”.
Cost Reduction and Minimization Of Transportation cost.
Three Types Of Vertical Mergers
 Backward Vertical Mergers.
 Forward Vertical Mergers.
 Balanced Vertical Mergers.
 Conglomerate Mergers
A Merger Between Firms that are involved in totally
unrelated business activities .
Two Types of Conglomerate mergers; i.e. Pure and Mixed.
The main reason behind this kind of Merger are increasing
Market Share, Synergy and Cross Selling.
They also Merged to diversify and reduce their risk
Exposure.
Exp: the Merger between Walt Disney company and the
American Broadcasting Company.
 Concentric Mergers
A type of merger where the two companies coming
together to share some common expertise that may posses
mutually advantageous. The Common Expertise may be
Managerial or Technological Know How that may not be
Industry or Product Specific.
In short combining two or more businesses in order to
pool expertise.
A Merger between a Motorcycle Manufacturer and an
Automobile Manufacturer would be an Example.
Example: Citi Group buying Salomon Smith Barney.
 Debt Restructuring
Definition:
A method used by companies with outstanding debt
obligations to alter the terms of the debt agreements in
order to achieve some advantage.
Debt Restructuring is court ordered or mutual agreement.
Debt restructuring may involve debt forgiveness, debt
rescheduling, and/or conversion of a portion of debt into
equity.
Debt restructuring is a process that allows a private and
public company or a sovereign entity facing cash flow
problems and financial distress, to reduce debts.
 Debt Restructuring
 A company will often issue callable bonds to allow them

to readily restructure debt in the future.

 For example, IDBI issued Flexi-bonds in 1996 with a

coupon rate of about 16%. Later, the interest rates fallen

considerably to be able to borrow at about 11.5%. So,
IDBI exercised a call option in 2001 and raised the funds
at 11.5%. This move has helped IDBI to save substantial
amount in interest cost over the rest of the life of bonds.
 Debt Restructuring
 Debt restructuring is usually less expensive and a preferable alternative to
bankruptcy.
 Debt-for-Equity Swaps: In a debt-for-equity swap, a
company's creditors  generally agree to cancel some or all of the debt in
exchange for equity in the company.
 Debt-for-equity swap may also be called a bondholder haircut.

 Converting debt to equity via bondholder haircuts presents an elegant

solution to the problem .
 For example, in case of a large US bank, a 20% haircut would reduce its
debt, creating an equal amount of equity, thereby recapitalizing the bank.
 Expansion
Expansion:
 Growth in Size, Balance Sheet, Total Assets
Merger


Amalgamation or Consolidation
 (A + B = A)
Absorption(A +
 B = C)
Acquisition
 A, B
Separate
Takeover
 Hostile
Tender offer


Asset Acquisition


Joint Venture(A’ +
 B’)
 Tender Offer
 Tender offer is a public, open offer or invitation, usually

announced in a newspaper by a prospective acquirer (bidder) to all

stockholders of a publicly traded company (target company) to
offer their stocks for sale at a specified price during a specified
time, subject to the tendering of a minimum and maximum
number of shares. In a tender offer, the bidder contacts
shareholders of target company directly. For example, Mittal
Steel announced a tender offer to the shareholders of Arcelor steel
 Tender Offer
 To attract the shareholders of the target company to sell, the

acquirer's offer price usually includes a premium over the current

market price of the target company's shares. Cash or other
securities may be offered to the target company's shareholders.
When securities are offered in a tender offer it is called as an
exchange offer.
 Tender offers may be friendly or unfriendly. SEBI laws

require any company or individual acquiring 5% of a company to

disclose information to the SEBI, the target company and the
exchange.
 Tender Offer
 A tender offer may be made by a firm to its own shareholders
to reduce the number of outstanding shares, or it may be
made by an outsider wishing to obtain control of the firm.
 A tender offer may be made by the company's management
in a bid to prevent a hostile takeover. Alternatively, it may be a
made by an outside company as part of a hostile takeover.
 Current stockholders, individually or as a group, can accept
or reject the offer. The shareholders who accept the tender
offer make a significant profit on their holdings and the
acquirer gains control of the company
 Sell offs
 Sell offs are the form of contraction or downsizing activities

undertaken by the companies as a part of corporate restructuring.

These activities allow the firm to maximize shareholder’s value
by redeploying assets through contraction and downsizing of the
parent company.
 Sell offs is a generic term and under it, various forms exist such

as spin offs, split offs, split ups, divestitures, equity carve outs etc.
 There are various considerations to sell offs such as economic,

operational, profits, tax, labor, capital redeployment, synergy etc.

 Sell offs
Rationale for Gains to Sell offs
 Efficiency gains and refocus: A particular business may be more
valuable to someone that will be paying higher price.
 Information effects: Announcement of sell offs can be seen as
change in investment strategy or in operating efficiency. This may
be taken in a positive sense and boost share price.
 Wealth Transfers: Sell offs may transfer the wealth from debt
holders to the shareholders.
 Tax Reasons: When company is making loss and is unable to use
tax-loss carry forward, it is better to sell off wholly or in part.
 Spin offs
Typically parent corporation distributes on pro rata basis,
all the shares it owns in subsidiary to its own
shareholders.
No money generally changes hands
Non taxable event
 as long as it jumps through substantial hoops
 Company A without Subsidiary B

Subsidiary B

Shareholders own shares of combined company. Own the equity in subsidiary implicitly.
 Company A after spinoff

New company B
Shareholders receive
Shares of company B

Old shareholders still own shares of company A, which now only represent ownership of A without B.
 Central Features of Spin offs
Spin offs are a distribution of subsidiary shares to parent
company shareholders
As such, no money (necessarily) comes into the parent company
as a result
No shares (or assets) of the subsidiary are sold to the market
(IPO) or to acquirer (divestiture)
Distribution in most instances is tax free
 Example of Spin offs

RCVL RCoVL REVL GFML

 Defining Divestitures
Selling assets, divisions, subsidiaries to another
corporation or combination of corporations or individuals
Company A without Subsidiary B

Subsidiary B

Company C
Company A w/o subsidiary B

Cash, securities or assets as

consideration

Old Sub B

Company C
 Features of divestitures
Selling corporation typically receives consideration for
the assets sold
 cash
 securities
 other assets
Divestitures are typically taxable events for selling
corporation (new basis for purchaser)

Example of Divestiture: JLR

LEGAL AND ACCOUNTING
ASPECTS OF MERGER AND
ACQUISITION
 M&A – Legal aspects and Accounting aspects

Legal Aspects
 Company Act, 1956

 SEBI, Substantial Acquisition of Shares and Takeovers,

Regulation 1997

Accounting Aspects
 Pooling Method

 Purchase Method
 M&A: Legal Aspects
Mergers lead to reduction in the number of players in the

market. This has an adverse impact on customers and public

interest by increasing price and reducing customer service.
Mergers can lead to big firms, which may discourage new
entrants.
Merger regulation needs to evaluate the trade-off between

reduction in competition and potential gains in economic

efficiencies.
With globalization, foreign firms pose a competition to

domestic firms. Regulatory system must take into account

these things.
 M&A: Legal Aspects
Economic reforms initiated in year 1991. Since then number

of M&As are increased.

The Supreme Court of India in the judgment of HLL-TOMCO

merger has said that:

“In this era of hypercompetitive capitalism and technological
change, industrialists have realized that mergers/acquisitions are
perhaps the best route to reach a size comparable to global
companies so as to effectively compete with them. The harsh
reality of globalization has dawned that companies which cannot
compete globally must sell out as an inevitable alternative.”
 Companies Act

Compliance under the Companies Act, 1956:

Prepared by the companies which have arrived at a

consensus to merge.
Respective Board of Directors of companies are required to

approve the scheme of amalgamation/merger.

As per the Companies (Amendment) Act, 2002, the powers

of the high court relating to reduction of capital,

amalgamation and disputes will be transferred to ‘National
Companies Law Tribunal (NCLT).’
 Companies Act

Approval of the scheme by financial institutions,

banks/trustees for debenture holders.

Intimation to stock exchange about proposed

amalgamation/merger
Application to NCLT for directions

NCLT directions for members’ meeting

Companies shall submit for approval of

amalgamation/merger to the Registrar of the respective

NCLTs.
 Companies Act

Notice to the members/shareholders.

Shareholders’ general meeting and passing the resolution

Dissolution of transferor company

Transfer of assets and liabilities

Allotment of shares to shareholders of transferor company

Listing of shares at stock exchange

Post-merger secretarial obligations

 SEBI, Substantial Acquisition of Shares and
Takeovers Regulation
In 1994, Takeover Code was introduced.
It was amended and in 1997, Substantial acquisition of

shares and takeover Regulation was created. This regulation

has undergone several amendments, latest 2006.
 SEBI guidelines relating to ESOPs do not permit grant of

ESOPs to the promoters. (In foreign countries, in many

cases, the management increases its holding by granting
stocks at a low cost or no cost).
 SEBI, Substantial Acquisition of Shares and
Takeovers Regulation

Salient features of Takeover Code of India as

• When holding crosses 5% and 15% of voting capital,

intimate the target company and the stock exchange

• Public offer for minimum 20% of voting capital
• Public offer price: Higher of the average price (average of
daily high and low) for last 6 months or last two weeks
• Public offer to be managed by SEBI registered merchant
banker
 Accounting for Mergers and Acquisitions

 Amalgamation in the nature of merger (combining):

Combining of assets, liabilities, shareholders’ interests and

business of companies

 Amalgamation in the nature of purchase: when one company

is acquired by other company, shareholders do not have a

proportionate share in the equity, business not continued.

 Method of Accounting for Amalgamation

 The Pooling of Interest Method: Combines assets,

liabilities, reserves at their existing carrying amounts. No

goodwill, nor capital reserves arise in this case.

 The Purchase Method: Combines assets and liabilities at

their existing carrying amounts or by allocating the purchase

consideration on the basis of their fare value

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