m covering a variety of flexible cooperative

arrangements between organizations, from fluid,

short term cooperation to long term, formal
agreements
m In a strategic alliance, partners remain
independent after forming the alliance, both share
alliance management and benefits, and both
contribute to the alliance on a continuing basis
or purposes, strategic alliances are defined as
cooperative relationships between 2 organizations
that meet the following criteria:
m ‡ Partners share resources, capabilities and/or
knowledge on a continuing basis;
m ‡ The alliances have strategic intent for the
partners; and
m ‡ Alliance objectives include the sharing and/or
exchange of products, services, knowledge and
profits.
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m The reasons for alliance dissolution may be
divided into two groups, those related to the
performance of the venture and those related to
altered partner capabilities or objectives.
m International expansion is inherently risky and the
level of dissatisfaction within strategic alliances
has been found to be extremely high. The rate of
success for both international alliances and cross-
border acquisitions is approximately 50 percent.
m A divestiture / demerger involves, unlike a merger
or amalgamation in which all assets are sold,
selling of some of the assets. These assets may
be in the form of a plant, division, product line,
subsidiary and so on. Divestitures can be
involuntary or voluntary.
m ^ All the property / liabilities of the undertaking, being transferred by the
demerged company, immediately before the demerger becomes the property /
liabilities of the resulting company by the virtue of the demerger;
m 2 The property / liabilities of the undertaking, being transferred by the
demerged company, immediately before the demerger is transferred at values
appearing in its books of account;
m 3 The resulting company issues, in consideration of the demerger, its shares on
a proportionate basis to the shareholders of the demerged company;
m 4 Shareholders holding not less than three-fourths in value of the shares in the
demerged company (other than shares already held therein immediately before
the demerger, or by a nominee for the resulting company or, its subsidiary
become shareholders of the resulting company or companies by the virtue of
the demerger;
m 5 The transfer of the undertaking is on a going concern basis;
m 6 The demerger is in accordance with the conditions, if any, notified in this
behalf under section 72 A (5 by the Central Government.
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a. A motive for a spin off may reduce information asymmetry about a
company¶s individual business units. This may argue for highly
diversified firms engaging in more spin-offs than less diversified firms.
b. It may be possible with a spin-off to obtain greater flexibility in
contracting things such as labor, debt, taxes and regulations. Greater
contracting flexibility, in turn, should lead to improved productivity.
c. inally, the spin-off may make the financial markets more complete.
With a publicly traded stock, the opportunity set of securities available
to investors is expanded.
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m a. One motivation for an equity carve-out is that with a separate stock price and public
trading, managers may have more incentive to perform well. or one thing, the size of
operations is such that their efforts will not go unnoticed, as they sometimes do in a multi-
business company.
m b. With separate stock options, it may be possible to attract and retain better managers
and to motivate them
m c. An equity carve-out is also a favorable means for financing growth. When the subsidiary
is in leading-edge technology but not particularly profitable, the equity carve-out may be a
more effective vehicle for financing than financing through the parent.
m d. Another motivation may be a belief by management that though the parent¶s stock is
undervalued, a subsidiary would not be undervalued and may be even overvalued by the
market.
m e. Also, with a separately traded subsidiary, the market may become more complete
because investors are able to obtain a µpure-play¶ investment.
m
Given the basic conceptual framework of capital budgeting,
the following format contains the steps involved in
assessing whether the divestiture decision is profitable for
the selling firm or not.
m a Decrease in CAT due to sale of division (for years ^, 2,
n«
m b Multiply by appropriate cost of capital relevant to division
(given its risk level
m c Decrease in present value of the selling firm (a X b
m d (- Present value of obligations related to the liabilities of
the decision
m e Present value lost due to sale of division (c ± d
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m Any transfer or issue of shares by the resulting
company to the shareholders of the demerged
company would not be regarded as transfer if the
transfer or issue is made in consideration of the
demerger of the undertaking.
m In case of demerger, the existing shareholders of the
demerged company would hold shares in the resulting
company as well as shares in the demerged company.
m urther, for computing the period of holding of such
shares in the resulting company, the period for which
such shares were held in the demerged company
would also be included.
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m The LBO must be distinguished from a Leveraged
Recapitalization, or ¢
%4
m With a LBO, public stockholders are bought out and
the company or the business unit becomes private.
With a leveraged recap, a publicly traded company
raises cash through increased leverage, usually
massive leverage. The cash then is distributed to
stockholders, often by means of a huge dividend. In
contrast to a LBO, the stockholders continue to hold
shares in the company. The firm remains a public
corporation with a traded stock.
m These shares are known as ³X shares
Though the leveraged recap is a defensive tactic and such
devices usually work to the disadvantage of stockholders,
this is different.
m a As a case, leverage and increased equity stake may
give management more incentive to manage efficiently and
to reduce wasteful expenditures.
m b There is also the tax shield that accompanies the use of
debt.
m c By the virtue of absorbing free cash flows, leverage may
have a productive effect on management efficiency.
m d Also, under the discipline of debt, internal organization
changes may now be possible that lead to improvements in
operating performance.
m a With the high degree of leverage, there is little
margin for error. Not surprisingly, a number of
leveraged recaps do not make it.
m b Operating difficulties, often due to industry wide
problems, beyond the control of the company, are
magnified by the financial leverage.
m c Another disadvantage, relative to an LBO, is that as
a public company, shareholder servicing costs and
security regulations and disclosures remain.
m
m One of the options available to small- to medium-
sized privately held companies that are looking to
raise additional capital or to make acquisitions is
the reverse merger
m The first is a failed public company that remains to
be sold in order to recoup some of the costs of the
failed business. These shells have the potential for
unknown liabilities, lawsuits, dissatisfied
shareholders, and other potential ³skeletons in the
closet.X
m The second are created for the specific purpose of
being sold as a shell in a reverse merger
transaction. These typically carry less risk of
having unknown liabilities.
m
m The advantages of public trading status include the
possibility of commanding a higher price for a later
offering of the company's securities. Going public
through a reverse takeover allows a privately held
company to become publicly held at a lesser cost, and
with less stock dilution than through an initial public
offering (IPO . While the process of going public and
raising capital is combined in an IPO, in a reverse
takeover, these two functions are separate. A
company can go public without raising additional
capital. Separating these two functions greatly
simplifies the process.
m These have an illiquid, low priced stock, a low valuation, and little
to no institutional following. The newly public company is
effectively worse off after completing the reverse merger than it
was prior to leaving the private domain.
m Other problems awaiting companies that emerge from the private
arena include issues surrounding the disclosures required by a
public firm and the regulatory requirements that the SEC
demands. Public companies are required to file regular quarterly
and annual reports, meet stringent accounting standards, and
make them available to their public investors. Small to medium
size private companies often lack the infrastructure and back
office capabilities to support the requirements of a public
company. This requires additional capital expenditures in order to
meet the regulatory and financial burdens of a publicly traded
company.
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m inancial restructuring is carried out internally in
the firm with the consent of its various
stakeholders. This form of reconstruction is
relatively easier to put to ground.
The sacrifice may be ±
m a In terms of waiver of a part of the sum payable to
various liability holders;
m b In terms of acceptance of new securities with a
lower coupon rate, with a view to reduce the future
financial burden on the firm;
m c The arrangement may also take the form of
conversion of debt into equity; sometimes, creditors,
apart from reducing their claim, may also agree to
convert their dues in to securities to avert pressure of
payment.
The aggregate sum resulting from ±
m a The reduction / waiver in the claims from
various liability holders, and
m b Profit accruing from the appreciation of assets
such as land and buildings