Corporate

Restructuring
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, surviving a currently adverse economic
climate, or acting on the self confidence of the corporation to
move in an entirely new direction.
 What is Corporate
Restructuring?
Any change in a company’s:
1. Capital structure,
2. Operations, or
3. Ownership
that is outside its ordinary course of
business.
So where is the value coming
from (why restructure)?
 Why Engage in
Corporate Restructuring?
• Sales enhancement and operating economies*
• Improved management
• Wealth transfers
• Tax reasons
• Leverage gains
• Management’s
personal agenda
Why Engage in
Corporate Restructuring?
• Growth
• •Diversification
• •Optimum utilization of capacities
• •Improved competencies
• •Cost reduction
• •Financial restructuring / support
• •Revival of weak or sick company
• •Widen market presence
• •Advantages of brand equity / goodwill / IP
 Sales Enhancement
and Operating Economies
• Sales enhancement can occur because of market
share gain, technological advancements to the
product table, and filling a gap in the product line.
• Operating economies can be achieved because of the
elimination of duplicate facilities or operations and
personnel.
• Synergy -- Economies realized in a merger where the
performance of the combined firm exceeds that of its
previously separate parts.
 Sales Enhancement
and Operating Economies

Economies of Scale -- The benefits of size in

which the average unit cost falls as volume
increases.
• Horizontal merger: best chance for economies
• Vertical merger: may lead to economies
• Conglomerate merger: few operating economies
• Divestiture: reverse synergy may occur
GOVERNING PROVISION

SECTION 391-394 of Companies Act, 1956

Most liberal sections in the entire

Companies Act, 1956.
By way of SCHEME you can
propose & achieve whatever you
want
Forms of Corporate Restructuring
Expansion

• Expansion is a form of restructuring, which results in an increase in

the size of the firm. It can take place in the form of a merger,
acquisition, tender offer, asset acquisition or a joint venture.
Mergers

• Merger is defined as a combination of two or more companies into a single

company
• Amalgamation is the type of merger that involves fusion of
two or more companies. After the amalgamation, the two
companies loose their individual identity and a new
company comes into existence. This form is generally
applied to combinations of firms of equal size.

A B AB
Brooke Bond Lipton Brooke Bond Lipton
India Ltd India Ltd India Ltd
Acquisition

• A corporate action where an acquiring company makes a bid for an

acquiree. If the target company is publicly traded, the acquiring
company will make an offer for the outstanding shares
• Absorption is a type of merger that involves fusion of a small company with a
large company. After the merger the smaller company ceases to exist.

A B A
Oriental Bank Of Global Trust Oriental Bank Of
Commerce Bank Commerce
Joint Venture

• Cooperation between two or more companies in which the

purpose is to achieve jointly a specified business goal.
• Upon the attainment of the goal, the joint venture is
terminated.
• A joint venture, which is typically limited to one project,
differs from a partnership that can work jointly on many
projects.
A B AB
Hero Motor Honda Hero Honda
Corp
 Tender Offer
• Tender offer is a corporate finance term denoting a type of
takeover bid.
• The tender offer is a public, open offer or invitation (usually
announced in a newspaper advertisement) by a prospective
acquirer to all stockholders of a publicly traded corporation (the
target corporation) to tender their stock for sale at a specified
price during a specified time, subject to the tendering of a
minimum and To induce 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.

B C
D
Public G
E
F
A Offer H
I
J
K
 Example ---- Tender Offer

Flextronics International giving an open market offer at

Rs. 548 for 20% of paid up capital in Hughes Software
Systems.
AstraZenca Pharmaceuticals AB, a Swedish firm,
announced an open offer to acquire 8.4% stake in
AstraZenca Pharma India at a floor price of Rs. 825 per
share.
 Asset Acquisition
 A buyout strategy in which key assets of the target company are
purchased, rather than its shares.
 These assets may be tangible assets like a manufacturing unit or
intangible assets like brands.
 This is particularly popular in the case of bankrupt companies,
who might otherwise have valuable assets which could be of use to
other companies, but whose financing situation makes the company
un- attractive for buyers

A B A
 Examples ---- Asset Acquistion
 The acquisition of the cement division of Tata Steel by Laffarge of
France. Laffarge acquired only the 1.7 million tonne cement plant
and its related assets from Tata Steel.

 The asset being purchased may also be intangible in nature. For

example, Coca-Cola paid Rs.170 crore to Parle to acquire its soft
drinks brands like Thums Up, Limca, Gold Spot etc.

 Google acquired the Motorola for its new open source operating
system “Android” for the need of Motorola’s 17000 patents out of
which Google needs around 6000 patents.

 M3M India acquired DLF 28- Acre Plot in Gurgaon as non core
assets for Rs 440 Cr.
Forms of Corporate Restructuring
 Contraction
• Contraction is a form of restructuring, which results in a reduction in the size
of the firm. It can take place in the form of a
• Spin-off,
• Split off,
• Divestiture
• Equity carve-out.
 Spin-off
• A Company distributes all the shares it owns in a subsidiary to its own
shareholders implying creation of two separate public companies with same
proportional equity ownership. Sometimes, a division is set up as a separate
company. Hence, the stockholders proportional ownership of shares is the same
in the new legal subsidiary as well as the parent firm. The new entity has its own
management and is run independently from the parent company. A spin-off
does not result in an infusion of cash to parent company.
Shareholders of
Shareholders of
Company A also has
Company A
shares of Company B

A B
A B
Subsidiary

Company
of A B
 Examples ----- Spin-off

• Air-India has formed a separate company named Air-India

Engineering Services Ltd., by spinning-off its engineering division.
• Guidant was spun out of Eli Lilly and Company in 1994, formed
from Lilly's Medical Devices and Diagnostics Division.
• Agilent Technologies spun out of Hewlett-Packard in 1999,
formed from HP's former test-and-measurement equipment
division.
• Cenovus Energy was spun out of Encana Corporation in
2009
• Shugart Associates was a spin-out of IBM.
 Split- off
• In a split off, a new company is created to takeover the operations of an existing
division or unit. A portion of existing shareholders receives stock in a subsidiary
(new company) in exchange for parent company stock Hence the shareholding
of the new entity does not reflect the shareholding of the parent firm. A split-off
does not result in any cash inflow to the parent company
Shareholders of
Shareholders of Company A
Company A
Shareholders Shareholders
of Company A of Company B

A D
New Company

C D E F C A
E F BD
Operations of Company
 Split-UP
• In a split-up the entire firm is broken up in series of spin-offs, so that the parent
company no longer exists and only the new off springs survive. A split-up
involves the creation of a new class of stock for each of the parent’s operating
subsidiaries, paying current shareholders a dividend of each new class of stock,
and then dissolving the parent company.
Shareholders of
Shareholders of Company A will get
Company A shares of

A A

B C D E
B C D E
Subsidiary Companies
Examples ------ Split-
UP
• The Andhra Pradesh State Electricity Board (APSEB)
was split-up in 1999 as part of the Power Sector
reforms.
• The power generation business and the
transmission and distribution business has
transferred to two separate companies called
APGENCO and APTRANSCO respectively. APSEB
ceased to exist as a result of split-up.
 Divestitures
• A divestiture is a sale of a portion of the firm to an outside party, generally
resulting in an infusion of cash to the parent.
• A firm may choose to sell an undervalued operation that it determines to be
non-strategic or unrelated to the core business and to use the proceeds of the
sale to fund investments in potentially higher return opportunities.

Some Operations of
A
Op
era
A Cash
B tion
s of
A
Ope

rati
ons
 Equity Carve Out
• A parent has substantial holding in a subsidiary. It sells part of that holding to
the public. "Public" does not necessarily mean a shareholder of the parent
company. Thus the asset item "Subsidiary Investment" in the balance-sheet of
the parent company is replaced with cash. Parent company keeps control of the
subsidiary but gets cash.

A
Issues IPO of B 20% Investors
Shares of B

Cash
B 20%
Shares of
Subsidiary Company
Company B
of A
Forms of Corporate Restructuring
Corporate Control

• Firms can also restructure without necessarily acquiring new firms or

divesting existing corporations.
• Corporate control involves obtaining control over the management
of the firm.
• Control is the process by which managers influence other
members of an organization to implement the organizational
strategies
 Takeover Defenses
• In M&A transactions, a defense mechanism (also known as a defense
strategy) is any set of procedures that are employed by a target
company to prevent a hostile takeover. ... between them and the
company's shareholders and prevent the takeover even if the deal can
potentially create value for the shareholders.
• Takeover defenses, both pre-bid and post-bid have been resorted to by
the companies.
• Pre Bid: This defense is also called preventive defense it is employed to prevent
a sudden, unexpected hostile bid from gaining control of the company.
• Post Bid: When preventive takeover defenses are not successful in fending off an
unwanted bid, the target implements post-bid or active defenses
• These takeover defenses intend to change the corporate
control position of the promoters.
 Share repurchases
A share repurchase, or buyback, is a decision by a company to buy back its
own shares from the marketplace. A company might buy back its shares to
boost the value of the stock and to improve the financial statements.
Companies tend to repurchase shares when they have cash on hand and the
stock market is on an upswing.
 Exchange Offers
In an exchange offer, a company makes an offer to holders of its outstanding
debt securities, agreeing to exchange newly issued debt or equity securities
(usually with terms more favorable to the company) for the outstanding debt
securities.
 Proxy contexts
a proxy contest is a strategy that involves using shareholders' proxy votes to
replace the existing members of a company's board of directors.

A proxy fight, proxy contest or proxy battle is an unfriendly contest for the
control over an organization. The event usually occurs when a corporation's
stockholders develop opposition to some aspect of the corporate
governance, often focusing on directorial and management positions.
Forms of Corporate Restructuring
Leverage Buyouts
A leveraged buyout (LBO) is the acquisition of another company using a significant
amount of borrowed money 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.
A leveraged buyout (LBO) occurs when someone purchases a company using
almost entirely debt. ... Typically, the ratio of an LBO purchase is 90% debt to 10%
equity. That is, if the purchaser is buying a company for $100 million, they will
borrow $90 million and pay $10 million from their own cash

Junk Bonds
Junk bonds are bonds that carry a higher risk of default than most bonds issued
by corporations and governments. ... Junk bonds represent bonds issued by companies
that are financially struggling and have a high risk of defaulting or not paying their
interest payments or repaying the principal to investors.
ESOPs and MLPs
An ESOP (Employee stock ownership plan) refers to an employee
benefit plan which offers employees an ownership interest in the
organization. Employee stock ownership plans are issued as direct
stock, profit-sharing plans or bonuses, and the employer has the
sole discretion in deciding who could avail of these options.
ESOPs are issued in the form of an incentive and as a retention plan
to directors and employees. 

Master limited partnerships (MLPs) are a business venture that

exists in the form of a publicly traded limited partnership. They
combine the tax benefits of a private partnership—profits are taxed
only when investors receive distributions—with the liquidity of a
publicly-traded company (PTP)
Master limited partnerships are business entities that qualify for
the favorable tax treatment of a pass-through entity. That means
that MLPs don't have to pay any taxes at the business level, instead
having their investors pay taxes on the income that's allocated to
them
Reliance Industries Limited
- A Unique Scheme of Arrangement-

PRE –ARRANGEMENT
SCENARIO
Reliance Industries Limited was
engaged in various
FACTS businesses:
(i) Coal based power business;
(ii) Gas based power business;
(iii) Financial services business;
(iv) Tele-Communication
business
 RIL… demerger

The family arrangement aims at

 Segregation between the two Ambani Brothers

 Provision for Specified Investors was made:

Holdings of RIL and other companies in the control

of Mr. Mukesh Ambani were transferred to a
wholly owned subsidiary, Reliance Industrial
Investments and Holdings Limited (RIIHL) along
with a Private Trust (Petroleum Trust).
RIIHL and Petroleum Trust were described as
“Specified Investors” which renounced their rights
in the scheme itself.
 RIL… demerger

 A s a result of demerger the shareholders of Reliance

Industries Ltd. other than “Specified Investors” got one
share each in the following four resulting companies
for each share held in RIL as on the record date:
Reliance Energy Venture Ltd. (REVL)
Reliance Communication Venture Ltd. (RCOVL)
Reliance Capital Venture Ltd. (RCVL)
Reliance Natural Resources Limited (RNRL)

 The shares of all these resulting companies got listed

on the stock exchanges under the provisions of Cl
Benefits achieved……..

Particulars Amount Amount

(Rs.) (Rs.)
24th March 20th December,
2006 2007
Value of the shares held 100 shares @928
by a shareholder as on
record date (25th
Jan,2006) (A) 92800
Shares in RIL 100 (@708) 70800 (@2700) 270000

Shares in REL 100 (@38) 3800 (@1900) 90000

Shares in RCOL 100 (@290) 29000 (@706) 70600

Shares in RCL 100 (@24) 2400 (@2376) 237600

Shares in RNRL 100 (@23) 2300 (@163) 16300

Total 108300 684500

Net benefit 15500 576200