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  • Demerger GIPE

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    The document discusses demergers, which involve selling some assets of a company like plants, divisions, product lines, or subsidiaries. This generates cash that can be used to expand other assets and business units to increase profits. Demergers are often done for positive financial reasons and can be viewed as reverse capital budgeting. There are two main methods - spin-offs, where a new separate company is created to hold the divested assets, and split-ups, where the entire company is broken up into new independent companies. An example given is Kirloskar Oil Engines Ltd demerging its engine and auto components business into a new company called Kirloskar Engines Ltd.

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    The document discusses demergers, which involve selling some assets of a company like plants, divisions, product lines, or subsidiaries. This generates cash that can be used to expand other assets and business units to increase profits. Demergers are often done for positive financial reasons and can be viewed as reverse capital budgeting. There are two main methods - spin-offs, where a new separate company is created to hold the divested assets, and split-ups, where the entire company is broken up into new independent companies. An example given is Kirloskar Oil Engines Ltd demerging its engine and auto components business into a new company called Kirloskar Engines Ltd.

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    8 views10 pages

    Demerger GIPE

    Uploaded by

    jagritbudsocialdigital
    The document discusses demergers, which involve selling some assets of a company like plants, divisions, product lines, or subsidiaries. This generates cash that can be used to expand other assets and business units to increase profits. Demergers are often done for positive financial reasons and can be viewed as reverse capital budgeting. There are two main methods - spin-offs, where a new separate company is created to hold the divested assets, and split-ups, where the entire company is broken up into new independent companies. An example given is Kirloskar Oil Engines Ltd demerging its engine and auto components business into a new company called Kirloskar Engines Ltd.

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    of 10

    De Merger

    De Merger
    It Involves selling of some of the assets only.

    Assets in the form of:


    Plant , Division, Product Line, Subsidiary, etc

    Selling of Unproductive / Non Performing Assets

    Generates Cash
    – Used in expanding other assets / Operating Units
    To Increase the profits of the demerged firm

    Motive for De Merger is often positive


    Financial Evaluation:

    It can be considered as Reverse Capital Budgeting

    In this
    Selling Firm receives cash by divesting an asset say
    division of the firm.

    These Cash flows received are compared with Present


    Value of CFAT (Cash Inflows After Taxes)
    Methods of Demerger
    Spin-off:

    - Outright Sale of an operating unit / division


    Termed as “Spin – Off”

    - It requires creation of new separate,


    Corporate firm

    - Shares of the newly created legal entity are


    distributed to existing shareholders of the
    parent company
    New entity becomes an independent company

    Takes its own decision & developing its own


    policies may be different from parent company

    New entity will not pay any further cash to parent


    company.
    Split – Up:

    It involves the breaking up of entire firm in a


    series of Spin – offs, so that the parent
    company no longer exists & only new
    offspring survives
    Example:

    A Corporate Firm has Four Divisions:

    A, B, C & D

    Split up implies that four new corporate firms are to


    be formed & original corporate firm is to be wound
    up.

    Cases:
    KOEL – Kirloskar Oil Engines Ltd
    Demerger of Ultra Tech Cement from L&T
    Demerger of Tower Business of RCOM & RTL
    into RITL – Reliance Infratel Ltd.
    Case Study

    KOEL
    Kirloskar Oil Engines Ltd.
    KOEL

    KOEL – Incorporated in 1946 as Public Ltd. Co.

    Manufactures
    Diesel Engines & Automotive Components
    Engine Bearings, Valves & Diesel Generating Sets

    Applications : In Agriculture, Material Handling


    Mining Machinery, Construction Equipments

    During FY-08, KOEL earned 93% of its total revenue


    from – Engines, 5 % from Auto-components
    2 % from other Strategic Business Units
    Demerger - KOEL
    Company announced date of Demerger as 1 st April 2009

    Demerger of Engine & Auto Component Business into


    Kirloskar Engines Ltd – KEIL

    KOEL has fixed Demerger Ratio at 3:4 which means


    that existing shareholders of KOEL to get 3 shares of
    KEIL for every 4 shares held in KOEL

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