af session 4 mba

8/10/2019 Af Session 4 Mba

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Copyright Amity University1

PAN African eNetwork

Project

Masters of Business Administration (IB)

Accounting and Finance

Semester - I

Dr. N N Sen Gupta


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Copyright Amity University


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ISSUE OF SHARES

&DEBENTURE


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SHARES


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Types of shares

1. Preference shares

Cum. Pref. Share, Non Cum. Pref. Share,

redeemable Pref. Share, Non participating pref.Share, Participating pref. Share

2. Equity shares-

Companysamendment Act,2000- shares withdifferential voting rights permissible


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ISSUE OF SHARE

Issue of prospectus

Application money at least 5% of face value of shares

Minimum subscription of 90% mandatory as per sebi ; refund tothe applicants within 42 days of the closure of issue; delayedrefundinterest @ 15% p.a.

Allotment money and subsequent calls- min. 1 month period

Sebi rules- size of issue up to 500 crores- shares are fully paidwithin 12 months of the date of allotment

Min. Application money paid by the applicant 25% of the issueprice


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STEPS FOR THE ISSUE OF SHARE1. TO ISSUE PROSPECTUS

2. TO RECEIVE APPLICATIONS

3. TO MAKE ALLOTMENTS

4. TO MAKE CALLS



Accounting entries for issue of share

Application received:

Bank A/c Dr.

To Equity Share Application A/c

Allotment :

Equity Share Application A/c Dr.

To Equity Share Capital A/c



ContdAmount due on allotment:

Equity Share Allotment A/c Dr.


Allotment money received:

Bank A/c Dr.

To Equity ShareAllotment A/c



ContdFirst call due:

Equity Share First Call A/c Dr.


Receipt of call money:

Bank A/c Dr.




Issue of shares :

Full subscription

Under subscription

Over subscription

- Rejection and full allotment

- Proportional (pro-rata allotment



Over subscription

Excess application money

Adjusted against allotment money.

Any surplus still remaining is either refunded or treated as

calls in advance which is a separate item between share

capital & reserves; Interest @ 6% p.a. Paid by the Co.

Calls in advance A/c Dr.

Bank (balance if needed) Dr.

To Call (1,2,final) A/c



Issue of shares at premium (sec 78) Issue price > par (face) value

Share premium receivable along with allotment

Capital reserve

Utilization of share premium

Issue of fully paid bonus shares to members

Writing off preliminary expenses of the co.

Writing off discount on the issue of shares /debentures

Providing premium on the redemption of preference shares

Buy back of shares

Share application a/c dr.

To share capital a/c

To share premium a/c



Issue of shares at a discount: (sec 79)

Issue price < par (face) value

Issue must be of a class of shares already issued

Issue permissible - one year since the date ofcommencement of business

Max . Discount @ 10% or higher rate as CLB permits

Issue within 2 months of the sanction

Share allotment a/c dr.

Discount a/c dr.

To share capital a/c



DEBENTURES



DEBENTURE

It is a certificate which acknowledges thatthe company owes to the persons a sum

of money ,promises that a stated rate ofinterest will be paid periodically to theperson named in the certificate .



KINDS OF DEBENTURES

Redeemable / Iredeemable

Secured/ Unsecured

Full convertible debenture's, Partial

Convertible debentures, Non convertibledebentures



KEY POINTS

Debt- servicing on issue of debentures

Payment of interest

Repayment to debenture holders at

redemption including premium if any

Tax deducted at source on interest and net interest

paid to holders

Debenture Interest a/c Dr.To TDS payable

To bank (net receipt)



REDEMPTION OF DEBENTURES

Expiry of fixed period

Drawing of lots

Purchase of own debentures in theopen market



Size Structure

Organizational Growth



Internal Growth vs. External Growth

Internal growth involves growth throughexpanding market share and producingmore goods and services

External growth is growth by acquisition(merger or takeover)



External Growth

A merger occurs when two companiesvoluntarily come together, resulting in anew legal identity

A takeover is where one company makesan offer of acquisition to the shareholdersof another (takeovers can be hostile)



Types of Mergers

Horizontal merger is a combinationbetween firms at the same stage in theproduction process (example: Daimler-

Benz and Chrysler)

Vertical mergers involve firms at differentstages of the production process



Horizontal Mergers

Many large companies achieve their sizethis way

Merged firms may benefit from economiesof scale and increased market share

In some cases these mergers are used toreact to competitors



Vertical Mergers

Vertical mergers can run backward toward thebeginning of the production process or forwardto the end

Backward integration allows control of rawmaterials, and may restrict competitor access

Forward integration allows control of the outletfor the finished product

Economies of scale may be achieved


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Advantages of External Growth Fast

Acquiring firm has access to an establishedmanagement team

If the shares of the acquiring company have highvalue compared to the shares of the acquiredcompany, additional cash may not be needed

Purchasing existing assets may be cheaper thanbuilding new production facilities


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Disadvantages of External Growth

Many takeovers and mergers fail, due toconflicts in management, corporateculture, and overspending on purchase

price


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Finance for Growth


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Internal Sources

Reinvestment of profits

There is an opportunity cost for use ofthose funds, therefore, financing throughreinvestment of profits should be judgedon rate of return, just like any other sourceof financing


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External Sources

Banks

Capital Markets

Money Markets Government

Trade Credit


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Bank Financing

Short- and medium-term financing throughloans and overdrafts

Loans include lines of credit


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Capital Markets

Primary markets-the buying and selling ofnew stocks and shares

Secondary markets-buying and selling ofexisting stocks and shares


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Types of Shares

Preference shares

Ordinary shares

Debentures


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Preference Shares

Represents ownership in the company

Carry a fixed dividend

Holders have a preference over othershareholders in the payment of dividendsand on liquidation

No voting rights


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Ordinary Shares (Equity)

Represents ownership in the company

No fixed dividend (Dividends are declaredand paid upon decision of management to

do so) More risky than preference shares for the

holder

Holders are last in line upon liquidation Holders have voting rights


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Debentures

Debentures are bonds given in exchange for a loan tothe company

Company agrees to repay the borrowed amount at somedate in the future (maturity date), and to make annual

payments of interest until maturity (coupon payments)

Debenture holders will be paid interest before dividendsare paid to shareholders

Debenture holders are NOT owners, but they are

Creditors of the company

This is a form of debt financing


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New Issue of Shares(IPO)

Company will employ an investment bankto advise on number of shares to issue,price, and other matters

Investment bank, acting as underwriter,will attempt to secure commitments for thestock from institutional investors prior tothe sale date

IPOs are expensive


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Limits to Growth

Excessive debt financing

Dysfunctional management structure

Stale or declining product market Government policies


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Small Firms vs. Multinationals


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Small Firms

What is a small firm?

Size of the firm may be based on number ofemployees or amount of revenues

To promote uniformity in Europe, the EUproposed members use less than 250employees as the definition of small to mediumsized enterprises (SME)

Under this definition, a large percentage ofmanufacturing firms and service firms in the UKare small firms


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Reasons for Growth in Small Firm Sector

Changing pattern of industry

Changes in consumer spending habits

Flexible specialization and growth ofsubcontracting

Reorganization and job reduction

Government policy Growth in self-employment


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Advantages of a Small Firm

Clearly defined small markets

Specialist, quality and non-standardizedproducts

Geographically localized markets

Development of new ideas


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Networking

Subcontracting

Networking

Virtual organization Joint ventures

Consortia


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Subcontracting

Current trend is an increase insubcontracting, where firms delegate apart of the production process to another

firm, or delegate business services Examples, subcontracting out accounting

or HR functions to specialist firms

Reduces costs for large firms and createsa larger market for small firms


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Networking

Networking-relationships that exist betweenorganizations and people within theorganizations

Two basic types:

1) Where firms are members of a network, butthe network has a different name from individualfirms

2) Where firms are part of a network ofindependent firms, but the network does nothave a separate identity


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Virtual Organization

Virtual organization-a network-basedstructure built on partnerships where asmall core operating company outsources

most of its processes Advantages are increased flexibility,

efficiency, and responsiveness tochanging market conditions

Also minimizes costs


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Consortia

A consortium will include contractors,suppliers, bankers and other groups whohave expertise and resources to carry out

a large product Example: Eurofighter


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Multinationals

Very large companies with central controlbut operations in many countries

Growth of multinationals is directly related

to more relaxed exchange controls andimproved communication


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Advantages of Multinationals

MNEs can locate their activities where it bestsuits them

MNEs can cross-subsidize operations, meaningprofit from one market can support operations inanother

MNEs can avoid tax in some countries bynegotiating tax breaks or using transfer pricing

MNEs can take advantages of subsidies and taxbreaks offered by governments


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Effects of MNEs on Local Economy

Labor market

Balance of payments (inflows ofinvestment, but outflows of dividends and

profits)

Flow of goods

Exploitation of developing countries?


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Globalization

Globalizationthe process of integrationof markets and production world-wide

Two main reasons:

1) Decline in barriers to trade andinvestment

2) Rapid advancement in communicationand IT technology


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CORPORATE RESTRUCTURING

Corporate restructuring refers to thechange in ownership, business mix, assetsmix and alliances with a view to enhance

the shareholder value. Corporaterestructuring may involve ownershiprestructuring, business restructuring and

assets restructuring.


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CORPORATE RESTRUCTURINGcontd.

Ownership restructuringis affected throughm&as, lbos, buyback of shares, spin-offs, jointventures and strategic alliances.

Business restructuring involves thereorganization of business units of divisionsthrough divestment, brand acquisitions etc.

Asset restructuringinvolves the acquisition orsale of assets and their ownershipstructure.eg.sale and leaseback of assets,receivable factoring etc.


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Mergers and

AcquisitionsExpansionPredominant reasons for expansion:

Existence

Advantages of Large Scale

Use for Higher Profits

Monopolistic Ambitions

Better Management

Natural Urge


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Forms of Expansion:-

Internal ExpansionIt results from the gradual increase in theactivities of the business.

External Expansion/BusinessCombination

It refers to business combination where twoor more concerns combine and expand theirbusiness activities.


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Forms of Combination:-

1.Merger or Amalgamation

A merger is combination of two or more

companies into one company.

The income tax Act, 1961 of India uses the termamalgamation for merger.

It may take any of the two forms: Merger thru absorption

Merger thru consolidation


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2.Acquisition and Take-Over

When a company takes-over the control ofanother company thru mutual agreement, its

called Acquisition or friendly take-over. On theother hand, if the control is acquired thruunwilling or when the take-over is opposed by

the target company, it is known as Take-Over


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3. Holding Companies:

Its a form of business organization which

is created for the purpose of combiningindustrial units by owning a controllingamount of their share capital.


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Reasons of Mergers:-

Economies of Scale Operating Economies Synergy

Growth Diversification Utilization of Tax Shields Increase in Value Elimination of Competition Better Financial Planning Economic Necessity


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Types of Mergers:-

1.Horizontal Merger

When two or more companies dealing insame product or service join together,

known as horizontal Merger.

Reason:

To avoid competition b/w the units.


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2.Vertical Merger

A merger of firms engaged at different stagesof production or distribution of the sameproduct or service.

Reason:

To take up two diff. stages of work to ensure

speedy production or quick service.


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3.Conglomerate merger

When two concerns dealing in totally

different activities join hands it will be a

case of conglomerate merger.

Reason:

To diversify the activities.


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LEGAL AND PROCEDURAL ASPECTS OF

MERGER Analysis of proposal by the

companies

Determining Exchange ratio

Approval of board of directors

Approval of Shareholders

Consideration of interest of theCreditors

Approval by the court

Clearance by Government

S h & S i


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Search & Screening

Search focuses on how & where to lookfor suitable candidates for acquisition.

A few candidates are short listed &

detailed information about them isobtained.

Merger objectives are the basis of search& screening & include attaining fastergrowth, improving profitability, improvingmanagerial effectiveness, gaining marketpower & leadership, achieving cost

reduction etc.


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Valuation of Firms

Discounted Cash Flow Approachthe DCF approachrelates the values of the firm to the present values of itsexpected future cash flows.

First StepTo estimate the Free Cash Flow for theexplicit forecast period.

Free Cash FlowFree Cash Flow from Operation +non-operating cash flows

Free Cash Flow from operations = Gross Cash Flow -Gross Investments


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Computation of Gross Cash Flow

EBITLess: Taxes

= Net operating Profit less Adjusted Taxes (NOPLAT)

Add: Depreciation

Add: Non-Cash Charges= Gross Cash Flow


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Computation of Gross InvestmentIncrease in Net Working Capital

Add: Capital Expenditure Incurred

Add: Increase in Other Assets

= Gross Investment Computation of Non-Operating Cash Flows

Non-Operating Cash FlowsPostTax Cash Flows from itemsother than the regular operations of the firm e.g. sale profitrealized on sale of fixed assets.


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Second Step - To compute the cost of capital

K0 = Ke S/V + Kp P/V + Kd (1 - t) B/V

Where,

Ko = Weighted average cost of capital

Ke = Cost of equity capital

Kp = Cost of preference capital

Kd = Cost of debt capital

S = Market value of equity capital

P = Market value of preference capital

B = Market value of debt

V = S + P + B

T = Applicable tax rate to the firm.


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Third Step: Computing the continuing value of the firm. Continuing value

represents the value of the Free Cash Flows beyond the explicit forecastperiod.

CVn = FCFn+1 / (Kg)

Where,

CVn = Continuing value of the firm at the end of the year n.

FCFn+1 = Expected free cash flow for the year n+1K = weighted average cost of capital

G = expected perpetual growth rate of the free cash flow.


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Last step: Determination of the value of the firm.The free cash flow projections & continuing value of the firm are

discounted by the cost of capital to get the present value of thecash flows and value of non-operating assets like investmentsone added to it. Market value of all claim are deducted to arriveat the ownership value of the firm.

Deal Structuring


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Deal Structuring

A well structured deal is one in which risks,rewards, resource requirement, &responsibilities are allocated fairly amongvarious parties.

The key issues here are- Scope & duration

Legal form

Resource contributions & ownershipdetermination

Management & control

Performance measurement & monitoring

Deal Structuring


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Deal Structuringcontd.

Dispute resolution mechanism

Revision of the agreement

Termination of the agreement

Transfer of interest

Handling of confidential information

Allocation of tax burden & savings Regulatory compliances

F f Fi i M


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Forms of Financing a Merger:-

The choice of the means depends upon

the financial position and liquidity of

the acquiring firm, its impact on capital

structure and EPS, availability of debtand market conditions.


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Forms of financing:

1. Cash OfferAdvantage:

It will not cause any dilution in the ownershipas well as EPS of the company.

2. Equity share FinancingIdeal method in case the PE ratio of theacquiring company is very high ascompared to acquired company.


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3.Debt and Preference Share Financing

Finance a merger thru issue of fixed interestbearing convertible debentures and

convertible preference shares bearing a fixed

rate of dividend.

4. Deferred Payment or Earn-Out plan


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Brief history


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Brief history

Leveraged buyouts have had a notorioushistory, especially in the 1980s when severalprominent buyouts led to the eventualbankruptcy of the acquired companies. This was

mainly due to the fact that the leverageratiowas nearly 100% and the interest paymentswere so large that the company's operating cashflows were unable to meet the obligation.


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The purposes of debt financing for leveraged buyouts

are: The use of debt increases (leverages) the

financial return to the private equity

sponsor. Tax benefit


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Some important points regarding LBOs

In an LBO, there is usually a ratio of 90%debt to 10% equity.

Lobs today focus more on growth and

complicated financial engineering toachieve their returns.

Most leveraged buyout firms look to

achieve an internal rate of return in excessof 20%.


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As of 2006, the largest LBO to date was the acquisition of HCAInc. in 2006 by Kohlberg Kravis Roberts & Co. (KKR), Bain &Co., and Merrill Lynch.

It can be considered ironic that a company's success (in theform of assets on the balance sheet) can be used against it as

collateral by a hostile company that acquires it. For this reason,some regard LBOs as an especially ruthless, predatory tactic.

LBO Mechanics


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LBO Mechanics

The first stageof operation consists of raisingthe cash required for the buyoutand devising amanagement incentive system. About 10 percent of the cash is put up by investor group and50-60 per cent is raised by borrowing againstthe company's assets in secured bankacquisition loans. The LBO represents debt

bonding activity.


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In the second stageof operation, the

organizing sponsor group may adopt thestock purchase format or asset purchaseformat. In the stock purchase format, allthe company's outstanding shares arepurchased and a new company is formed.

A new private company purchases all theassets of the company.


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In the third stageof operation the management strives to

increase profits and cash flows by reducing operating costs andaltering market strategies to help LBO bonds managers to meetnewly set targets.

The investor group in the fourth stagemay take the companypublic if the company is strong and the goals of the group areachieved.

Norms for leverage buyouts


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Norms for leverage buyouts

The Reserve Bank o f Ind iais expected tocome out with guidelines for financingleveraged buyouts. The norms are

expected to encourage public sectorbanks to finance mergers and acquisitions(M&A).

the RBI is expected to tell banks to put inplace transparent leveraged buyout rulesapproved by their boards.

Notable leveraged buyout firms


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Notable leveraged buyout firms

Apollo Management Bain Capital The Blackstone Group The Carlyle Group Goldman Sachs Capital Partners (PIA)

Hellman & Friedman Kohlberg Kravis Roberts (KKR) Madison Dearborn Providence Equity Partners Silver Lake Partners Thomas H. Lee Partners TPG Capital, L.P. Warburg Pincus Caxton-Iseman Capital, LLC


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Post Merger Integration


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A horizontal merger or acquisition requires adetailed planning for integration. Integration Plan: After the merger or acquisition,

the acquiring company should prepare a detailedstrategic plan for integration based on its own andthe acquired companys strengths and weakness.

Communication: The integration plan should becommunicated to all employees.

Authority and Responsibility: The first step that the

acquiring company should take is to take allemployees into confidence and decide theauthority and responsibility relationships.

Post Merger Integrationcontd.


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Cultural integration: Management should focus the culture integration of theemployees. A proper understanding of the cultures of two organisations, clear

communication and training can help to bridge the cultural gaps. for skill and competencies up-gradation through training and implement it immediately. Structural Adjustments: After affecting the cultural integration and skills up-gradation,

management may design the new organisation structure and redefine the roles,authorities and responsibilities. Management should be prepared to make adjustmentsto accommodate the aspirations of the employees of the acquired company.

Control system: Management must ensure that it is in control of all resources andactivities of the merged firms.


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Pooling of Interest Method


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Pooling of Interest Method

In the Pooling of Interests Method ofaccounting, the balance sheet items and theprofit and loss items of the merged firms arecombined without recording the effects of

merger.


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Illustration (Rs. in crore)

Firm T Firm S Combined Firm

Assets

Net fixed assets 24 37 61Current assets 8 13 21

Total 32 50 82

Liabilities

Shareholders Fund 10 18 28Borrowings 16 20 36

Current liabilities 6 12 18

Total 32 50 82

Purchase Method


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Purchase Method

Under the purchase method, the assets &liabilities of the acquiring firm after theacquisition of the target firm may be stated

at their existing carrying amounts or at theamounts adjusted for the purchase pricepaid to the target company. The assets &

liabilities after merger are generallyrevalued under the purchase method.


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Firm S acquired Firm T by assuming all its assets and liabilities. The fairvalue of Firm Ts fixed assets and current assets is Rs. 26 crore and Rs.7crore. Current liabilities are valued at book value while the fair value ofdebt is estimated to be Rs. 15 crore. Firm S raises cash of Rs. 15 crore topay to Ts shareholders by issuing shares worth Rs. 15 crore to its ownshareholders. The balance sheets of the firms before acquisition and theeffect of acquisition are shown in Table. The balance sheet of firm S (theacquirer) after acquisition is constructed after adjusting assets, liabilities andequity.


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Illustration (Rs. in crore)

Firm T Firm S Firm S afterMerger

Assets

Net fixed assets 24 37 63Current assets 8 13 20

Goodwill - - 3

Total 32 50 86

LiabilitiesShareholders Fund 10 18 33

Borrowings 16 20 35

Current liabilities 6 12 18

Total 32 50 86

Restructuring through Privatization


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g g

Going private means converting acompany whose stock is publicly held intoa private company. The small group of

investors, with incumbent managementhaving a substantial stake, usually holdsthe private companys stock. The

ownership change is typically brought outby buying out the shares held by thepublic.


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Several factors may prompt management to take acompany private:A public company has to incur considerable costs in

providing investors with periodical reports, holdingshareholder meetings, communicating with financial

analysts, fulfilling various statutory obligations, and soon. These are substantially saved by going private.

The fixation on quarterly earnings may deflect themanagement of a public company from the goal of long-term value creation. Going private may bring long-termvalue creation into sharper focus.

Due diligence


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the business' past and forecast financial performance

accounts

valuation of property and other assets

legal and tax compliance

major customer contracts

intellectual property protection

Due diligence, by definition, is the verification of allinformation given to a company by any prospective

business associate.

Due Diligence Process

The Due Diligence Process is likely to cover the following:

Due diligence


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Why Due Diligence?

Unfortunately, deceptive people are a fact of doing business today. Manypeople misrepresent themselves and their intentions.

For example, in order to secure a deal, a company may

overstate its capabilities,

inflate its assets,

camouflage its lack of financial stability,

or even neglect to reveal bankruptcy, civil or criminal actions.

E l


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Example

A large mortgage broker, Empire Mortgage, was planning to purchase a

smaller brokerage.

Before signing the final papers, the CEO of Empire Mortgage decided to

conduct a due diligence investigation, which revealed a trail of criminal

behavior by the smaller brokerages principal officer. Included were three

indictments for

trafficking in cocaine

possession with intent to sell

and delivering controlled substances

It also revealed a conviction for domestic violence.

Due to these unsuspected findings, Empire dropped its acquisition plan,

possibly saving itself from exposure to fraud, embezzlement, or worse.


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Due diligence reduces risk by ensuring the credibility of all companies and

individuals with whom a company conducts business

Companies that are wise conduct due diligence investigations routinely to

verify information and uncover discrepancies, overstatements, and unrevealed

facts. This extra check ensures that everyone involved in a proposed

relationship is accurately presented.

Restructuring of Sick Enterprises


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Widely used in both the developed and developing countriesnowadays. To achieve a higher level of performance. To survive when the given structure becomes dysfunctional.

Takes place at different levels. At the level of the whole economy, it is a long-term response to

market trends, technological change, and macroeconomicpolicies.

At the sector level, restructuring causes change in the productionstructure and new arrangements across enterprises.

At the enterprise level, firms restructure through new businessstrategies and internal reorganization in order to adapt to newmarket requirements.

REASONS FOR SICKNESS


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Old and obsolete plant andmachinery

Outdated technology Resource crunch Low capacity utilization Excess manpower Heavy interest burden Weak marketing strategies Inherent problems of sick

taken over enterprises

Ineffective Management Financial Bungling

Stiff competition Reluctance of financialinstitutions to provide fundsfor revival/rehabilitation

High input cost Erosion of net worth due to

continuous losses


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STRATEGIES FOR RESTRUCTURING

Revival of PSEs through the process of BIFR; Financial restructuring wherever appropriate;

Formation of joint ventures by induction ofpartners capable of providing technical, financial

and marketing inputs; Infusion of fresh funds;

Organizational and business restructuring;

Manpower rationalization through approvedVoluntary Retirement Scheme (VRS);

Improved marketing strategies;

Cost control measures.


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MANPOWER RATIONALISATION


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Through approved Voluntary Retirement

Scheme(VRS).

Appointment of experts/core specialists

Intra and Inter organisation transfers

Accountability

Competent, skilled& trained management

Profit sharing (ESOPs)


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The Art Of Takeover Defense

The warning signals


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g g

Suddenly minority shareholders get interested inbusiness affairs

Company becomes object of various inspections

by bodies of state control Becomes target of negative publicity

Small transactions of shares have considerablyincreased

Other companies in industry effected by raiders

Unsolicited offers to sell shares

Types of Takeover Defenses


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Charter amendments supermajority: 67% or more of votes

necessary to approve control change

fair fair- -price: price: supermajority clausecan be avoided if supermajority clause can beavoided if price is high enough (P/E or P/B)

staggered board: only 1/K of board is electedeach year

poison pills: something to kill sharks that areeager to eat



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Litigation- if some activities of target (or bidder) firm areregulated it may slow down successful bid

Asset Restructuring "Crown Jewel" defense: contract to sell attractive assets to third

party bidder contingent on hostile bid

"Pac Man" defense: make competing tender offer forshares of bidder

Leveraged Recapitalizations: partial LBO leavingequity holders with much riskier claim

ESOPs: employees get equity claim in the firm butemployees get equity claim in the firm, but managementvotes the shares of the stock in the ESOP



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Golden Parachutes lump sum payments to target management if fired

due to takeover due to takeover

usually small relative to size of deal, so probably not

much deterrence effect

Greenmail:(targeted share repurchases,usually at a premium) often linked with "standstill

agreements" -- bidder will go away White Knights

Costs of using defenses are:


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Transaction costs (lawyers, investmentbankers, etc.)

May deter some deals that would have

been profitable with weaker defenses, butaren't now

entrenchment is easier

hard (impossible) to measure deals that neverget tried


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GREENMAIL

Greenmail


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Greenmail:Situation in which a large block ofstock is held by an unfriendly company. Thisforces the target company to repurchase the

stock at a substantial premium to prevent atakeover. It is also known as a "Bon VoyageBonusor a "Goodbye Kiss".

Not unlike blackmail, this is a dirty tactic, but it'svery effective

Greenmail


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Definition: Greenmail or greenmailing is acorporate acquisition strategy for

generating large amounts of money fromthe attempted hostile takeovers of large,often undervalued or inefficient companies.

Two divergent views of Greenmails


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Two divergent views of Greenmails

1. Greenmailers damage shareholders

Large block investors are corporate "raiders"

who expropriate corporate assets Raiders' voting power used to give themselves

excessive compensation and perquisites

Raiders receive substantial premium, "looting"

corporate treasury


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2. Greenmail brings about improvements

Large block investors involved in greenmailforce improvements in corporate personnel orin corporate strategies and policies

Large block investors have stronger incentivesand superior skills for evaluating potentialtakeover targets

Managers make greenmail payments to buytime to turn around the firm


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Greenmail sometimes accompanied by

standstill agreement Voluntary contract in which blockholder

agrees not to make further investments intarget company during specified period oftime

If no targeted repurchase is made, largeblockholder agrees not to further increase

ownership percentage of the firm


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Greenmail and standstill agreement

Negative returns standstill agreementviewed as reducing probability of subsequenttakeover

40% of firms experience subsequent control

change within three years of greenmail evenwith standstill agreement

Positive market reaction if greenmailviewed as giving directors more time to

work out better solution


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Greenmail


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Example: Raider takes large stake incompany, express interest in takeover

Management resists, offers to buy him out

at large premium over market price. Raider gets huge profits without even

bidding for firm. Managers keep jobs.

Shareholders get drop in market price oftheir stock.

Greenmail Example


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Bass Bros. acquire 9.9% of Texaco stock,expressed interest in the other 90.1%.

Texaco paid $1.3 billion ($55 per share), $137million over market price.

Outside shareholders got $35 per share.

Example


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Disneys buyback of 11.1 percent of its stockfrom Saul Steinbergs Reliance Group in 1984,which gave Steinberg a quick $60 million profit.The day the buyback was announced, the price

of Disneys stock dropped approximately 10percent.

A group of stockholders sued, and Steinbergand the Disney directors were forced to pay $45million to Disney stockholders.


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ACCOUNTING FOR

SHARE CAPITAL

A h i d i l f


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1. An authorized capital refers to

(a) Paid up value of all shares

allotted

(b) Called up value of all shares

allotted

(c) Nominal value of all shares

offered to public.

(d) That amount which is stated in the

capital clause of the Memorandum

of Association as the Share Capital

1 An authorized capital refers to


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1. An authorized capital refers to

(a) Paid up value of all shares

allotted


allotted


offered to public.

(d) That amount which is stated in the

capital clause of the Memorandum

of Association as the Share Capital


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2. Under the Capital Clause of the Memorandum ofAssociation of the Company, it is must to

state

(a) The division of share capital

into shares of fixed amount.

(b) The division of the authorized

capital into different classes of

shares.

(c) The rights of various classes of

shareholders

(d) None of these

2 U d th C it l Cl f th M d f


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2. Under the Capital Clause of the Memorandum ofAssociation of the Company, it is must to

state

(a) The division of share capital

into shares of fixed amount.

(b) The division of the authorized

capital into different classes of

shares.

(c) The rights of various classes of

shareholders

(d) None of these

3 I d C it l f t


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3. Issued Capital refers to

(a) Paid up value of all shares allotted.


allotted.


allotted.

(d) Nominal value of all shares

offered to public

3 I d C it l f t


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3. Issued Capital refers to

(a) Paid up value of all shares allotted.


allotted.


allotted.

(d) Nominal value of all shares

offered to public


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4 Equity Shares can be issued


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4. Equity Shares can be issued

(a) With proportionate voting rightsonly

(b) With differential voting rights

only

(c) With differential right as todividend and voting

(d) None of these

5 P ti i ti P f Sh i hi h


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5. Participating Preference Share is one whichcarries

(a) A right to receive arrears of dividend

(b) A rights to participate in the surplus

profits and surplus assets

(c) A right to participate in the surplus

profits or surplus assets or both

(d) A right to conversion into equityshare

5 P ti i ti P f Sh i hi h


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5. Participating Preference Share is one whichcarries

(a) A right to receive arrears of dividend

(b) A rights to participate in the surplus

profits and surplus assets

(c) A right to participate in the surplus

profits or surplus assets or both

(d) A right to conversion into equityshare

6 U l th i t t d th f


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6. Unless otherwise stated, the preferenceshares are deemed to be

(a) Non-cumulative,Non-participatingand Non-convertible.

(b) Cumulative, Non-participatingand Convertible.

(c) Cumulative, Participating and

Non- convertible

(d) None of the above


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7 Prospectus of a company is


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(a) An application for shares /debentures

(b) An offer by the company to the

public to sell its shares ordebentures

(c) An invitation to make an offer to

subscribe the shares of debenturesof the company

(d) All of above



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(a) An application for shares /debentures

(b) An offer by the company to the

public to sell its shares ordebentures


subscribe the shares of debenturesof the company

(d) All of above

8 An application of shares is


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8. An application of shares is

(a) An acceptance of an offer totake shares made by the

company in its prospectus

(b) An offer to take shares made byan applicant


take shares

(d) None of these

8 An application of shares is


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8. An application of shares is

(a) An acceptance of an offer totake shares made by the

company in its prospectus

(b) An offer to take shares made byan applicant


take shares

(d) None of these

9 A company can issue shares at premium


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9. A company can issue shares at premium

(a) if the Articles authorise thecompany to do so

(b) even in the absence anyexpress authority in itsarticles

(c) if the Memorandum authorise the

company to do so

(d) None of these

9. A company can issue shares


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9. A company can issue shares

at premium

(a) if the Articles authorise thecompany to do so

(b) even in the absence anyexpress authority in itsarticles

(c) if the Memorandum authorise the

company to do so

(d) None of these

10. One of the conditions regarding


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g g

issue of shares at a discount is

(a) The issue must be authorised by a

special resolution of the company.

(b) The sanction of the Court must be

obtained.

(c) At least one year must have lapsed

since the date on which the company

was incorporated.

(d) None of the above.

10. One of the conditions regarding


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issue of shares at a discount is

(a) The issue must be authorised by a

special resolution of the company.

(b) The sanction of the Court must be

obtained.

(c) At least one year must have lapsed

since the date on which the company

was incorporated.

(d) None of the above.

11 If some shares are issued to a vendor who


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11. If some shares are issued to a vendor whosupplied a fixed asset, these shares are

(a) not required to be disclosed.

(b) required to be disclosed

separately under sub-headissued capital.

(c) required to be disclosed

separately under sub-headauthorised capital.

(d) None of these.

11 If some shares are issued to a vendor who


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11. If some shares are issued to a vendor whosupplied a fixed asset, these shares are

(a) not required to be disclosed.

(b) required to be disclosed

separately under sub-headissued capital.

(c) required to be disclosed

separately under sub-headauthorised capital.

(d) None of these.


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12. Maximum amount that can be collected as

premium as a percentage of face value = ?

(a) 5%

(b) 25%

(c) 100%

(d) Unlimited

12 Maximum amount that can be collected as


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12. Maximum amount that can be collected aspremium as a percentage of face value = ?

(a) 5%

(b) 25%

(c) 100%

(d) Unlimited


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Issue of

Debentures


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1. Which debentures are secured by a charge


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(a) Debentures which are convertible on or after 18months

(b) Non

convertible debentures which areredeemable after18 months

(c) None of these

2 Debentures interest -


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2. Debentures interest

(a) Is payable only is case of profits

(b) Accumulates in case of losses or inadequate profits

(c) Is payable after the payment of preference dividendbut before the payment of equity dividend

(d) Is payable before the payment of any dividend onshares

2 Debentures interest -


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2. Debentures interest

(a) Is payable only is case of profits

(b) Accumulates in case of losses orinadequate profits

(c) Is payable after the payment ofpreference dividend but before thepayment of equity dividend

(d) Is payable before the payment ofany dividend on shares

3. Convertible Debentures are those debentureswhich are


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(a) Convertible into equity shares only atthe option of debenture holders

(b) Convertible into equity shares only at the option ofcompany only

(c) Convertible into equity shares only at the option ofdebenture holders or company

(d) Convertible into any securities at the option of debentureholders or company

3. Convertible Debentures are those debentureswhich are


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(a) Convertible into equity shares only atthe option of debenture holders

(b) Convertible into equity shares only at the option ofcompany only

(c) Convertible into equity shares only at the option ofdebenture holders or company

(d) Convertible into any securities at the option of debentureholders or company

4. Which of the following is false?


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(a) A company can issue redeemable debentures(b) A company can issue debentures with voting rights

(c) A company can buy its own shares

(d) A company can buy its own debentures.

4. Which of the following is false?


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(a) A company can issue redeemable debentures(b) A company can issue debentures with voting rights

(c) A company can buy its own shares

(d) A company can buy its own debentures.

5. In case of an issue of a debenture of Rs


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5. In case of an issue of a debenture of Rs

100 at Rs 110, Rs 10 is to be credited to:

(a) Securities Premium Account

(b) Debenture Premium Account(c) Capital Redemption Reserve Account

(d) Debenture Redemption Reserve

Account

5. In case of an issue of a debenture of Rs 100

at Rs 110, Rs 10 is to be credited to:


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(a) Securities Premium Account

(b) Debenture Premium Account

(c) Capital Redemption Reserve Account

(d) Debenture Redemption Reserve

Account


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6. Debenture Redemption Premium

Account is a


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(a) Personal Account

(b) Real Account

(c) Nominal Account(d) None of these

7. In the Balance Sheet of a Company


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Debenture Redemption Premium Account appears

under the head:

(a) Share Capital

(b) Reserves & Surplus(c) Secured Loans

(d) Miscellaneous Expenditure

(e) Unsecured Loans

7. In the Balance Sheet of a Company



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under the head:

(a) Share Capital

(b) Reserves & Surplus

(c) Secured Loans

(d) Miscellaneous Expenditure

(e) Unsecured Loans

8. Interest on Debentures is


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calculated on

(a) Its face value

(b) Its issue price

(c) Its book value

(d) Its cost price

(e) Its market value


calculated on


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calculated on

(a) Its face value

(b) Its issue price

(c) Its book value

(d) Its cost price

(e) Its market value

9. In Balance Sheet of a Company, Interest accrued


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p y,

but not due on debentures appears under the

head

(a) Secured Loans

(b) Unsecured Loans

(c) Current Liabilities Provisions

(d) Contingent Liabilities

9. In Balance Sheet of a Company, Interest accrued

but not due on debentures appears under the head


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(a) Secured Loans

(b) Unsecured Loans

(c) Current Liabilities Provisions

(d) Contingent Liabilities


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Thank You

Please forward your query

To: [email protected]

CC: manoj amity@panafnet com
mailto:[email protected]:[email protected]

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