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CORPORATERESTRUCTURING
PRESENTED BY
AMIT KUMAR
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Profitable growth constitutes one of prime objectiveof most of the business organizations.
It can be done by two methods-
Internal Through the process of introducing or developing
new products
By expanding or enlarging capacity of the
existing product(s).External
By acquisitions of existing business firms in the
form of Mergers, Acquisitions, Amalgamations,
Takeovers, Consolidations, Etc.
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Merger :
two companies becoming one.
usually mutual between both firms.
Amalgamation:
It is an arrangement in which the assets/liabilities of two or more firms
become vested in another firm. As a legal process, it involves joining of two
or more firms to form a new entity.
Acquisition:
A corporate action in which a
company buys most, if not all, of the target
company's ownership stakes in order to
assume control of the target firm.
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Takeover:It implies acquisition of controlling interest in company by another company.
It does not lead to dissolution of the company whose shares are being/have
been acquired.
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Horizontal merger: It is a merger when two or more firms dealing in similar lines of activity combine
together.
e.g. Orissa power supply co. merged with BSES Ltd.
e.g. The merger of ACC (erstwhile Associated Cement Companies Ltd.) with
Damodar Cement
Vertical merger: It is a merger that involves two or more stages of production/distribution
that usually separate.
Conglomerate merger: It is a merger in which firms engaged in different unrelated activities
combine together.
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Economies of scale: The operating cost advantage in terms of economies of scale is
considered to be the primary objective for mergers. They result in
low average cost of production and sales due to higher level of
operations.
Synergy: It results from complementary activities.
Fast growth: A merger often enables the amalgamating firm to grow at a rate
faster than is possible under the internal expansion route.
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Diversification: A major advantage, especially in a conglomerate merger.
The merger between two unrelated firms would tend to reduce
business risk.
The greater the combination of statistically independent income
streams of the merged companies, the higher will be the reduction inthe business risk factor and the greater will be the benefits of
diversification.
Limitation:
A merger may not turn out to be a financially profitable proposition inview of non-realisation of potential economies in terms cost
reduction.
The management of two companies may not go along because of
friction.
It attract government antitrust action in terms of the competition Act.
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Determining the firm value:
The value of firm depends not only upon its earning but also upon
the operating & financial characteristics of the acquiring firm. To
determine an acceptable price for a firm, a numbers of factors are
relevant.
Book value: It is based on the balance sheet value of the owners equity.
Determined dividing net worth by number of equity shares
outstanding. Appraisal value:
This value is acquired from an independent appraisal agency.
Normally based on the replacement cost of asset.
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.Determining the firm value
Market value: The current quoted price at which investors buy or sell a share of
common stock or a bond at a given time. Also known as "market
price".
The market capitalization plus the market value of debt.
Sometimes referred to as "total market value".
Earning per share: The portion of a company's profit allocated to each outstanding
share of common stock. Earnings per share serves as an
indicator of a company's profitability. Calculated as:
net profit dividends on preferred stock
number of outstanding shares
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After the value the firm has been determined, the next step is the choice
of method of payment of the acquired firm.
The payment take the form of cash or securities, i.e. ordinary shares,
convertible securities, etc.
Ordinary share financing: It implies that the financing of merger is done by the use of ordinary
shares.
The price-earning ratio of two firms are an important consideration. For a firm having high P/E ratio, ordinary shares represent an ideal
method for financing mergers.
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Debt & preference share financing: In an attempt to tailor a security to the requirement of investor who
seek dividend/interest income in contrast to capital growth,
convertible debenture and preference shares might be issued.
It has several advantage:
1) Potential earning dilution may be partially minimised by issuing
a convertible security.
2) Convertible security represent a possible way of lowering the
voting power of the targeting company.
Deferred payment plan: Besides making an initial payment, the acquiring firm also
undertakes to make additional payment in future years to the target
firm in the event of being able to increase earnings consequent to
the merger.
It is also known as EARNOUT PLAN since it is linked to the firms
earning.
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Tender offer: It involves bid by the acquiring firm for controlling interest in the
acquired firm.
Purchaser approaches shareholder of the firm rather than the
management to encourage them to sell their shares generally at a
premium over the current market price.
Prior approval of the management of target firm is not required.
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The merger should be evaluated as a capital budgeting decision.
The target firm should be valued in terms of its potential to generate
incremental future free cash flows.
The decision criteria is to go for merger if NPV is positive.
The following are the steps used to evaluate merger decision as per
the capital budgeting approach:
1) Determination of incremental projected free cash flows to the
firm(FCFF).
FCFF = after tax operating earning
+ non-cash expenses, such as depreciation
- investment in long term assets
- investment in net working capital
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2) Determination of appropriate discount rate/cost of capital.
3) Determination of present value of FCFF.
4) Determination of cost of acquisition.
It can be determined as
payment to equity shareholder.
+ payment to preference shareholder.
+ payment to debenture holder.
+ payment to other external liabilities.
+ obligations assumed to be paid in future.
+ dissolution expenses.
- cash proceed from sale of assets of target firm.
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Tax concession to amalgamated company: Carry forward and set off business losses.
Expenditure on scientific research.
Expenditure on acquisition of patent rights or copy rights.
Expenditure on know-how. Expenditure for obtaining license to operate telecommunication services.
Preliminary expenses. Bad debt.
Tax concession to amalgamating company: Free of capital gain tax.
Free of gift tax
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Meaning of demerger: it means the transfer, by the demerged company, of
one or more of its undertaking to any resulting company.
Tax concession to resulting company:
Carry forward and set off business losses. Expenditure on acquisition of patent rights or copy rights.
Expenditure on know-how.
Expenditure for obtaining license to operate telecommunication services.
Preliminary expenses.
Bad debt.
Expenditure related to demerger.
Tax concession to demerged company: Free of capital gain tax.
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Acquisition/takeover It implies acquisition of controlling interest in a company by another
company/group.
It can assumes three forms:
Negotiated/friendly takeover:
o A situation in which a target company's management and board of
directors agree to a merger or acquisition by another company.
o E.g. Mannesmann takeover by Vodafone.
Open market/hostile:
o A hostile takeover is an acquisition in which the company being
purchased doesnt want to be purchased, or doesnt want to be
purchased by the particular buyer that is making a bid.
o Hostile takeovers only work with publicly traded companies.o E.g. The most famous recent proxy fight was Hewlett-Packards
takeover of Compaq.
Bail out:
o A bailout is an act of giving capital to an entity (a company, a country,
or an individual) in danger of failing in an attempt to save it frombankruptcy, insolvency, or total liquidation .
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Other forms of Corporate
RestructuringFinancial restructuring: Financial restructuring is the reorganization of the financial assets and
liabilities of a corporation in order to create the most beneficial financial
environment for the company.
The process of financial restructuring is often associated with corporate
restructuring, in that restructuring the general function and composition
of the company is likely to impact the financial health of the corporation.
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..........Other forms of Corporate Restructuring
Divestiture: Eliminating a division or subsidiary that does not fit strategically
with the rest of the company.
It can be done by
Spin-off:
separating a subsidiary from its parent company, with no change
in equity ownership. The parent firm no longer has control over the subsidiary.
Split-up:
A single company splits into two or more separately run companies.
Shares of the original company are exchanged for shares in the newcompanies.
An effective way to break up a company into several independent
companies.
After a split-up, the original company ceases to exist.
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