CORPORATE RESTRUCTURING ANDLEVERAGED BUY-OUTS

Presented by:Hardeep Singh (9)

Iqra Rashid (10)

INTRODUCTION

Corporate restructuring can make a business more appealing to prospective stakeholders because such a financial management tactic typically decreases expenses, improves operational effectiveness, raise EPS and provides a foundation for much better overall operational results.

• Businesses, just like people, by no means ever stop changing. Increasing competitive challenges, continuing shareholders’ requirements, management’s choices with attendant positive and negative results combined with an ever-changing legal and political ecosystem, all require that businesses continue to reinvent themselves and adjust to a constantly changing business climate.

MEANING OF 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.

• Corporate Restructuring is a comprehensive process by which a company can consolidate its business operations and strengthen its position for achieving its short-term and long-term corporate objectives. Corporate Restructuring is vital for the survival of a company in a competitive environment.

DEFINITION:

• a. Corporate restructuring can be defined as any change in the business capacity or portfolio that is carried out by an inorganic route or

• b. Any change in the capital structure of a company that is not a part of its ordinary course of business or

• c. Any change in the ownership of or control over the management of the company or a combination thereof.

• a.1 Any change in the business capacity or portfolio carried out by inorganic route.

• Tata Motors launched Sumo and later, Indica-leading to an expansion of its business portfolio. However, these products were launched from Tata Motor’s own manufacturing capacity in through an organic route. Hence, it would not qualify as ‘corporate restructuring’

• Tata Motors acquisition of Jaguar Land Rover from Ford, through Jaguar Land Rover Limited is ‘corporate restructuring’

• a.2 Change in the business portfolio could also be in the nature of reduction of business handled by a company.

In the case of Grasim and L&T, the demerger of L&T’s cement business into UltraTech Cement Limited was reduction of its business portfolio and thus, amounted to ‘corporate restructuring’ of L&T.

b. Any change in the capital structure of a company that is not in the ordinary course of its business.

(a) Car finance loan (b) Scheduled repayment of a term loan, etc. keeps on

changing the debt-equity ratio within planned or targeted range. Such changes do not qualify as Corporate Restructuring.

• (a) An initial public issue• (b) Follow-on public issue• (c) buy-back of equity shares may alter the capital structure of

a Company permanently. Such activities are not in the ordinary course of business of company- amounts to corporate restructuring.

c. Any change in the ownership of a company or control over its management

a) Merger of two or more companies belonging to different promoters

b) Demerger of a company into two or more with control of the resulting company passing on to other promoters

c) Acquisition of a company d) Sell-off of a company or its substantial assets e) Delisting of a company

All these would qualify to be called exercises in ‘corporate restructuring’.

EXAMPLE OF CORPORATE RESTRUCTURING

•Grasim’s proposed merger of Cement Businesses achieves many other important objectives like strengthening Promoter Group’s control over cement business, improving future cash flow position, etc.

GRASIM- PRE RESTRUCTURING

GRASIM-POST RESTRUCTURING

REASONS FOR CORPORATE RESTRUCTURING

• To enhance liquidity • To lower the cost of capital

• To reduce risk • To avoid loss of control

• To improve shareholder value

PROCESS FOR CORPORATE RESTRUCTURING

• While looking at the concept of corporate restructuring, there is process to make it successful in achieving its stated objectives. For that a company must understand the objectives which are to be achieved and put forward the options or their opinions to achieve them. On selecting the appropriate option, a company can execute the same.

NEEDS OF CORPORATE RESTRUCTURING:

1) To expand the business or operations of the company. 2) To carry on the business of the company more economically or

more efficiently. 3) To focus on its core strength4) Cost Reduction, by deriving the benefits of economies of scale.5) To obtain tax advantages by merging a loss-making company

with a profit-making company. 6) To have access to better technology. 7) To improve the debt-equity ratio. 8) To have a better market share. 9) To overcome significant problems in a company.

1) MERGER

• Merger is an arrangement whereby the assets of two or more companies become vested in or under the control of one company, which may or may not be one of the original two companies, which have as its shareholders, all or substantially all, the shareholders of the two companies. A merger is a transaction that results in the transfer of ownership and control of a corporation.

• It is when one company purchases another company of an approximately similar size. The two companies come together to become one. Two companies usually agree to merge when they feel that they can do something together that they can’t do on their own. “Combining of two or more commercial organizations into one in order to increase efficiency and sometimes to avoid competition”.

TYPES OF MERGER

HORIZONTAL MERGER A merger occurring between companies producing similar

goods or offering similar services. This type of merger occurs frequently as a result of larger companies attempting to create more efficient economies of scale.

VERTICAL MERGER A merger between two companies producing different goods

or services for one specific finished product. This type of merger occurs in between firms that have actual or potential buyer- supplier relationship.

CONGLOMERATE MERGER

A merger between firms that are involved in totally unrelated business activities is known as conglomerate merger. Example- a simple example would be American Broadcasting Company (ABC) which has highest broadcasting channels joining Waltdisney that creates cartoon characters to promote cartoon channels in America.

2) REVERSE MERGER

• It is when a private company purchases control of a public company and then carries out a merger with a private company. With a reverse merger, the private company shareholders receive most of the shares of the public company and control of the Board. A reverse merger is a quick way of going public with the time-table being only a couple of weeks. The reason a reverse merger is so quick is that the public company has already completed all the necessary paper-work and reviews in order to become public.

3) CONSOLIDATION

• The combining of two or more firms to form an entirely new entity is known as consolidation. Assets and liabilities of the firms are absorbed by the new company. In a consolidation, two or more companies merge to form one new, larger company. All of each company's assets and liabilities then become the property of the new company. In consolidation, two or more corporations come together to form a completely new corporation.

• Example- company A and Company B consolidate to form company C.

4) ACQUISITION• Acquisition is when one firm buys the assets or shares of

another firm. It is also called takeover. In this process of restructuring, one company overpowers the other company and the decision is mainly taken during downturns in economy or during declining profit margins.

• It implies the acquiring firm is larger than the target. It can be friendly or hostile.

• The combined operations then run under the name of the powerful entity who also takes over the existing stocks of the other company.

5) AMALGAMATION • It is the process of combining or uniting multiple entities into

one form. The term amalgamation is not defined under the Companies’ Act, 1956.

• Generally speaking, amalgamation is a legal process by which two or more companies are joined together to form a new entity or one or more companies are to be absorbed or blended with another.

• As a consequence, the amalgamating company loses its existence and its shareholder becomes the shareholder of the new or amalgamated company.

6) JOINT VENTURE• A contractual agreement joining together two or

more parties for the purpose of executing a particular business undertaking is known as joint venture. Two parties, (individuals or companies), incorporate a company in India.

• The business of one party is transferred to the company and, as a consideration for such a transfer; shares are issued by the company and subscribed by that party. The other party subscribes to the shares in cash. The parties subscribe to the shares of the joint-venture company in agreed proportion, in cash, and start a new business.

• All parties agree to share in the profits and losses of the enterprise. The parties in the JV share in the management, profits, and losses, according to a joint venture agreement (contract). Joint ventures are often entered into for a single purpose - a production or research activity. But they may also be formed for a continuing purpose.

EXAMPLE

• Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones.

• The stated reason for this venture is to combine Sony's consumer electronics expertise with Ericsson's technological leadership in the communications sector. Both companies have stopped making their own mobile phones.

7) BUY-BACK OF SECURITIES

• The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares in the market is called buy-back of securities. Companies will buy back shares either to increase the value of shares still available or to eliminate any threats by shareholders who may be looking for controlling powers.

• In other words, Buyback is the reverse of issue of shares by a company where it offers to take back its shares owned by the investors at a specified price; this offer can be binding or optional to the investors.

SHARE BUY-BACK is when a company makes an offer to buy-back some of its own shares.

There are several types of buy-backs. Three common types

are: • an equal access scheme - when the company offers to buy

back the same proportion of each shareholders shares;

• a selective buy-back - when the company offers to buy back shares from only one or some of its shareholders; or,

the company may buy the shares on the exchange where the shares are traded.

8) DELISTING OF SECURITIES

• To be able to understand the meaning of delisting, one has to first understand the meaning of the word “Listing”. Listing means admission of a Company’s securities to the trading platform of a Stock Exchange, so as to provide marketability and liquidity to the security holders.

COMPANYSTOCK

EXCHANGESLISTING

• “Delisting” is totally the reverse of listing. To delist means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be tradeable at that stock exchange.

• "Delisting" i.e. the said removal from a Stock Exchange, may be Voluntary (i.e. at the will of the Company) or Compulsory (i.e. out of a penal action by the Stock Exchanges, for the reason of any violations/ lapses).

DELISTING

STOCK EXCHANGE

S

COMPANIES

9) DEMERGER

• The act of splitting off a part of an existing company to become a new company, which operates completely separate from the original company is known as demerger. Shareholders of the original company are usually given an equivalent stake of ownership in the new company.

• A demerger is often done to help each of the segments operate more smoothly, as they can now focus on a more specific task.

TYPES OF DEMERGER

Split off

Spin off

Split up

Equity-carved out

Divestitures

SPIN OFFS

• It is a kind of Demerger when an existing Parent Company distributes on a pro rata basis all the shares it owns in a controlled Subsidiary to its own shareholders.

• It results into two separate public corporations with same equity ownership proportion as earlier. No money transaction is involved. Subsidiary’s assets are not revalued.

• Transaction is treated as Stock Dividend and tax-free exchange.

08/04/2023Spin Offs & Split UpsSpin Offs

Shareholders own shares of combined company. Own the equity in subsidiary implicitly.

Company A without Subsidiary B

Subsidiary B

08/04/2023Spin Offs & Split Ups

Spin Offs

Company A after spinoff

New company BShareholders receive Shares of company B

Old shareholders still own shares of company A, which now only represent

ownership of A without B.

EXAMPLE:-

• THE PEPSI SPIN-OFF• Reduced Profitability

▫ Pepsi losing ground to Coke.▫ Pepsi’s Pizza Hut and KFC chains under intense pressure from

competitors ( McDonald and Burger King )• Spin-Off

▫ In 1997, PepsiCo spun-off (100%) KFC, Pizza Hut, and Taco Bell into a separate corporation – Tricon Global Restaurants Inc.

• Spun-Off its bottling operation into an independent Public Company.• Result

▫ Better focus on Pepsi beverage operations and Frito Lay snack business.

▫ Its concentration and bottling setup looking a lot more like Coke.

SPLIT UPS

• It is the division of a company into two or more parts through transfer of stock and parent company ceases to exist. Accomplished usually by initial carve-outs and spin-offs of individual parts from one or more core activities.

• In a split-up, the existing corporation transfers all its assets to two or more new controlled subsidiaries, in exchange for subsidiary stock. In other words, a single company splits into two or more separately run companies.

EXAMPLE • HEWLETT-PACKARD AND AGILENT• Initial Public Offering – First stage of Split-Up On November 18, 1999, HP completed $2.2 billion IPO of its Test and

Measurement Equipment subsidiary, Agilent Technologies.• Spin-Off• Spun-off Agilent in 1999 for the more promising computer business.• Cause

▫ Asian Economic crisis, Low sales growth

Result▫ Avoid overlap of capabilities between the computer business and

the instrumentation business.▫ More focus on producing computers.

08/04/2023Spin Offs & Split UpsSplit Up

Example of Split-ups in Indian companies:-

RELIANCE INDUSTRIES Reliance Industries was split into 5 listed companies in the year 2005-06.

Mukesh Ambani-Reliance

Industries

Anil Ambani-Reliance

Communications,Reliance Natural

Resources,Reliance Energy,Reliance Capital

SPLIT-OFF

• Split-offs is a type of reorganization where the stock of a subsidiary is offered in exchange for shares in the parent company. In a split-off, the parent company offers its shareholders the opportunity to exchange their Parent Co shares for new shares of a subsidiary (Split Co).

• This tender offer often includes a premium to encourage existing Parent Co shareholders to accept the offer. If the tender offer is oversubscribed, meaning that more Parent Co shares are tendered than Split Co shares are offered, the exchange is conducted on a pro-rata basis.

• If the tender offer is undersubscribed, meaning that too few Parent Co shareholders accept the tender offer, Parent Co will usually distribute the remaining unsubscribed Split Co shares pro-rata via a spin-off.

EXAMPLE- Parent Co might offer its shareholders $11.00 worth of Split Co stock in exchange for $10.00 of Parent Co stock (a 10% premium).

EQUITY CARVED OUT• In an equity carve-out, the parent company (Parent Co) sells a

portion of its interest (equity stock) in a subsidiary (Sub Co) to the public in an initial public offering. Also known as an IPO carve-out or Split off IPO.

• A newly publicly listed company is created, but the parent keeps a controlling stake in the newly traded subsidiary. Subsidiary’s shares are offered for sale for increasing cash inflow.

Company before Equity carve-out

Company A without subsidiary B

Subsidiary B

Stock Market

Company after Equity carve-out

Company A without subsidieary B

Portion ofSub B equity

Not sold

Stock Market

X % ofCo.

B shares

X % of sub B equity soldTo market for cash

In IPO

DIVESTITURE

• Disposition or sale of an asset by a company is called divestiture. A company will often divest an asset which is not performing well, which is not vital to the company's core business. In other words a divestiture or divestment is the reduction of an asset or business through sale, liquidation, exchange, closure, or any other means for financial or ethical reasons. It is the opposite of investment.

EXAMPLE:• Let's assume Company XYZ is the parent of a food company, a car

company, and a clothing company. If for some reason Company XYZ wants out of the car business, it might divest the business by selling it to another company, exchanging it for another asset, or closing down the car company.

CONCLUSION

• The restructuring usually takes place when a business is struggling and losing money. A third party will be brought in to assess the way that the business is being run, and then make recommendations based on what they found that will help make the business run more efficiently.

• A strong corporate restructuring firm will have experts in a wide variety of areas that can examine all aspects of a business to help find solutions. A good corporate restructuring firm will not just identify problems of where money is being lost, but also offer solutions that a company can implement in order to solve those problems.

LEVERAGED BUYOUT

LEVERAGED BUYOUT

• A leveraged buyout (LBO) is an acquisition (usually of a company but it can also be single assets like a real estate) where the purchase price is financed through a combination of equity and debt and in which the cash flows or assets of the target are used to secure and repay the debt. As the debt usually has a lower cost of capital than the equity, the returns on the equity increase with increasing debt. The debt thus effectively serves as a lever to increase returns which explains the origin of the term LBO.

• LBOs are a very common occurrence in today's "Mergers and Acquisitions" (M&A) environment. The term LBO is usually employed when a financial sponsor acquires a company. However, many corporate transactions are part-funded by bank debt, thus effectively also representing an LBO.

• LBOs mostly occur in private companies, but can also be employed with public companies (in a so-called PtP transaction, Public to Private).

Contd.

Contd.

•As financial sponsors increase their returns by employing a very high leverage (i.e., a high ratio of debt to equity), they have an incentive to employ as much debt as possible to finance an acquisition. This has in many cases led to situations, in which companies were "overlevered", meaning that they did not generate sufficient cash flows to service their debt, which in turn led to insolvency or to debt-to-equity swaps in which the equity owners lose control over the business and the debt providers assume the equity.

Contd. • A leveraged buyout or LBO is a type of aggressive

business practice whereby investors or a larger corporation utilizes borrowed funds (junk bonds, traditional bank loans, etc.) or debt to finance its acquisition.

• Both the assets of the acquiring corporation and acquired company function as a form of secured collateral in this type of business deal.

• In addition, any interest that accrues during the buyout will be compensated by the future cash flow of the acquired company. Other terms used synonymously with an LBO are “hostile takeover,” “highly-leveraged transaction,” and “bootstrap transaction.”

GOING PRIVATE

• Once the control of a company is acquired, the firm is then made private for some time with the intent of going public again. During this “private period,” new owners (the buyout investors) are able to reorganize a company’s corporate structure with the objective of making a substantial profitable return.

• Some comprehensive changes include downsizing departments through layoffs or completely ridding unnecessary company divisions and sectors. Buyout investors can also sell the company as a whole or in different parts in order to achieve a high rate on returns.

MANAGEMENT BUYOUTS OR MBO• The most common buyout agreement is the management

buyout or MBO. In this corporate arrangement, the company’s management teams and/or executives agree to “buyout” or acquire a large part of the company, subsidiary, or divisions from the existing shareholders.

• Due to the fact that this financial compromise requires a considerable amount of capital, the management team often employs the assistance of venture capitalists to finance this endeavour. As with traditional leveraged buyouts, the company is made private and corporate restructuring occurs.

An MBO can occur for a number of reasons; e.g.,

• The owners of the business want to retire and want to sell the company to the management team they trust (and with whom they have worked for years)

• The owners of the business have lost faith in the business and are willing to sell it to the management (who believes in the future of the business) in order to get some value for the business

• The managers see a value in the business that the current owners do not see and do not want to pursue

PROS AND CONS OF LEVERAGED BUYOUTS

CORPORATE RESTRUCTURING

• Pros- One positive aspect of leveraged buyouts is the fact that poorly managed firms prior to their acquisition can undergo valuable corporate reformation when they become private. By changing their corporate structure (including modifying and replacing executive and management staff, unnecessary company sectors, and excessive expenditures), a company can revitalize itself and earn substantial returns.

• Cons- Corporate restructuring from leveraged buyouts can greatly impact employees. At times, this means companies may have to downsize their operations and reduce the number of paid staff, which results in unemployment for those who will be laid off. In addition, unemployment after leveraged acquisition of a company can result in negative effects of the overall community, hindering its economic prosperity and development. Some leveraged buyouts may not be friendly and can lead to rather hostile takeovers, which goes against the wishes of the acquired firms’ managers.

(corporate restructuring) Contd.

(corporate restructuring) Contd.

• An example of a hostile takeover occurred when the PepsiCo acquired the Quaker Oats Company, an American food company well-known for its breakfast cereals and oatmeal products. In 2001, PepsiCo, in an attempt to diversify its portfolio in non-carbonated drinks, primarily acquired Quaker Oats because QO owned the Gatorade brand. Even though this merger created the fourth-largest consumer goods company in the world, many of Quaker Oats’ managers were against the acquisition, claiming that such a merger was unlawful and contrary to the public interest.

SMALL AMOUNT OF CAPITAL REQUIREMENTS

•Pros- Since this type of acquisition involves a high debt-to-equity ratio, large corporations can easily acquire smaller companies with very little capital. If the acquired company’s returns are greater than the cost of the debt financing, then all stockholders can benefit from the financial returns, further increasing the value of a firm.

• Cons- However, if the company’s returns are less than the cost of the debt financing, then corporate bankruptcy can result. In addition, the high-interest rates imposed by leveraged buyouts may be a challenge for companies whose cash-flow and sale of assets are insufficient. The result cannot only lead to a company’s bankruptcy but can also result in a poor line of credit for the buyout investors

(small amount of capital requirements )Contd.

• An example of an unsuccessful leveraged buyout is the

Federated Department Stores. The Federated Department Stores had many stores nationwide and tailored primarily to high-end retailers. However, they lacked an effective marketing strategy. In 1989, Robert Campeau, a Canadian financier, bought out Federated with the hope to make considerable changes. Only one year later, and only after some reforms, Federated could not keep up with the financial burdens of high interest payments and had to file bankruptcy for 258 stores.

(small amount of capital requirements )Contd.

MANAGEMENT BUYOUT

• Pros- As mentioned earlier, management buyout of a company is a common business practice. Often times, MBOs occur as a last resort to save an enterprise from permanent closure or replacement of existing management teams by an outside company. Many analysts strongly believe management buyouts greatly promote executive and shareholder interests as well as management loyalty and efficiency.

•Cons- Not every MBO turns out to be successful as planned. Management buyouts can generate substantial conflicts of interest among employees and managers alike. Management and executive teams can easily be lured to propose a short-term buyout for personal profit. In addition, they can also corruptly mismanage a company, leading to an enterprise’s depreciated stock.

(management buyout) Contd.

• An example of a successful management buyout is Springfield Remanufacturing Corporation, or SRC, an engine remanufacturing plant located in Springfield, Missouri. In 1983, SRC was at risk for permanent closure and was being bought by an outside company until their employees decided to buyout the company. The management buyout of SRC resulted in extreme success. Since 1983, it has grown exponentially from one company within $10,000 of being shut down to a proud assembly of 23 small businesses with a combined profit of over $120 million today.

(management buyout) Contd.

ECONOMY

•Pros- Every leveraged buyout can be considered risky, especially in reference to the existing economy. If the existing economy is strong and remains solid, then the leveraged buyout can greatly improve its chances for success.

•Cons- On the other hand, a weak economy is highly indicative of a problematic LBO. During an economic crisis, money may be difficult to come by and dollar weakness could make acquiring companies result in poor financial returns. In addition, acquisition can affect employee morale and can hinder the overall growth of a company.

(economy) Contd.

RECENT EXAMPLES OF LEVERAGED BUYOUTS

Dell readies $13-15 billion leveraged buyout debt financingFeb 5, 2013

NEW YORK: Computer maker Dell Inc is preparing a debt financing package of between $13 billion and $15 billion to back its $24.4 billion leveraged buyout, banking sources following the situation told Thomson Reuters LPC.

The final size of the debt financing depends on what portion of the company's existing notes remain outstanding, sources added.

Dell investor sues to block Michael's leveraged buyoutFeb 7, 2013

Michael Dell's offer to take Dell Inc private for $24.4 billion should be blocked because the leveraged buyout is unfair to the struggling computer company's stockholders, according to a lawsuit by an individual investor that was filed on Wednesday.

The buyout announced on Tuesday at $13.65 per share substantially undervalued the company's long-term prospects, according to the lawsuit, which seeks class action status to represent all Dell investors.

.

Conclusion•There are many advantages and disadvantages

concerning leveraged buyouts. •First, this type of agreement can allow many large

companies to acquire smaller-sized enterprises with very little personal capital.

•Second, since corporate restructuring can take place, the acquired company can benefit from necessary reorganization and reform. In addition, management buyout can prevent a company from being acquired by external sources or from being shut down completely.

However, there are many disadvantages imposed by LBOs as well.

• Often times, the restructuring can lead a company to downsize and can even result in hostile takeovers.

• The high interest rates from the high debt-to-equity amounts can result in a corporation’s bankruptcy, especially if the company is not generating substantial returns after acquisition.

• Lastly, management buyouts can produce conflicts of interest among employees, executives, and management teams as well as possible mismanagement by the buyout owners. With the potential for enormous profit, it is no wonder that leveraged buyout strategies expanded throughout the 1980s and have recently made a comeback in modern corporate America.

REFERENCESWeston, J. Fred. (2002). Takeovers, Restructuring & Corporate Governance. Delhi: Pearson Education.

Verma, J.C. (1997). Corporate Mergers, Amalgamations & Takeovers. New Delhi: Bharat Publishing House.

Vishwanath, Krishnamurthy. (2008). Mergers, Acquisitions and Corporate Restructuring. Sage Publications Pvt. Ltd.

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