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The Companies Act, 1956 is a voluminous piece of legislation on the statute book with 658 sections and 14 schedules. However, there are only seven sections here on corporate restructuring including mergers, de mergers etc. Although corporate re-engineering physically occupies a small portion of the Companies Act comprising barely seven sections from 390 to 396A therein, yet its impact on industry and commerce has been far reaching. These provisions have been borrowed from the English Companies Act and have withstood the test of times. Compromise, arrangement, reconstruction and amalgamation Chapter V of the Companies Act deals with schemes of compromises, arrangements and reconstructions covering Sections 390 to 396A. Arrangement has a very wide meaning and is wider than compromise. Compromise hints at some element of accommodation on each side. Arrangement or reconstruction describes any form of restructuring of the company for its betterment and includes merger of two or more companies and the division of one company into two or more companies. Generally in such schemes the rights of the concerned creditors and members have to be curtailed. The value of the provisions of the said Chapter V of the Companies Act is clearly evident where dissenting stakeholders are concerned. For reduction of rights individual agreement with or consent of each affected member or creditor would have been required. In such eventuality, dissenting or untraced members or creditors, though in a minority, could frustrate any arrangement. The provisions of statutory scheme ensure that such minority become bound by the restructuring exercise supported by the affected majority for betterment of the company and cannot scuttle it. Powers of Court to sanction compromise or arrangement According to Section 391 (1) where a compromise or arrangement is proposed between a company on one hand and its creditors or a class of them or with its members or a class of them, the Court may on an application of concerned member or creditor order a meeting of the creditors or members or concerned class of them, as the case may be for consideration of such proposals. Such proposals for compromise or arrangement under Section 391 of the Companies Act can also involve a scheme of reconstruction or amalgamation of companies by virtue of Section 394 of the said Act.
Reconstruction here is a generic term, which also includes within its ambit division, takeover, spin offs, divestitures etc. of corporate enterprises. Under Section 391 (2) if a majority in number of, however, at least 3/4th in value of such creditors or members, as the case may be, present and voting either in person or by proxy agree, such compromise or arrangement shall be binding and enforceable, if sanctioned by the Court. However, no order sanctioning any arrangement or compromise shall be made by the Court unless it is satisfied that the company or any person by whom the application is made has disclosed to the Court by affidavit or otherwise that all material facts relating to the company, such as its latest financial position, the latest auditors report on the accounts of the company, particulars of any pending investigation or proceedings in relation to the company under Sections 235 to 251 of the said Act and the like. Under Section 391 (3) the order of the Court shall not have any effect unless a certified copy of the same has been filed with the Registrar of Companies of the State in which the registered office of the company is situated. Under Section 391 (6) the Court may at any time after the application has been made stay the commencement or continuation of any suit or proceedings against the company on such terms the Court thinks fit, until the application is finally disposed of.
Transaction Structure
Below is a simple diagram of an LBO structure. The new investors (e.g. and LBO firm or management of the target) form a new corporation for the purpose of acquiring the target. The target becomes a subsidiary of NewCo, or NewCo and the target can merge.
Returns
In LBO transactions, financial buyers seek to generate high returns on the equity investments and use financial leverage (debt) to increase these potential returns. Financial buyers evaluate investment opportunities with by analyzing expected internal rates of return (IRRs), which measure returns on invested equity. IRRs represent the discount rate at which the net present value of cash flows equals zero. Historically, financial sponsors' hurdle rates (minimum required IRRs) have been in excess of 30%, but may be as low as 15-20% for particular deals under adverse economic conditions. Hurdle rates for larger deals tend to be a bit lower than hurdle rates for smaller deals. Sponsors also measure the success of an LBO investment using a metric called "cash-on-cash" (CoC). CoC is calculated as the final value of the equity investment at exit divided by the initial equity investment, and is expressed as a multiple. Typical LBO investments return 2.0x - 5.0x cash-on-cash. If an investment returns 2.0x CoC, for example, the sponsor is said to have "doubled its money". The returns in an LBO are driven by three factors, which we demonstrate in our topic on creating value in LBOs: De-levering (paying down debt) Operational improvement (e.g. margin expansion, revenue growth) Multiple expansion (buying low and selling high)
Risk
Equity holders In addition to the operating risk assumed risk arises due to significant financial leverage. Interest costs resulting from substantial amounts of debt are "fixed costs" that can force a company into default if not paid. Furthermore, small changes in the enterprise value (EV) of a company can have a magnified effect on the equity value when the company is highly levered and the value of the debt remains constant. Debt holders The debt holders bear the risk of default equated with higher leverage as well, but since they have the most senior claims on the assets of the company, they are likely to realize a partial, if not full, return on their investments, even in bankruptcy.
Exit Strategies
Ideally, an exit strategy enables financial buyers to realize gains on their investments. Exit strategies most commonly include an outright sale of the company to a strategic buyer or another financial sponsor, an IPO, or a recapitalization. A financial buyer typically expects to realize a return on its LBO investment within 3 to 7 years via one of these strategies.
Exit Multiples
The value of a company acquired in an LBO transaction is often value at the time of acquisition using valuation multiples (e.g. EV/EBITDA). While exiting the investment at a multiple higher than the acquisition multiple will help boost a sponsor's IRR, it is difficult to justify a prediction that the exit multiple will be higher than the entry multiple (known as "multiple expansion"). It is important that exit assumptions reflect realistic approaches and multiples (exit multiples should generally equal acquisition multiples) for analytical purposes, and multiple expansion is usually an unjustifiable assumption.
Company-specific characteristics: Strategic positioning within the industry (market share) Growth opportunity Operating leverage Sustainability of operating margins Potential for margin improvement Level of maintenance CapEx vs. growth CapEx Working capital requirements Minimum cash required to run the business Ability of management to operate effectively in a highly levered situation
Market conditions: Accessibility and cost of bank and high yield debt Expected equity returns
A joint venture takes place when two parties come together to take on one project. In this type of project, both parties are equally invested in the project in terms of money, time, and effort to build on the original concept. While joint ventures are generally small projects, major corporations also use this method in order to diversify. Working in this way can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a jointsetup allows both parties to share the burden of the project, as well as the resulting profits. A joint venture is not to be taken lightly. For a businessperson to embark on one, he or she needs to be committed and willing to work cooperatively with the other party involved. A person involved in this type of agreement can no longer make all of the decisions for the business alone. For it to be truly a joint project there has to be 100% commitment from both sides.
What is a joint venture? A joint venture is a strategic alliance where two or more parties, usually businesses, form a partnership to share markets, intellectual property, assets, knowledge, and, of course, profits. A joint venture differs from a merger in the sense that there is no transfer of ownership in the deal. This partnership can happen between goliaths in an industry. Cingular, for instance, is a strategic alliance between SBS and Bellsouth. It can also occur between two small businesses that believe partnering will help them successfully fight their bigger competitors. Companies with identical products and services can also join forces to penetrate markets they wouldn't or couldn't consider without investing tremendous resources. Furthermore, due to local regulations, some markets can only be penetrated via joint venturing with a local business. In some cases, a large company can decide to form a joint venture with a smaller business in order to quickly acquire critical intellectual property, technology, or resources otherwise hard to obtain, even with plenty of cash at their disposal.
How does a joint venture work? The process of partnering is a well-known, time-tested principle. The critical aspect of a joint venture does not lie in the process itself but in its execution. We all know what needs to be done: specifically, it is necessary to join forces. However, it is easy to overlook the "hows" and "whats" in the excitement of the moment. We will look at the "hows" in our review of the Eight Critical Factors of Success. For the moment, let's keep in mind that all mergers, large or small, need to be planned in detail and executed following a strict plan in order to keep all the chances of success on your side. The "whats" should be covered in a legal agreement that will carefully list which party brings which assets (tangible and intangible) to the joint venture, as well as the objective of this strategic alliance. Although joint venture legal agreement templates can readily be found on the Internet, I suggest you seek the appropriate legal advice when entering such a business relationship.
access to new markets and distribution networks increased capacity sharing of risks and costs with a partner access to greater resources, including specialised staff, technology and finance
Joint ventures often enable growth without having to borrow funds or look for outside investors. You may be able to use your joint venture partner's customer database to market your product, or offer your partner's services and products to your existing customers. Joint venture partners also benefit from being able to join forces in purchasing, research and development. A joint venture can also be very flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting the commitment for both parties and the business' exposure. Joint ventures are especially popular with businesses in the transport and travel industries that operate in different countries.
the objectives of the venture are not totally clear and communicated to everyone involved the partners have different objectives for the joint venture there is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners different cultures and management styles result in poor integration and co-operation the partners don't provide sufficient leadership and support in the early stages
Success in a joint venture depends on thorough research and analysis of aims and objectives. This should be followed up with effective communication of the business plan to everyone involved
The next section or sections should provide a brief description of each company involved in the joint venture. Companies should describe their management teams, resources, or goods available and any other details pertinent to the joint venture business plan. Essentially, a profile is necessary to describe the partners in the agreement. It is crucial for each company to demonstrate their expertise and reason for inclusion in the joint venture. A statement on the purpose of the joint venture may be necessary as well.
Market strategies are also a section in the joint venture business plan. The plan needs to define the market the goods and services will target. This section may contain detailed analysis, graphs, and other information that define the market and show why the joint venture will be a success. In most cases, companies in the agreement will collaborate on this section to put together analysis from each partner. The length and detail will depend on the purpose of the joint venture; a competitive analysis may also be present here. A final section in the joint venture business plan should be financial projections. The section will include information specific to product prices and cost of goods or services sold, expected sales and profits, and potential expenses from the activities. Pro forma financial statements may also be included here. The statements are a formal look at potential profits and allow banks or lenders to assess the ventures probability for success. Other statements or documents may also fall in this section.
Fully Integrated
A fully integrated joint venture closely resembles a merger. In this arrangement, firms integrate all of their functions, from manufacturing to sales. They may integrate functions in just one area of business, such as a particular product line, or all areas.
Purchasing
An agreement to purchase goods together gives both firms more marketing power. They typically purchase goods at a lower rate by purchasing them in larger amounts, which they divide between each other. Firms can also reduce costs by storing goods together and sharing the administrative staff who monitor the inventory.
Networking
In some industries, joint ventures between numerous firms create a network that better serves customers. The telecommunications, banking and transportation industries are examples of networking joint ventures. For example, banks use large networks to process credit card transactions and allow customers access to their funds via ATMs.
The Disadvantages of Joint Ventures It takes time and effort to build the right relationship and partnering with another business can be challenging. Problems are likely to arise if: The objectives of the venture are not 100 per cent clear and communicated to everyone involved. There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners. Different cultures and management styles result in poor integration and co-operation. The partners don't provide enough leadership and support in the early stages. Success in a joint venture depends on thorough research and analysis of the objectives.
Embarking on a Joint Venture can represent a significant reconstruction to your business. However favourable it may be to your potential for growth, it needs to fit with your overall business strategy. It's important to review your business strategy before committing to a joint venture. This should help you define what you can sensibly expect. In fact, you might decide there are better ways to achieve your business aims. You may also want to study what similar businesses are doing, particular those that operate in similar markets to yours. Seeing how they use joint ventures could help you decide on the best approach for your business. At the same time, you could try to identify the skills they use to partner successfully. You can benefit from studying your own enterprise. Be realistic about your strengths and weaknesses - consider performing strengths, weaknesses, opportunities and threats analysis (swot) to identify whether the two businesses are compatible. You will almost certainly want to identify a joint venture partner that complements your own skills and failings. Remember to consider the employees' perspective and bear in mind that people can feel threatened by a joint venture. It may be difficult to foster effective working relationships if your partner has a different way of doing business. When embarking on a joint venture its imperative to have your understanding in writing. You should set out the terms and conditions agreed upon in a written contract, this will help prevent misunderstandings and provide both parties with strong legal recourse in the event the other party fails to fulfil its obligations while under contract.
A written Joint Venture Agreement should cover: The parties involved The objectives of the joint venture Financial contributions you will each make whether you will transfer any assets or employees to the joint venture Intellectual property developed by the participants in the joint venture Day to day management of finances, responsibilities and processes to be followed. Dispute resolution, how any disagreements between the parties will be resolved How if necessary the joint venture can be terminated. The use of confidentiality or non-disclosure agreements is also recommended to protect the parties when disclosing sensitive commercial secrets or confidential information.
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. EDIT [03/03/2012]: This joint venture agreement is no more available.
Virgin Mobile India Limited is a cellular telephone service provider company which is a joint venture between Tata Tele service and Richard Branson's Service Group. Currently, the company uses Tata's CDMA network to offer its services under the brand name Virgin Mobile, and it has also started GSM services in some states.
While partnership can last for many years till the parties involved have no differences, companies involve in a joint venture for only a limited period till their goal has been achieved. In a joint venture, the members have come together for some specific purpose, while in a partnership the members have joined together for only business. Another difference that the joint venture and partnership have is with regard to tax. One of the main differences is regarding the Capital Cost Allowance. The members in a partnership can claim CCA as per the partnership rules. Joint ventures on the other hand can use as much or as little of the CCA as they wish. There is no need to file returns in a joint venture but it has to be filed in partnership. In Partnership, the members cannot act as per their wishes and they do not have any individual identity; they belong to a group. However, a member of the joint venture can retain the identity of his firm or property. Summary 1. Joint venture involves two or more companies joining together in business. In partnership, it is individuals who join together for a combined venture.
2. A Joint Venture is a contractual arrangement between two companies, which aims to undertake a specific task. Partnership involves an agreement between two parties wherein they agree to share the profits and losses.
3. The members in a partnership can claim CCA as per the partnership rules. Joint ventures on the other hand can use as much or as little of the CCA as they wish.