CORPORATE RESTUCTURING

Corporate restructuring is necessary when a company needs to improve its efficiency and profitability and it requires expert corporate management. A corporate restructuring strategy involves the dismantling and rebuilding of areas within an organization that need special attention from the management and CEO.

The process of corporate restructuring often occurs after buy-outs, corporate acquisitions, takeovers or bankruptcy. It can involve a significant movement of an organizations liabilities or assets.
A significant modification made to the debt, operations or structure of a company. This type of corporate action is usually made when there are significant problems in a company, which are causing some form of financial harm and putting the overall business in jeopardy. The hope is that through restructuring, a company can eliminate financial harm and improve the business.

Corporate restructuring are generally categorized into two types of restructuring: Operational restructuring Financial restructuring

Operational Restructuring refers to the outright or partial scale of companies or product lines or downsizing by closing unprofitable or nonprofit able facilities. Financial Restructuring describes actions by the firm to change its total equity and debt structure. Financial restructuring includes share repurchase or adding debt to either lower the corporations overall cost of capital or as a part of an antitakeover defense.

MERGER
Mergers can be described from either of perspectives such as legal perspective & an economic perspective. According to the legal perspective: A merger is a two or more firms in which all but one legally cease to exit, and the combined organization continues under the original name of the surviving firm.

In a typical merger share holders of the target firm exchange the shares for those of acquiring firm ,after the share holders vote approving the merger. Minority share holders, those are not favor of the merger, are required to accept the merger and exchange their shares for those of the acquirer.

If the Parent Firm is the primary shareholder in the subsidiary the merger does not require approval of the parents shareholder in majority of the states.such a merger is called a short form of merger. A Statutory merger is one which is aquiring company assumes that the assets and liabilities of the target in accordance with the statutes of the state in which the combined companies will be incorporated.

A Subsidiary merger involves the target becoming a subsidiary of the parent to the public the target firm may be operated under its brand name ,but it will be owned and controlled by the acquirer

An Economic Perspective: An occurrence that involves the production of a union

The combination of two or more commercial companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.
Merger is depends on whether the merging firms are in the same or different industries and their positions in the corporate value chain . Horizontal merger occurs between the two firms of same industry Conglomerate merger are those in which the aquiring company purchases firms in largely unrelated industries. Vertical mergers are those in which two firms participate in different stages of production or value chain .

Congeneric merger: A merger is said to be Congeneric when two companies belong to the same industry. They however, do not have any common customer, buyer, supplier Other types of mergers include: Reverse mergers. Dilutive mergers. Accretive mergers. Tool for measuring the effect of merger on the market: A common tool used for studying the aftermath of a merger on the market conditions include the Herfindahl index. Regulatory bodies governing mergers: US Federal Trade Commission, European Commission and United States Department of Justice are some of the regulatory bodies looking into matters related to mergers.

Mergers are not without their downsides. They can consume an incredible amount of time and money, legal and tax complications, and problems with mixing corporate cultures. It has been estimated that fully 50 percent never achieve the initial financial and market goals projected. Interestingly, this percent has remained relatively stable over the past 40 years in spite of the growth of mergers as a viable option for businesses. The quest for growth and pressure to grow Internal growth initiatives do not materialize, or there are no other organic growth options, merger transactions prove to be the only way to create growth. External pressure can also force managers to initiate additional Merger transactions. The demand for double-digit growth from analysts and investors becomes hard to satisfy. Being a consolidator Companies also engage in Mergers in order to survive. Promoters of Merger come up with alleged opportunities and the motive to buy companies in order to prevent competitors from doing so is always difficult to evaluate.

Steps in a Merger There are three major steps in a merger transaction: planning, resolution, implementation. 1. Planning, which is the most complex part of the merger process, entails the analysis, the action plan, and the negotiations between the parties involved. The planning stage may last any length of time, but once it is complete, the merger process is well on the way. More in detail, the planning stage also includes: signing of the letter of intent which starts off the negotiations; the appointing of advisors who play the role of consultants, examining the strengths, weaknesses, opportunities, and threats of the merger; detailing the timetable (deadline), conditions (share exchange ratio), and type of transaction(merger by integration or through the formation of a new company); expert report on the consistency of the share exchange ratio, for all of the companies involved.

2. The resolution is simply management's approval first, then by the shareholders involved in the merger plan. The resolution stage also includes: the Board of Directors calling an extraordinary shareholders meeting whose item on the agenda is the merger proposal; the extraordinary shareholders meeting being called to pass a resolution on the item on the agenda; any opposition to the merger by creditors and bondholders within 60 days of the resolution; green light from the Italian Antitrust Authority, that evaluates the impact of the merger and imposes any obligations as a prerequisite for approving the merger.

3.Implementation is the final stage of the merger process, including enrolment of the merger deed in the Company Register. Normally medium-sized/big mergers require one year from the start-up of negotiations to the closing of the transaction. This is because, in addition to the time needed technically, there are problems relating to the share exchange ratio between the merging companies which is rarely accepted by the parties without drawn-out negotiations. During the merger process, share prices will adjust to the share exchange ratio. On the effective date of the merger, financial intermediaries will enter the new shares with the new quantities in the dossiers. The shareholders may trade without constraint the new shares and benefit from all rights (dividends, voting rights).

The reciprocation of the target company, the approach of the acquiring company plays a vital role in the entire process.

The commencement of the process of mergers is marked with a "tender offer".

A tender offer is an offer wherein the purchase of all or some of the shares belonging to the shareholders is intended. The price fixed for the same is of a premium rate as compared to the market price. The laws formulated by the SEC or Securities And Exchange Commission necessitates that if a company or an individual acquires 5% stock in a company, the same should be conveyed to the SEC. A tender offer may either be a "friendly" one or an "unfriendly" one. A company, which intends to acquire a company eventually buys out all the shares of the target company. However the limit is restricted to only 5% and the outstanding shares are reported as SEC. Declaration about the number of shares are made before the SEC. The total price the acquiring company is ready to pay for the target company and its assets is worked out with assistance from investment bankers as well as the financial advisors. Thereafter the tender offer is published informing the shareholders about the offer price as well as deadlines for either rejecting the offer or accepting it.

Reaction of the target company:

The target company responds to the above course of action in any one of the following ways: (I) Agree with the Offer terms: In the event it is felt by the top level executives and managers that the offer price may be accepted, the deal of merger is struck. (II) Try to negotiate: If the terms offered by the acquiring company is not acceptable, then the shareholders of the target company will try to negotiate the deal of merger. The shareholders and the top level management of the subject company will try to work out issues so that they do not lose their jobs and simultaneously see the interest of the target company.

(III) Looking for a White Knight: A White Knight is referred to another company, which would like to go for a friendly take over of the subject company, thereby saving the target or the subject company from falling prey to that company, which is intending for a hostile takeover of the target company.
(IV) Using a Poison Pill: The target company uses a Poison pill wherein it attempts to make its assets or shares less appealing to the company, which is attempting the tale over. The target company may do it by two methods: (a) By using a "flip in": Permits the prevailing shareholders of the target company to buy shares at a discounted rate. (b) By using a "flip over": Permits the shareholders to buy stakes of the acquiring company at a discounted rate after the merger has taken place.

Closure of the deal of merger:

When the tender offer has been finally agreed upon by the target company and after fulfilling certain regulatory criteria, the deal of merger is executed wherein some kind of transaction takes place. During the course of the transaction, the company, which buys the target company makes payment with stock, cash or with both.

Impact of mergers
On employees On top management On share holders
The Shareholders of the acquiring firm. The shareholders of the target firm.

Differences between mergers and acquisition.

Mergers Acquisition Two firms together form a new company. One firm takes over another and establishes its power as the single owner The relatively less powerful, smaller firm loses its existence, and the firm taking over, runs the whole business with its own identity. Unlike the merger, stocks of the acquired firm are not surrendered, but bought by the public prior to the acquisition, and continue to be traded in the stock market. In an unfriendly deal, where the stronger firm swallows the target firm, even when the target company is not willing to be purchased, then the process is labeled as acquisition.

After the merger, the separately owned companies become jointly owned and obtain a new single identity. Generally, mergers take place between two companies of more or less same size. In these cases, the process is called Merger of Equals. When a deal is made between two companies in friendly terms, it is typically proclaimed as a merger, regardless of whether it is a buy out.

Reasons
Enhancing company productivity. There is also a general tendency that the merged companies would monopolize the market, thereby ousting others. Political factors. Cutting down expenses and increasing revenues. When a company is not self sufficient to operate on its own. Hindrances may be in the form of insufficient investment capacity, excessive competition due to which the company is not able to keep pace with other companies. Under such circumstances, the subsidiaries may merge with the parent company for better output.

Costs of Mergers
Costs of Mergers are calculated in order to check to the viability and profitability of any Merger deal. The different methods adopted for this cost calculation are the Replacement Cost Method, Discounted Cash Flow Method and Comparative Ratio calculation method.

Replacement Costs actually refers to the cost of replacing the target firm. Generally, Target company's value is calculated by adding the value of all the equipments, machinery and the costs of salary payments to the employees. So, the company which wishes to acquire the target firm, offers price accounting to this value. But, if the target firm does not agree on the price offered, then the other firm can create a competitor firm with same costing. So, this idea of cost calculation is referred as the calculation of Replacement Cost. But, it should be mentioned here that, in case of the firms, where the main assets are not equipments and machinery, but people and their skills, this type of cost calculation is not possible.

The other methods that are followed in calculating Costs of Mergers, are the methods of Discounted Cash Flow Method and Comparative Ratio calculation Method. In Discounted Cash Flow Method, weighted average costs of capital are calculated, while in Comparative Ratio calculation method, Price- Earnings Ratio and Enterprise Value to Sales Ratio are calculated.

Merger Accounting
Merger and acquisition accounting is done either by the purchase or pooling of interests methods. There are some differences between these two accounting methods
Purchase Method The asset and liabilities of the merged company are presented at their market values as on the date of acquisition, in order to ensure that the resulting values of the accounting process are able to reflect the market values. This refers to the value, which was recorded before the final settlement of the acquisition deal at the time of bargaining. In this process, the total liabilities of the joint company equals the sum of individual liabilities of the two separate firms. The purchase price then determines the amount by which the acquiring firm's equity is going to increase. However, one of the drawbacks with purchase method is the chance that it may overrate depreciation charges. This is because the book value of assets used in accounting is generally lower than the fair value if there is inflation in the economy. Pooling of Interests Method In this method, transactions are considered as exchange of equity securities. Here, assets and liabilities of the two firms are combined according to their book value on the acquisition date. The total asset value of the joint company equals the sum of assets of the separate firms. In this case, the accounting income is found to be higher than in the purchase method, as the depreciation in the pooling method is calculated based on the historical book value of assets.

 An acquiring firm should pursue a merger only if it creates some real economic values which may arise from any source such as better and ensured supply of raw materials, better access to capital market, better and intensive distribution network, greater market share, tax benefits etc. The financial evaluation of a target candidate, therefore, includes the determination of the total consideration as well as the form of payment, i.e., in cash or securities of the acquiring firm.

 Valuation based on assets. Valuation based on earnings. Market value approach. Earnings per share. Share exchange ratio. Other methods of valuation.

The worth of the target firm, no doubt, depends upon the tangible and intangible assets of the firm. The value of a firm may be defined as:Value of all assets External Liabilities = Net Assets

The assets of firm may be valued on the basis of the book values or realizable values

BOOK VALUE OF THE ASSETS

In this case, the values of various assets given in the latest balance sheet of the firm are taken as worth of the assets. From the total of the book values of all the assets, the amount of external liabilities is deducted to find out the net worth of the firm.

The net worth may be divided by the number of equity shares to find out the value per share of the target firm.

 In this case, the current market prices or the realizable values of all the tangible and intangible assets of the target firm are estimated and from this the expected

external liabilities are deducted to find out the net

worth of the target firm.

VALUATION BASED ON EARNINGS

In the earnings based valuation, the PAT (Profit after taxes) is multiplied by the Price Earnings ratio to find out the value. MARKET PRICE PER SHARE = EPS * PE RATIO The earnings based valuation can also be made in terms of earnings yield as follows:EARNINGS YIELD = EPS/MPS *100 Earnings valuation may also be found by capitalizing the total earnings of the firm as follows:VALUE = EARNINGS/ CAPITALIZATION RATE * 100

MARKET VALUE APPROACH

This approach is based on the actual market price of securities settled between the buyer and seller. The price of a security in the free market will be its most appropriate value.

Market price is affected by the factors like demand and supply and position of money market.
Market value is a device which can be readily applied at any time.

According to this approach, the value of a prospective merger or acquisition is a function of the impact of merger/acquisition on the earnings per share. As the market price per share is a function (product) of EPS and Price- Earnings Ratio, the future EPS will have an impact on the market value of the firm.

SHARE EXCHANGE RATIO

The share exchange ratio is the number of shares that the acquiring firm is willing to issue for each share of the target firm. The exchange ratio determines the way the synergy is distributed between the shareholders of the merged and the merging company. The swap ratio also determines the control that each group of shareholders will have over the combined firm.

METHODS OF CALCULATION
BASED ON EARNINGS PER SHARE (EPS) Share Exchange Ratio = EPS of the target firm / EPS of the Acquiring firm BASED ON MARKET PRICE (MP) Share Exchange Ratio = MP of the target firms share / MP of the Acquiring firms share BASED ON BOOK VALUE (BV) Share Exchange Ratio = BV of share of the target firm / BV of share of the Acquiring firm

OTHER METHODS OF VALUATION

ECONOMIC VALUE ADDED EVA is based upon the concept of economic return which refers to excess of after tax return on capital employed over the cost of capital employed. MARKET VALUE ADDED MVA is another concept used to measure the performance and as a measure of value of a firm. MVA is determined by measuring the total amount of funds that have been invested in the company (based on cash flows) and comparing with the current market value of the securities of the company.

 Cash offer Equity share financing or exchange of shares Debt and preference share financing Deferred payment or earn out plan Leveraged buy-out Tender offer

BENEFITS AND COSTS OF MERGER

The advantages of synergy of merger and the resultant expectation of risk reduction may affect both the acquiring firm and the target firm. If synergy is perceived to exist in a takeover, the value of a combines firm would be greater than the sum of the values of the target firm and the acquiring firm. V (AT) > V (A) + V (B)

Controlling Authorities.
NBFIs SECP Banks SBP Other High Court The Competition Commission of Pakistan (CCP-Monopoly Control Authorities) has oversight in respect of all mergers.

Legislation Dealing Mergers in a Particular Sector.

For Banking Companies. Section 48 of the Banking Companies Ordinance, 1962

For N.B.F.Cs

282L of Companies Ordinance, 1984

For Insurance Companies.

Section 67 to 71 of the Insurance Ordinance, 2000 and application to High Court

Specific Laws Dealing Mergers.

Section 287 to 289 read with Section 282L & 284 of the Companies Ordinance, 1984 applies to mergers involving companies incorporated under the laws of Pakistan. Section 2 (1A); 20 (3); 57A, 97; 97A & Clause 62 of Part IV of Second Schedule to the Income Tax Ordinance, 2001. Section 11 of Competition Ordinance, 2007.

Legislation on Foreign Investment.

Board of Investment and Foreign Exchange Regulation contain certain exceptions and restrictions for non-residents for which general or special permission is required.

Section 2 (1A) of the Income Tax Ordinance, 2001

Amalgamation
1. 2. 3. 4. 5.
means the merger of one or more

banking companies or non-banking financial institutions, or insurance companies, or companies owning and managing industrial undertakings or companies engaged in providing services and not being a trading company or companies.

In such manner that

The assets of the amalgamating company or companies immediately before the amalgamation become the assets of the amalgamated company by virtue of the amalgamation, otherwise than by purchase of such assets by the amalgamated company or as a result of distribution of such assets to the amalgamated company after the winding up of the amalgamating company or companies; and

Section 2 (1A) of the Income Tax Ordinance, 2001

The liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation

Requisite criterion
One company must be a public company or A company incorporated under Companies Ordinance,1984 or under any other law for the time being in force,

Merger/Amalgamation.
From Members/Shareholders Point of View

From the Point of View of Company to be Merged/Amalgamating.

From the Point of View of Amalgamated

Company.

From Amalgamated Company Point of View.

Tax value of assets / liabilities acquired?

S 76 - Relating to cost of purchase.

S 98C, concerning succession. The tax value of assets in the hands of amalgamating company (immediately before amalgamation) shall be taken as the tax value for amalgamated company

From Amalgamated Companys Point of View.

What about goodwill taxation?

Goodwill an intangible or capital asset a dilemma?

Treatment of goodwill? Difference between Tax-value and Accounting value of assets?

From the Amalgamated Companys Point of View.

What is the treatment of merger related expenses?

S 20(3) - Only expenditures incurred under following heads are tax deductible Legal Advisory Services Financial Advisory Services Administrative expenses Planning and Implementation of amalgamation S. 57A - In the year of amalgamation only assessed loss of the amalgamating companies for the tax year is available for the set off. The facility to set off accumulated losses of amalgamating companies has been taken away from July 01, 2007.

What about carry forward and set-off of losses sustained by the amalgamating company ?

Tax Consequence in Case of Acquisitions.

Acquirer point of view

Acquiree point of view

Acquirer Point of View.

In case of non-arms length transaction the fair market value may be treated as consideration as cost of acquisition [S. 76 & 78] Tax treatment for payment of goodwill. Tax deductibility of consideration paid under restrictive covenants ?

Acquiree Point of View.

Transfer of assets and liabilities have tax implications depending on the basis of nature of asset. Consideration may be taken at higher of the actual selling price or Fair Market Value [S. 77] Slump sale principle Applicability ? [S. 77] Consideration under restrictive covenant whether capital or revenue?

Role of tax Advisor in Mergers & Acquisitions.

International mergers and acquisitions require appropriate planning. Planning will end after consideration of domestic laws effect on home country & other country laws. Effective consideration will be whether to merge or acquire. If to acquire consideration to be given to manner of acquisition. To acquire the business as a whole, slump transaction or through shares or as an asset purchase.

Going Forward.
Consistency in Policies. Facilitate & Encourage Regional Mergers. Level Playing Field. Conducive Industrial Environment for Intra Regional Investment. Common Legislation. Removal of Trade Barriers.

A number of human resource (HR) issues surface during a merger between companies. Staff members can be affected personally if layoffs are done or if workers are relocated. Mergers take time and effort, both for the physical transfer of work equipment as well as for all affected parties to adjust to the new working environment. Human resource officers often play the middle in a merger. They secure confidential information from upper management regarding corporate goals and expected personnel shifts related to the merger, but they are often the peacemakers as well as the contact people for staff members to ask questions or address concerns. Human resources staff should establish a good rapport with both upper management and other staff members from both companies. When communicating with staff, HR representatives should be careful in word choice so as not to be condescending or challenging, and should be completely honest with them. They shouldn't make promises that can't be kept. In addition, staff should always know what is expected of them. New Business Processes After a merger, new business processes will likely be a combination of both companies business practices. Joan Lloyd recommends establishing easy and straightforward business practices first. HR reps should work with staff to handle each change step by step, and there should be an acknowledgment that changes take time to implement. The ultimate goal following a merger should be to establish synergy between the companies, within the given parameters

Mergers may require a dramatic cultural change. When one organization purchases or absorbs another, it can affect the core of the acquired organization. Financial, human capital (employees) and material assets may be scrutinized. Employees at all levels may become insecure about continued employment, demotions or decreased salaries. Human Resources may play a major role in mergers, and careful planning for a successful transition is necessary for success. Layoffs and Downsizing Main HR issues in mergers is how many employees will be affected and what time lines will be involved. In some situations, the downsizing is dramatic and the number of layoffs can be high. Employees are tense, as losing their jobs affects their ability to provide food and shelter for their families. Planning a fair method of implementing a layoff process can be challenging as the dominant company may be in charge of the decisions. This requires HR employees to remain businesslike and professional in their dealings with both companies. This issue calls for good communication and discouragement of rumors to alleviate the concerns of remaining employees. Assimilation of New Employees Other HR issue in a merger is the assimilation of new employees. Employees coming into the acquired company may be a source of tension and stress for the present employees. Careful planning is required to introduce the employees and facilitate teamwork. HR-planned activities involving all employees may be helpful to allow for introductions and socializing. Preparing for Change can be a major HR issue in a merger. Some people may not like change and will resist any change actions. HR professionals can be helpful by preparing written communications, holding department meetings, and placing suggestion boxes in various areas. Preparing all employees for the planned changes within the company and discussing how the changes will affect them can enhance a successful transition.

Demerger
Demerger is the converse of a merger. It describes a form of restructure in which shareholders or unit holders in the parent company gain direct ownership in a subsidiary (the demerged entity). Underlying ownership of the companies and/or trusts that formed part of the group does not change. The company or trust that ceases to own the entity is known as the demerging entity. If the parent company holds a majority stake in the demerged entity , the resulting company is referred to as the subsidiary.

Tools for Demerger: Equity carve outs. Selloffs. Tracking Stock. Spin Offs.

Equity carve outs: Shareholder value gets enhanced by the use of this de merger method of equity carve outs. In this process, a subsidiary belonging to a parent firm is made public by IPOs or initial public offerings. This results in the sell off of shares partially. A new firm, which is publicly listed comes into being. However, the controlling power remains in the hands of the parent firm. This process is embraced when it is found that the subsidiary is progressing at a faster pace than the parent company. Sell offs: When a subsidiary of a parent company is sold off, the process is referred to as a "sell off". Sell off is carried out in case of subsidiaries, which do not find a place in the core strategy of the company. Tracking stock: A special type of stock is used to keep track of the value of any one segment of a firm. A publicly held company issues the tracking stocks. Spin offs: Spin offs occur when a subsidiary company gets the status of an independent entity. Under such circumstances, shares belonging to the subsidiary are distributed by the parent firm by means of stock dividends.

Advantages of de merger: The advantage of de merger is that the shareholders get access to better and updated information about the business as separate financial details are provided. Disadvantage of a de merger: Since the size of the de merged firms are smaller than those of the parent firm, tapping the credit market may be a difficult task especially for a small company who may not be able to afford the expensive finances.

The principal benefits from mergers can be listed as increased value generation, increase in cost efficiency and increase in market share.

Mergers will generate tax gains, can increase revenue and can reduce the cost of capital.
When a firm wants to enter a new market When a firm wants to introduce new products through research and development When a firms wants achieve administrative benefits To lower cost of operation and/or production To gain higher competitiveness For industry know how and positioning For Financial leveraging To improve profitability and EPS

Why Mergers Fails

The failures of mergers may harm the companies, tarnish their credibility in the market, and ruin the confidence of their shareholders.
There are several reasons merger failures. Some of the prominent causes are summarized below: If a merger is planned depending on the (bullish) conditions prevailing in the stock market, it may be risky. There are times when a merger may be effected for the purpose of "seeking glory," rather than viewing it as a corporate strategy to fulfill the needs of the company. Regardless of the organizational goal, these top level executives are more interested in satisfying their "executive ego." In addition to the above, failure may also occur if a merger takes place as a defensive measure to neutralize the adverse effects of globalization and a dynamic corporate environment. Failures may result if the two unifying companies embrace different "corporate cultures." It would not be correct to say that all mergers fail. There are many examples of mergers that have boosted the performance of a company and addressed the well-being of its shareholders. The primary issue to focus on is how realistic the goals of the prospective merger are.