CORPORATE RESTRUCTURING

Introduction

 If

you give a man a fish, you feed him for a day. If you teach a man to fish, you feed him for a lifetime Lao Tze

SYLLABUS

OVERVIEW
A defining force of corporate success today is M&A. Only 70 of the firms on the original 1955 list of the so called Fortune 500 companies are on todays list. Most have dropped off as a result of merger, acquisition, bankruptcy, downsizing or some other form of corporate restructuring. Optimizing the business portfolio? Developing and managing a successful portfolio of businesses requires taking the right path to acquire, redeploy or divest resources and capabilities. Whether that means a merger, an acquisition, an alliance, a licensing contract, a divestment or internal development, it is imperative to understand the pros and cons of each path and to learn which is most appropriate for a successful corporate strategy. Corporate development tools: Build Acquire Ally License Divest

OVERVIEW

What is corporate restructuring? Used to describe actions taken to expand or contract a firms basic operations or fundamentally change its asset or financial structure. It runs the gamut from reorganizing business units to takeovers and joint ventures to divestitures, spin offs and equity carve outs. It enhances shareholder wealth and returns on corporate assets.

ANALYSTS PERSPECTIVE

Analysts ask the questions like the following: Does this merger add value? Does the justification for the merger proposed by the management make sense? Which company ( the acquirer or the target) captures the value ( if any) created by the merger? How will the takeover defenses employed by the target firm affect the likelihood of the merger succeeding?

CASES
P&G - Gillette
1. 2. Dovetail the P&G personal care portfolio with Gillette Gillettes reputation for quality and innovation will make it the best brand in P&G stable. Gillette to teach P&G about products with a recurring revenue stream Clout with retailers like Wal-Mart Negotiate advertizing contracts International expansion and more sales from emerging markets Expect to reap $14 billion in cost savings.

3. 4. 5. 6. 7.

CASES

ICICI Bank Bank of Madura Merger 1. 2. 3. 4. 5. 6. ICICI Bank merged with a traditional bank - Bank of Madura Swap ratio: 2:1 ICICI Bank: Total assets 12063 crs & Deposits 9728 crs BoM: Total assets 3988 crs & Deposits 3395 crs Number of employees of I Bank: BoM :: 1400: 2500 I Bank gets a immediate boost to a branch network of 350 odd branches which the bank would have taken around 5 yrs to build organically. 7. Merger also gives access to the client base of around 1.2 million of BoM. 8. BoM is strong in south India where I Bank lacks presence

CASES

HDFC Bank + Times bank = HDFC Bank Centurion Bank + Bank of Punjab + Lord Krishna Bank = CBoP HDFC Bank + CBoP = HDFC Bank

Strategic reasons for the merger: Robust growth momentum of CBoP Access to branch network. ( would add 398 branches of CBoP to HDFC Bank network). The branch network is not overlapping and is complimentary. Would also add more branch network in lucrative metro and top tier cities were RBI is reluctant to grant licenses. Complementarities in product portfolios: HDFC Bank focused on corporate clients and CBoP on retail and SME clients. Complementarities in income stream: CBoP has a higher growth in fee based income than HDFC Bank. Economies of scale and scope: Managerial synergies:

CASES

Renault Nissan alliance: Cross cultural combination among car makers A buffer to protect partners during regional downturns Renault owns 43.4% in Nissan and Nissan Owns 15% in Renault. They also have 50-50 ownership in Renault Nissan BV. Synergies to come from cost reductions and cost avoidance. Renault Nissan Purchasing Organization negotiates prices from suppliers Shared platforms and common parts increase economies of scale and reduce development and production costs. A drive to commonize with the common module family (CMF). A module is a set of parts that can be applied to different car models. A unified logistics team for packing, shipping etc. Common IT infrastructure, data centers and licenses.

CORE PRINCIPLES

M&As create overall value but the distribution of that value tends to be lopsided , accruing primarily to the selling companies shareholders. Empirical research shows that only half of the acquiring companies create value for their own shareholders. Acquisitions create value when the cash flows of the combined companies are greater than they would otherwise have been. Some of that value will accrue to the acquirers shareholders if it doesnt pay too much for the acquisition. Company A buys Company B for $1.3 billiona transaction that includes a 30 percent premium over its market value. Company A expects to increase the value of Company B by 40 percent through various operating improvements, so the value of Company B to Company A is $1.4 billion. Subtracting the purchase price of $1.3 billion from $1.4 billion leaves $100 million of value creation for Company As shareholders.

M&A

When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable.

M&A

A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.