Corporate Restructuring

IV Sem MBA; Rajagiri Centre for Business

Studies
Faculty : Dr Roshna Varghese
E-mail : roshnavarghese@gmail.com
Mob : 9847473625

Internal Evaluation
Internal

Assessment Test

: 15

marks
Assignments/Presentations : 15
marks
Class participation
: 10
marks
Total

: 40 marks

Assignments/Presentations : 15
marks
Assignment

: 5 marks

Presentation

10 marks 10

minutes
I restructuring story
(Merger/acquisition/takeover..)
Type, motivation, parties involved
Financing
Results of restructuring; current status
..\..\..\Project

on.xlsx

Management\Presentati

Corporate Restructuring- Syllabus

o Module 1 : Restructuring-Merger and
acquisitions
o Module 2 : Valuation
o Module 3 : Financing, Takeover and share
buyback
o Module 4 : Swap ratio
o Module 5 : Sweat equity, ESOP

Module I
Restructuring

different methods

Mergers:

Types and Characteristics

Motives
Theories
Acquisitions

Corporate Restructuring
Any

fundamental change in a companys business or

financial structure designed to increase the companys
value to shareholders or creditor.

Common

forms

Mergers/amalgamations; acquisitions/takeovers; financial

restructuring; divestitures/demergers; buyouts
Divided

into two

Operational restructuring
Financial restructuring

Giddy, Ian, H. Corporate financial restructuring. Available online at .

Operational Restructuring
Process

of increasing economic
viability of the underlying business
model.
e.g. Mergers, spin offs, cost cutting
measures

Financial Restructuring
Relates to improvements in the capital structure of
the firm.
Involves restructuring assets and liabilities of
companies including their debt to equity
structures to
Promote efficiency
Support growth; Maximise value to stakeholders
e.g. Add debt to lower overall cost of capital; share buy back
Bankrupt firms financial restructuring as a plan of reorganisation

In most restructuring situations, both financial and

operational restructuring occurs

Expansion

Corporate Control

Mergers, Acquisitions &

Takeovers
Tender offers
Asset acquisition
Alliances and Joint ventures

Anti take over defenses

Share buyback/repurchases
Debt equity Exchange offers
Financial reorganisation
(bankruptcy)
Proxy contests

Contraction

Changes in ownership
structures

Divestitures
Spin -offs
Split - ups
Equity carve outs
Assets sale

Leveraged buyout and Junk bonds

Going private
ESOPs and MLPs

Expansion
Form

of restructuring which
results in an increase in size of
the firm.

Merger, Acquisition & takeovers

Tender offers
Asset acquisition
Alliances & Joint ventures

Restructuring - Expansion

Mergers:
oTwo firms join and integrate operations as co-equals.
oE.g. Daimler-Benz (German)-Chrysler(US) (1998)
Merger came to an end on 2007.
oRIL & RPL merger (2009);
oCenturion Bank & bank of Punjab Centurion Bank
of Punjab (2005)
oCBOP with HDFC (2008)

Restructuring - Expansion
o

Acquisitions

o One firm buys a controlling interest in another firm

with the intent to make the other firm a division or
subsidiary of the acquiring firm.
o

In general these agreements are friendly but do

not result in a co-equal relationship.
o Tata tea Tetley(2000);
o HUL & modern foods (PSU) (2000);
o Cadbury (Britain) acquisition by Kraft foods (US)
(2010)

Restructuring - Expansion
o Takeovers:
o Acquisition bid is unsolicited.
o Generally results in incumbent
management being removed.
o e.g. UB group Shaw Wallace
(Chhabria group) (2005);
o Hindujas Ashok Leyland (1987);
o Reliance IPCL (2002)

Restructuring - Expansion
o Tender offers
o Making a public offer for acquiring the shares
of the target company with a view to acquire
management control in that company.

o Asset Acquisition
o Buying assets of another company- tangible
assets and intangible like brands
o Cement division acquisition of TISCO (Tata steel)
by Laffarge (France) (1998)
o Coca Cola Parle (Thums Up; Gold Spot; Limca)
(1993)
o HLL (now HUL)- Lakme (1998)

Source : ICFAI material, p.6. begi.

Weston, Mitchell & Muherin. (2006). Takeovers, restructuring, and corporate governance, New Delhi :

Restructuring - Expansion
o Joint ventures
o Two companies enter into an agreement to
provide certain resources for a specific
business purpose and a limited duration.
o e.g. Hindustan Motors & Mitsubishi to produce
Lancer & Pajero
o JV between Maruti Udyog and Suzuki of Japan
Now Maruti Suzuki India Ltd
o Sony Corporation (Japan) And Erricsson
(Sweden) (Split the JV after 10 years recently
Oct 2011)

Restructuring - Contraction
o Reduction in size of the firm
o Divestiture
o Selling assets, divisions, subsidiaries to
another corporation or combination of
corporations or individuals, generally
resulting in an infusion of cash.
o Types
o Spin - offs
o Split - ups
o Equity carve - outs
o Assets sale

Restructuring - Contraction
Spin-offs
A new, independent company created by detaching
either a division of a parent companys assets and
operations or a subsidiary.
Shares in the new company are distributed to the
parent companys shareholders on a pro rata basis.
e.g. IT division of Wipro was spun off as Wipro Infotech
in 1980s;
Godrejs Retail division Natures basket (Feb, 2009)
Pantaloon Retail spin off Big Bazaar and Food bazaar
into a new entity Future value retail (March, 2009)
L&T spun off its cement business (2002)

Restructuring - Contraction
o Split-ups
o The entire company is broken up into two or more
companies, parent company no longer exists
o With one or more spin-offs
o New class of stock for each company
o e.g. Cendant (US) 4 cos real estate; travel; hospitality,
vehicle rental business in 2005 ;
o APSEB into APGENCO & APTRANSCO (1999)
o L&T is planning for Split up 9 independent companies
(Jan 2012)
o Power,hydrocarbon,machinery & product,switchgear,heavy
engineering,infrastructure,building & factories,metals & minerals
and electrical businesses make up the nine independent companies.

Restructuring - Contraction
o Equity carve-out
o Offering of full or partial interest in a subsidiary to the
investment public OR IPO of a corporate subsidiary OR to a
strategic partner

o e.g DuPont in 1998 subsidiary Conoco; Lucent (1996);

AT&T (1993)

o Asset sale
o Sale of tangible or intangible assets of a company to
generate cash
o Cash to shareholders and go out of existence/continue to do
business

o e.g. Asset sale of Dahol Power company;

Restructuring Corporate Control

o Obtaining control over the management of a firm;
o To influence in organisational strategies
o Share Buybacks/repurchases
o Company buying its own shares back from the existing
shareholders or from open market.
o Reduction in equity capital
o Strengthens promoters controlling position
o Takeover defense
o Treasury Stock
o e.g.DLF (2008); ipca (2008); Reliance infrastructure

o Takeover defenses
o To prevent a sudden, unexpected hostile takeover and
gaining control of the company
o Pre offer defenses and post offer defenses

Restructuring Corporate
Control
Exchange offers
On or more classes of securities the right or option to
exchange a part or all their holding for a different class of
securities of the firm
Exchanging debt for equity (increases leverage) or Equity
for debt (decreases leverage)

Financial Reorganisation and bankruptcy

Restructuring when firm experiences financial distress
Out of court procedures
Merger into another firm
Formal legal proceedings reorganisation OR liquidation

Proxy contests
Attempt by a single or a group of shareholders to
Take control in a company
Expel the board or management
Source : ICFAI material, p.9. begi.
Weston, Mitchell & Muherin. (2006). Takeovers, restructuring, and corporate governance, 4 th ed., New Delhi :

Restructuring Changes in ownership

structure
Leveraged Buyout
Debt is used for acquiring a company
Often applied to firm borrowing fund to buy back its own stock
(MBOs)
e.g. Berkshire Hathaway for Shaw Industries Inc;
Tatas acquisition of 25 per cent govt holding in VSNL(2002).

Restructuring Changes in ownership

structure
o Going Private
o Transformation of a public limited company into a
privately held firm
o Delisting
o companies desire to avoid scrutiny of shareholders,
regulators and potential investors, and also avoid
payment of exorbitant compliance costs associated
therewith.
o e.g. Essar steel; Carrier Aircon India Lts, Otis Elevator
Compay India Ltd

Restructuring Changes in ownership

structure
o ESOP
o Mechanism whereby a company can make tax deductible
contributions of cash or stock into a trust.
o An ESOP is nothing but an option to buy the company's
share at a certain price. This could either be at the market
price (price of the share currently listed on the stock
exchange), or at a preferential price (price lower than the
current market price).
o If the firm has not yet gone public (shares are not listed on
any stock exchange), it could be at whatever price the
management fixes it at.
o Not taxed until withdrawn by them or sell the shares.
o Anti take over defence

Restructuring Changes in ownership

structure
MLPs (Master Limited Partnership)
Not prevalent in India
Type of limited partnership whose shares are publicly
traded.

Conditions for /(Gains form)Financial

Restructuring
o Synergy Acquisition & Merger
o Positive incremental net gain
associated with the combination of two
firms through a merger or acquisition
o Due to Revenue enhancement; Cost
Reduction; Lower taxes; Reduction in
capital needs

Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw -Hill Irwin,
pp.804-810

Conditions for /(Gains form)Financial

Restructuring
o Revenue enhancement
o Marketing gains
o ads, distribution, product mix
o HDFC CBoP (2008)
HDFC - 170 branches in North & 140 in South
CBoP 250 in North & 150 in South
o Tata Tetley (UK) (2000)
o E.g. Daimler-Benz (German)-Chrysler(US) (1998)
Merger came to an end on 2007.

o Strategic benefits
o Procter Gambles acquisition of Charmin Paper Co

o Market power
o E.g. HP Compaq; Glaxo (New Zeland) & Smithkline (UK) (in
2000)

Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw -Hill
Irwin, pp.804-810

Conditions for /(Gains form)Financial

Restructuring
o Cost Reduction
o Economies of scale
o Average cost per unit
o Sharing of central facilities top mgmt, headquarters;
computer services

o Economies of vertical integration

o To coordinate closely related operating activities
o E.g. HLL and Tata tea acquiring tea gardens;
o Coke acquiring bottling companies

o Complementary resources
o such as a firm that is very good at distribution and
marketing merging with a very efficient producer
o Merger bw HDFC and Times Bank in 1999
HDFC branches in metro and Times in non-metro
urban
o ICICI bank and Bank of Madurai (South Indian
Market)2000
Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw -Hill
Irwin, pp.804-810

Conditions for /(Gains form)Financial

Restructuring
Lower taxes

Net operating losses

Unused debt capacity
Surplus funds
Asset write ups
e.g. Arbind Mills acquisition of Ahmedabad Cotton Mills Ltd
(ACML) - 2 crore tax benefits.

Acquisition of Ashok Leyland Information Technology

(ALIT) by Hinduja Finance

Reduction in capital needs

EPS growth

Diversification

Mergers and Acquisitions

When two business combine their
activities, the combination may take the
form of
Merger (Amalgamation)
Acquisition (Takeover)

NB : Although these forms are different from a legal standpoint, the

financial press frequently doest not distinguish them. The term
merger is often used regardless of actual form of acquisition.
Board of Editors. (2003). Mergers and acquisitions. Vol 1, New Delhi : ICFAI University Press, pp.91-95
Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw
-Hill Irwin, p.798.

Mergers and Acquisitions

Mergers:

Two firms join and integrate operations as co-equals.

Chrysler Diamler Benz example.

Acquisitions:

One firm buys a controlling interest in another firm with the inten
make the other firm a division or subsidiary of the acquiring firm
In general these agreements are friendly but do not result in a co
relationship.
Oracle acquires Sun Micro systems, HP - Compaq

Takeovers:

Acquisition bid is unsolicited.

Generally results in incumbent management being
removed.
UB group SWC, Hinduja Ashok - Leyland

Mergers or Amalgamations
In India, mergers are called
amalgamations in legal parlance.
A merger is the combination of two
or more companies into one
company.

M&A
by
HLL
(HUL)
Food and Beverages

Mar 1993 Acquisition of Kothari General Foods (by Brooke Bond India, BBIL)
Jun 1993 Merger of Doom Dooma India (Tea Plantations) (BBIL)
Jun 1993 Merger of Tea Estates India (Tea Plantations) (BBIL)
Jun 1993 Merger of Brooke Bond India and Lipton India to form Brooke Bond
Lipton India (BBLIL)
Jun 1993 Acquisition of Kissan Products (BBLIL)
Jul 1993 Acquisition of Cadburys Dollops (Ice creams) (BBLIL)
Mar 1994 Acquisition of Tata Oil Mills Company (TOMCO) (HLL)
May 1994 Acquisition of Merryweather Food Products (BBLIL)
Dec 1994 Acquisition of Kwality Ice Creams (BBLIL)
Apr 1995 Acquisition of Milkfood Ice Creams (BBLIL)
Jan 1996 Merger of BBLIL into HLL
Jan 1998 Acquisition of Kwality Frozen Foods
Dec 1999 Acquisition of Rossell Industries Ltd. (Tea plantations) (Unilever)
Jan 2000 Acquisition of Modern Foods Industries

M&A by HLL (HUL)

Detergents
Mar 1995 Restructuring detergents and chemicals
business with subsidiary Stepan Chemicals and
Hind Lever Chemicals
Feb 1996 Acquisition of Vashisti Detergents

Personal Care Products

Oct 1995 Acquisition of Lakme Lever Ltd.
Sep 1996 Acquisition of Lakmes manfacturing
facilities
Jan 1998 Merger of Ponds India Ltd. with HLL

Impact of M&A
Segment

Market
share
199293

Market
share
1997-98

Souces, ketch ups,

jams

Nil

63.54

Ice creams

Nil

74.06

Tea

Nil

22.52

Coffee

Nil

5.90

Soaps

19.66

26.01

Detergents

33.12

46.72

Cosmetics

Nil

56.49

Merger Absorption &

Consolidation

o Merger can be
o Absorption

o One firm acquires another company,

o The acquiring firm (the bidder)
o retains its name & identity
o Acquires all the assets & liabilities of the acquired firm

o The acquired firm (target firm) ceases to exist as

a separate business entity.

o Consolidation
o A merger in which an entirely new firm is
created and both the acquired and acquiring
firm cease to exist.
Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw -Hill
Irwin, p.798-799

Types of Mergers/Strategies
o Horizontal mergers
o Merger between two firms competing in the same
industry
o Increases firms market power.
o e.g. Bank of Punjab and centurion Bank;

o Vertical mergers
o Merger between firms that are in different stages of
production or value chain.
o Combination of companies that usually have a buyer
seller relationship backward /forward integration
o e.g. Tata tea buying tea gardens

o Conglomerate mergers
o Merger between firms that are not related to each
other or unrelated business activity.
o Product extension or geographic market
extension/pure conglomerate mergers
Board of Editors. (2003). Mergers and acquisitions. Vol 1, New Delhi : ICFAI University Press, pp.91-95
37
Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw

Benefits of Mergers ad acquisitions

Sensible Reasons

Strategic benefit
Market power
Economies of scale
Economies of vertical integration
Complementary resources
Tax shields
Utilisation of surplus funds
Managerial Effectiveness
Diversification
Lower financing costs
Earnings growth

Chandra, P. (2004). Financial Management, 6th ed. New Delhi: Tata McGraw Hill, pp.918-922

M&A Process/Organisation of
Mergers/Acquisitions
1. Develop a strategic plan (Business plan)
2. Develop a merger plan
3. Search candidates for merger
4. Screening process
5. Initiate contact with the target
6. Negotiation
7. Integration plan
8. Closing
9. Post closing integration
10.Post closing evaluation

Board of Editors. (2003). Mergers and acquisitions. Vol 1, New Delhi : ICFAI University Press, pp.95-125

Merger/acquisition Process
1. Developing the business plan

Mission and vision of the firm

Where to compete, how to compete, self
assessment, defining mission statement, setting
objectives, selecting strategy

2. Merger Plan

Key management objectives financial & non

financial
Resource assessment
Schedule for completion

3. The Search Process

Establish a primary screening

Develop the search strategy

Merger/acquisition Process
4. The Screening Process

Starts with Initial list of potential list of

potential candidates
Criteria Specific market or product segment,
profitability, degree of leverage and market
share

5. First Contact

Alternate approach strategies

Discussing value

Income (DCF); Market (Comparables Company);

Asset and other approaches

Preliminary legal documents

Confidentiality agreement, letter of intent

Merger/acquisition Process
6. Negotiation

Defining purchase prices

Refining valuation
Structuring the Deal
Due diligence

Total consideration
Total purchase price/Enterprise value
Net purchase price

Buyers and sellers due diligence

Developing a financing plan

Merger/acquisition Process
7. Developing the Integration Plan
8. Closing

Closing document consists of

Purpose of acquisition
Price
Allocation of price
Payment mechanism
Assumption of liabilities
Representations and warranties
Covenants
Conditions for closing
Indemnification
Other documents AoA; litigations; contracts; loan
agreements; stock option schemes; insurance policies

Merger/acquisition Process
9. Post closing integration
Combining resources, processes, and
responsibilities of the merged companies

10. Post closing Evaluation

Evaluate success of merger
Actual performance and expected
performance
Corrective actions , if any

Participants in merger
Activity
Investment
banks

Identification of areas for restructuring

Buyer/seller identification
Structuring and valuation
Negotiation
Legal compliance

Lawyers
Accountants
Valuation Experts
Institutional investors
Arbitrageurs
Board of Editors. (2003). Mergers and acquisitions. Vol 1, New Delhi : ICFAI University Press, pp.113-116

Acquisitions and Restructuring

Very popular strategy during the 20

th

Century.

55,000 acquisitions in the 1980s worth $1.3 trillion.

Pace of acquisitions picked up in the 1990s $11 trillion
The annual value of M&As peaked in 2000 at about $3.4
trillion and

fell to $1.75 trillion in 2001.

2004 ------ $1.95 trillion

Cross border acquisition By Indian companies 40 in 2002
170 in 2006

Acquisition
An Act of acquiring effective control over assets
or management of a company by another
company without any combination of businesses
or companies.
One firm buys a controlling interest in another
firm with the intent to make the other firm a
division or subsidiary of the acquiring firm.

In general these agreements are friendly but do

not result in a co-equal relationship.

Acquisition classifications

Horizontal acquisition

Acquisition of a firm competing in the same industry

Increases firms market power.
e.g. Welspun CHT Holdings (UK); Hindalco Novelis(US,
2007); Tata Motors Daewoo (S Korea)

Vertical acquisition
Acquisition of firms that are in different stages of
production or value chain.
Combination of companies that usually have a buyer
seller relationship backward /forward integration
e.g. Tata tea buying tea gardens; e.g. Oracles (Hardware)
Acquisition of Sun Microsystems (software) (April, 2009)

Conglomerate acquisition
When the bidder and the target firms are not related to
each other or unrelated business activity.
48
Board of Editors. (2003). Mergers and acquisitions. Vol 1, New Delhi : ICFAI University Press, pp.91-95

Top Acquisitions
Rank

Year

Purchaser

Purchased

2000

America Online Inc.

(AOL)

Time Warner

2000

Glaxo Wellcome Plc.

2004

2006

2001

2004

2000

2002

2004

SmithKline
Beecham Plc.
Royal Dutch Petroleum Shell Transport
Co.
& Trading Co
BellSouth
AT&T Inc.
Corporation
AT&T
Comcast Corporation
Broadband &
Internet Svcs
Sanofi-Synthelabo SA
Aventis SA
Spin-of: Nortel
Networks Corporation
Pharmacia
Pfizer Inc.
Corporation
JP Morgan Chase & Co Bank One Corp

Transaction
value (in mil.
USD)

164,747
75,961
74,559
72,671
72,041
60,243
59,974
59,515
58,761

Top 10 acquisitions made by Indian

companies worldwide:
Acquirer
Tata Steel
Hindalco
Videocon
Dr. Reddys
Labs
Suzlon
Energy
HPCL
Ranbaxy
Labs
Tata Steel
Videocon

Target
Company
Corus Group
plc
Novelis
Daewoo
Electronics
Corp.

Country
targeted

Deal value ($
Industry
ml)

UK

12,000

Steel

Canada

5,982

Steel

Korea

729

Electronics

Betapharm

Germany

597

Pharmaceutica
l

Hansen Group Belgium

565

Energy

Kenya
Petroleum
Refinery Ltd.

Kenya

500

Oil and Gas

Terapia SA

Romania

324

Natsteel
Thomson SA

Singapore
France

293
290

Pharmaceutica
l
Steel
Electronics

Acquisition
Two or more companies may remain
independent, separate legal entity
but there may be change in control
or ownership of companies.

Gains form OR rationale behind

Acquisitions
Synergy Acquisition & Merger
Positive incremental net gain associated with the
combination of two firms through an acquisition

Revenue enhancement
Marketing gains
ads, distribution, product mix
E.g. Daimler-Chrysler; HDFC CBoP; Tata Tetley Pfizer
Warner Lambert

Strategic benefits
Procter Gambles acquisition of Charmin Paper Co

Market power
E.g. HP Compaq; Glaxo & Smithkline

Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw -Hill Irwin,
pp.804-810

M&A Motives and theories

By FriedrichTrautwein
o Monopoly Theory
o Efficiency theory
o Valuation theory
o Raider Theory
o Empire building theory
o Process Theory
o Disturbance Theory

Theories and Motives of M & A

Merger as
a rational
choice

Merger
benefits
bidders
shareholders

Net gains through

synergies

Efficiency
theory

Wealth transfer
from targets
customers

Monopoly
theory

Wealth transfer
from targets
shareholders

Raider theory

Net gains through

private information

Valuation
theory

Merger benefits bidders Managers

Merger as a process outcome
Merger as a macroeconomic phenomenon

Empire building
theory
Process theory
Disturbance
theory

M&A Motives and theories

o Monopoly Theory
o Explains M&A planned and executed to
achieve market share and market power, at
time pricing power
o market leaders trying to consolidate their position
further
o E.g. Mittal steel acquiring Arcelor; RIL acquiring IPCL;

o Profitable and cash rich companies trying to gain

market leadership
o Tata steel acquiring Corus; Grasim acquiring L&T
cement division

o Market entry strategy

o Vodafones acquisition of Hutchison; Daiichi Sankyo
acquiring Ranbaxy; Tata Tea- Tetley

Efficiency theory
o Explains M&A planned and executed to achieve
synergies adding to enterprise valuation.
o Revenue generating synergies
o Merger of ICICI with ICICI bank

o Cost reduction synergies

o Tata Steel Corus

o Synergies
o Manufacturing
o Ranbaxy & Daiichi Sankyo; Tata Motors--->Daewoo

o Operational
o Kingfisher ----> Deccan Airways; Jet airways ---> Sahara
Airlines

o Marketing
o HLL----> Lakme

o Financial & Tax synergies

o RPL with RIL

Valuation theory
o Explains M&A planned and executed
by the acquirer because of better
private information abt valn of the
target company
o Acquirer is ready to pay premium
over the present market price

M&A Motives and theories

o Raider Theory
o In the context of PE (Private equity funds),
acquirer gets controlling stake in cash needy
companies at much lower valuation than the
actual
o In India, applicable only for unlisted
companies

o Empire building theory

o By managers for expanding their own
empires rather than creating wealth for
shareholders

M&A Motives and theories

o Process Theory
o M&A decisions are outcomes of processes governed
by one or more of the following influences:
organizational routines, political games played
between an organization's sub-units and outsiders,
and individuals' limited information processing
capabilities.

o Disturbance Theory
o M&A waves are caused by economic disturbances:
Economic disturbances cause changes in individual
expectations and increase the general level of
uncertainty, thereby changing the ordering of
individual expectations. Previous non-owners of assets
now place a higher value on these assets than their
owners and vice versa. The result is an M&A wave.