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Corporate restructuring

Any change in a company’s:


1. Capital structure,
2. Operations, or
3. Ownership
that is outside its ordinary course of business.
MOTIVES FOR CORPORATE
RESTRUCTURING
• To expand the business or operations of the company
• To carry on the operations of the company more efficiently
and effectively
• To focus on its core strength
• Cost reduction by deriving benefits of economies of scale
• To obtain tax advantage by merging loss making unit with
profit making company
• To have access to better technology
• To improve the debt equity ratio
• To have a better market share
• To become globally competitive
• To overcome significant problems in a company
Illustrating Economies of Scale
Period 1: Firm A (Pre-merger) Period 2: Firm A (Post-merger)

Assumptions: Assumptions:
• Price = $4 per unit of output sold • Firm A acquires Firm B which is producing
• Variable costs = $2.75 per unit of output 500,000 units of the same product per year
• Fixed costs = $1,000,000 • Firm A closes Firm B’s plant and transfers
• Firm A is producing 1,000,000 units of output per production to Firm A’s plant
year • Price = $4 per unit of output sold
• Firm A is producing at 50% of plant capacity • Variable costs = $2.75 per unit of output
• Fixed costs = $1,000,000

Profit = price x quantity – variable costs Profit = price x quantity – variable costs
– fixed costs – fixed costs
= $4 x 1,000,000 - $2.75 x 1,000,000 = $4 x 1,500,000 - $2.75 x 1,500,000
- $1,000,000 - $1,000,000
= $250,000 = $6,000,000 - $4,125,000 - $1,000,000
= $875,000

Profit margin (%)1 = $250,000 / $4,000,000 = 6.25% Profit margin (%)2 = $875,000 / $6,000,000 = 14.58%
Fixed costs per unit = $1,000,000/1,000,000 = $1 Fixed costs per unit = $1,000,000/1.500,000 = $.67

Key Point: Profit margin improvement is due to spreading fixed costs over more units of output.
1Margin per $ of revenue = $4.00 - $2.75 - $1.00 = $.25
2Margin per $ of revenue = $4.00 - $2.75 - $.67 = $.58
Illustrating Economies of Scope
Pre-Merger: Post-Merger:

• Firm A’s data processing center • Firm A’s and Firm B’s data
supports 5 manufacturing facilities processing centers are combined
into a single operation to support
• Firm B’s data processing center all 8 manufacturing facilities
supports 3 manufacturing facilities • By combining the centers, Firm A
is able to achieve the following
annual pre-tax savings:
– Direct labor costs = $840,000.
– Telecommunication expenses
= $275,000
– Leased space expenses =
$675,000
– General & administrative
expenses = $230,000

Key Point: Cost savings due to expanding the scope of a single center to
support all 8 manufacturing facilities of the combined firms.
Forms of corporate restructuring
• AMALAGATION
• ACQUISITION
• DEMERGER
• DIVESTITURE
• DISINVESTMENT
• CARVE-OUT
• JOINT VENTURE
• BUY-BACK OF SECURITIES
• REDUCTION OF CAPITAL
• STRATEGIC ALLIANCE
• FRANCHISING
• SLUMP SALE
DEMERGER
The act of splitting off a part of an existing
company which operates completely
separately from the original company.
Shareholders of the original company are
usually given an equivalent stake of
ownership in the new company. It is often
done to help each of the segments operate
more smoothly as they can now focus on a
more specific task.
Forms of demerger
• Spin-off
• Split-up
• Split-off
Spin off: It involves transfer of all the assets,
liabilities, loans and business of one of the
business divisions or undertakings to another
company whose shares are allotted to the
shareholders of the transferor company on a
proportionate basis. Here the transferor
company continues to carry on at least one of
the businesses.
Split-up: It involves transfer of all the assets,
liabilities, loans and businesses of the
company to two or more companies in which
the shares in each of the new companies are
allotted to the original shareholders of the
company on a proportionate basis but unlike
spin-off, the transferor company ceases to
exist.
Split-off: here all the shareholdersof the
transferor company do not get the shares of
the transferee company in the same
proportion in which they held the shares in the
transferor company.
Demerged company: the company whose
assets, liabilities are being transferred in the
process of demerger. It is otherwise known as
transferor company.
Resulting company: the company to which
assets and liabilities are being transferred in
the process of demerger.
DIVESTITURE
It involves sale of all the assets of the
company or any of its business usually for
cash and not against equity shares.it is also
called slump sale under the income tax Act
1961. in this process assets are not sold in a
piecemeal manner, means these are sold as
one lump and the consideration is also
determined as one lump sum amount and
not for each asset separately.
DISINVESTMENT
• It is a policy of Government of India in the
area of privatizing the public sector
undertakings, refers to transfer of assets or
service delivery from the Government to
private sector.
• Here Government is the majority shareholder.
CARVE OUT
Here a company transfers all the assets,
liabilities loans and business of one of its
division to its 100 percent subsidiary. Thus at
the time of transfer the shares are issued to
the transferor company itself and not to its
shareholders. Later on, the company sells
the shares in parts to outsiders by private
placement or by offer for sale method.
JOINT VENTURE
It is an arrangement in which two or more
companies contribute to the equity capital of
a new company in pre decided proportion.
Normally joint ventures are formed to pool the
resources of the partners and carryout a
business or a specific project beneficial to
both the partners, but which none of the
partners wants to carry out under its own
corporate entity.
Share buyback
It occurs when company holds idle cash which
it does not require in the medium term, it is
advisable for the company to return this
excess cash to its shareholders.
• during the phase of recession it can occur
• Company can return excess cash by paying a
hefty special or onetime dividend.
• It has another use that the promoters stake in
the voting capital of the company can be
increased by avoiding possibility of takeover
bid by an outsider.
FRANCHISING
It may be defined as an arrangement
where one party (franchiser) grants
another party (franchisee) the right to use
trade name as well as certain business
systems and process to produce and
market goods or services according to
certain specifications.
REDUCTION OF CAPITAL
• By extinguishing or reducing the liability in
respect of share capital not paid up (since
not called as yet).
• By writing off or cancelling the capital which
is lost
• By paying off or returning excess capital that
is not required by the company.
Application: Xerox Buys ACS
In late 2009, Xerox, traditionally an office equipment manufacturer, acquired Affiliated
Computer Systems (ACS) for $6.4 billion. With annual sales of about $6.5 billion, ACS
handles paper-based tasks such as billing and claims processing for governments and
private companies. With about one-fourth of ACS’ revenue derived from the healthcare and
government sectors through long-term contracts, the acquisition gives Xerox a greater
penetration into markets which should benefit from the 2009 government stimulus
spending and 2010 healthcare legislation. There is little customer overlap between the two
firms.
Previous Xerox efforts to move beyond selling printers, copiers, and supplies and into
services achieved limited success due largely to poor management execution. While some
progress in shifting away from the firm’s dependence on printers and copier sales was
evident, the pace was far too slow. Xerox was looking for a way to accelerate transitioning
from a product driven company to one whose revenues were more dependent on the
delivery of business services.
More than two-thirds of ACS’ revenue comes from the operation of client back office
operations such as accounting, human resources, claims management, and other
outsourcing services, with the rest coming from providing technology consulting services.
ACS would also triple Xerox’s service revenues to $10 billion. Xerox chose to run ACS as a
separate standalone business.

Discussion Questions:
1. What alternatives to a merger do you think they could have considered?
2. Why do you think they chose a merger strategy? (Hint: Consider the
advantages and disadvantages of alternative implementation strategies.)
3. How are Xerox and ACS similar and how are they different? In what way will their
similarities and differences help or hurt the long-term success of the merger?
4. How might the decision to manage ACS as a separate business affect realizing the full
value of the transaction?

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