Forms of Corporate Restructuring Merger & Acquisition

Forms of CR
a) b) c) d) e) f) g) h) i) j) Merger Consolidation Acquisition Divestiture Demerger (Spin off/split up/ split off) Carve out Joint Venture Reduction in Capital Buy back of securities Delisting of securities / company

Merger
It involves combination of all the assets, liabilities, loans & business (on a going concern basis) of two (or more) companies such that one of them survives. For Examples:

A limited has a paid up equity capital of Rs. 10 Cr. Consisting of 1 cr shares of face
value of Rs. 10 each. B limited has a paid up equity capital of Rs 50 Cr consisting of 5 Cr shares of face value of Rs 10 each. A Limited is proposed to be merged with B Limited, wherein based on relative valuation of both the companies, shareholder of A will be given, two shares of B limited for every 5 shares of A Limited held by them. Upon the merger being carried out, the following things will happen: Shareholders of A limited will get 40 lakh shares of face value of Rs 10 each of B limited in exchange of shares of A limited. Shares of A limited will get cancelled since A limited will cease to exist through a legal process called dissolution without winding up.

Merger
All the assets & liabilities of A limited will be transferred to B Limited Business of A Limited will be conducted under the name of B limited along with the erstwhile business of B Limited Balance sheet of B limited will have equity capital of Rs. 54 cr & will include assets & liabilities of both A limited & B limited. All the rights exercisable by A limited against the third parties will now be exercisable

by B limited against them & Vice versa.

In Short, A limited will cease to exist & B limited will survive carrying on businesses of both A limited & B limited. This is called Merger.

Consolidation
It involves creation of an altogether new company owing assets, liabilities. Loans & businesses ( on going concern basis) of two or more companies, both/all of which cease to exist. For Example: A Ltd has paid up equity capital of Rs 10 cr consisting of 1 cr shares of face value of Rs 10 each. B Ltd has paid up equity capital of Rs 50 cr consisting of 5 cr shares of face value of Rs 10 each. A Ltd & B Ltd decide to consolidate themselves into C ltd. In the process, based on relative valuation of the shares of A ltd & B lit, it is decided that for every two shares of A ltd held by them, shareholders of A ltd will get one shares of C limited & for every 5 shares of B limited, its shareholders will get 2 shares of C limited. The following things would happen when the consolidation is carried out: shareholders of A ltd will get 50 lakh shares of face value of Rs 10 each of C ltd in exchange of shares of A ltd & shareholders of B ltd will get 200 lak equity shares of C limited in exchange of shares of B ltd.

Consolidation
Shares of A limited & B limited will get cancelled since A limited & B limited will cease to exist through legal process called dissolution without winding up All the assets & liabilities of A limited & B limited will be transferred to C limited The balance sheet of C limited will have equity capital f 25 cr & will include assets & liabilities of both A limited & B limited. Business of A limited & B limited will be conducted under the name of C limited All rights exercisable by A limited & B limited against the third parties will now be exercisable by C limited against them & Vice versa. In short, A Limited & B limited will cease to exist & C limited will carry on the businesses of both A limited & B Limited. This is called a CONSOLIDATION.

Amalgamation
This term is used only in India. It is an umbrella term which includes both merger & consolidation. Thus, amalgamation could either be in the form of merger or consolidation. For Example: In 1901, business magnates Elbert H. Gary & J P Morgan , bought Andrew Carnegies steel company. This company, along with Gary & Morgans Federal Steel Company &

five other companies, i.e. American Steel & Wire Company, American Steel Hoop
company, National Tube Company, American Tin Plate Company & American Steel Sheet Company were consolidated to form U.S. Steel Company. Upon such consolidation U. S. steel accounted for 67 % of steel production in the U. S. Later on,

over a period of a century, U. S. Steel acquired & merged a number of small & big
competitors with itself.

Acquisition
Acquisition is an attempt or a process by which a company or an individual or a group of Individuals acquires control over another company company. called target

It is to be noted that in acquisition, unlike merger, the target companys identity

remains intact. There are many ways in which control over a company (target company) can be acquired: By acquiring a substantial percentage of the voting capital of the target company. By acquiring voting rights of the target company through a power of attorney or through a proxy voting arrangement. By acquiring control over an investment or holding company, whether listed or unlisted, that is turn holds controlling interest in the target company. By simply acquiring management control through a formal or informal understanding

or agreement with the existing person(s) in control of the target company.

Divestiture
It means an out & out sale of all or substantially all the assets of the company or any of its business undertakings/divisions, usually for cash & not against equity shares. Normally, the secured & unsecured loans are not taken over by the purchaser. The transferor repays the loan from the consideration received in cash. However, the specific current liabilities such as sundry creditors, o/s expenses & advance received from the customers may be taken by the transferee company & netted out against the total value of assets to arrive at the net value of assets taken over. Consideration is normally payable in cash for two reasons: The divesting/transferor company needs cash to pay off the liabilities & secured / unsecured loans. Most of the time divestiture is done to bring cash into the company for pumping into remaining business or to start a new business.

Divestiture of Pharmaceutical Business by Camlin Limited

Till the FY 2004-05, Camlin limited was engaged in three business 1. Its Consumer Products Division (CPD) was engaged in its conventional business of stationery products, color products, art materials, etc. 2. Its Fine Chemicals Division (FCD) was engaged in the manufacture & sales/export of food grade antioxidants & other allied products. 3. Its Pharmaceutical Division (PD) was engaged in the marketing of branded pharmaceutical formulations manufactured by its group company Liva Pharma Limited which was owned by some

of the promoters.
For many years ending, PD had been making losses despite the fact that it was engaged only in marketing operations. PD had actually become a drag on Camlins profitability. therefore, the BOD on 7 March 2005 announced that the company will substantially discontinue the said operation & divest all the net assets & (specific) liabilities of Pharma Division to Liva Pharma Limited for a consideration payable in cash. Accordingly, beginning 1 April 2005 & ending 31 December 2005 the net assets & specific liabilities of pharma division were divested to Liva Pharma Limited for a net outstanding consideration of Rs. 130.687 lakhs as on 31 December 2005. this is a case of a Divestiture.

Demerger
It can take three forms: Spin off Split up Split off Spin off involves transfer of all or substantially all the assets, liabilities, loans & business (on going concern basis) 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. Split up involves transfer of all or substantially all assets, liabilities , loans & businesses (on going concern basis) of the company to two or more companies in which, again like spin off, 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 is a spin off with the difference that in split off, all the shareholders of 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.

Demerger
In case of spin off & split up, consideration is always in the form of equity shares of the transferee company(ies). U/S 391 of the Companies Act, a High Court has very wide powers to sanction any arrangement or reconstruction so far as the shareholders & creditors approve the arrangement with requisite majority & in required manner & so far as the other provisions of section 391 to 393 are duly complied with Under the Income Tax Act, 1961, section 2(19AA), defines demerger & makes it mandatory that consideration must be in the form of shares of the resulting (transferee ) company only. Demerged company means the company whose assets, liabilities, loans & business are being transferred in the process of demerger to another company in case of either spin off or split up. It is also called transferor company. Resulting company on the other hand mean s the company or companies to which assets, liabilities, loans & business are being transferred in the process of demerger.

Spin offs and split ups are normally resorted to achieve focus in the respective businesses, especially if the businesses are unrelated (non synergistic). They are also used to improve the price earning ration & consequently the market

capitalization by demerging not so profitable businesses into a separate company or

companies. Another use of demerger is that it can be done to demerge or carve out capital hungry businesses from the businesses which require normal levels of capital so that further fund raising by equity dilution can be restricted to capital intensive businesses while sparing the other businesses from equity dilution. Normally Split offs are used to realign the inter se holding of promoters while businesses are being split off & brought under control of respective factions.

Demerger of Indian Aluminum Company Limited (Indal) into Hindalco Industries Limited (Hindalco)
Indal had been originally promoted by a Canadian aluminium major Alcan Aluminium Limited (Alcan). At time in 1998 when Sterlite Industries Limited made a hostile takeover offer for acquiring 20 % of Indals equity capital, Alcan was holding 34.6 % in Indal. In the takeover battle, Alcan finally succeeded to fend away Sterlites attack & in process Alcans stake went upto 54.6 % through the open offer. In the year 2000, Hindalco purchased this 54.6% share from Alcan & acquired another 20 % in the consequent open offer. This made Hindlacos stake in Indal to 74.6 %.

In the year 2004, Hindalco wanted to integrate Indals aluminium business. For this, the process that was used
was not amalgamation but demerger. Indals entire business expect its aluminium foil business at Kollur was demerged into Hindlaco wherein Hindlaco, which had much bigger aluminium business of its own acted as a resulting company. Demerged Indal was left with a small aluminium foil business.

Carve - Out
It is a hybrid of divestiture & spin off. In carve out, a company transfers all the assets, liabilities, loans & business of one of its divisions/undertakings to its 100 % subsidiary. Thus, at time of transfer, the shares are issued to the transferor company itself & not to its shareholders. Later on. The company sells the shares in parts to outsiders whether institutional investors by private placement or to retail investors by offer for sale.

Joint Venture
It is an arrangement in which two or more companies (called joint venture partners) contribute to the equity capital of new company (called joint venture) in pre decided proportion. Normally, JV are formed to pool the resources of the partners & carry out a business or a specific project

beneficial to both the partners but which none of the partners want to carry out under its own corporate
entity for any one of the given reasons The venture may be highly risky JV Partners may otherwise be competitors but may be wanting to collaborate only for a specific project or business Neither of the partners may be willing to dilute control on their businesses by accepting funding, especially equity funding, in their own balance sheet. To ensure that management control of the common business or project is shared in the agreed proportion through charter of the JV company. To ensure that rewards of the common business or the project are shared in the predetermined ratio without the possibility of manipulation in favour of either side.