Mergers, Acquisitions and Corporate Restructuring: Prasad G. Godbole

Mergers,
Acquisitions And
Corporate
Restructuring
Prasad G. Godbole
Copyright
Copyright©©2009
2009Vikas Publishing
Prasad House Pvt.
G. Godbole. Ltd. All
All rights rights reserved.
reserved.
Chapter 15
Leveraged Buyout and Going Private
Copyright © 2009 Vikas

PrasadPublishing House
G. Godbole. Pvt. Ltd.
All rights All rights reserved.
reserved.
CHAPTER 15
Introduction
➨ Leveraged buyout (LBO) is a

financial engineering product of the
takeover and corporate
restructuring wave of 1980’s in the
US .
➨ For domestic acquisition in India

LBOs are not practiced.
➨ However, Indian companies have

been successfully resorting to the
LBOs for the overseas acquisition.
CHAPTER 15
Leveraged Buyout And
Going Private
funds
Leveraged buyout (LBO) simplistically means mobilizing borrowed
based on the security of assets and cash flows of the target
company (before its takeover) and using those funds to acquire the
target company.
leveraged
These are four characteristics/steps in a typical or classical
buyout.
CHAPTER 15
Going Private
Characteristics/steps in a
typical or classical
leveraged buyout.
CHAPTER 15
1
Incorporation of a
privately/wholly owned
company to act as a special
purpose vehicle (SPV) for
acquisition of a target
company.
CHAPTER 15
2
Mobilization of borrowed
funds in the SPV, based on
the security of assets and cash
flows of the target company
(before its takeover).
CHAPTER 15
3
Acquisition of the entire or

near entire share capital of
the target company.
CHAPTER 15
4
Merger of the target company into the

SPV. This last move, which is also a
critical step in the leveraged buyout, has
two effects:
 It brings the assets of the target
company and the loans
 It makes the target company go
private, i.e., the target company gets
unlisted.
CHAPTER 15
Going Private
The first major LBO by an Indian

company was acquisition of Tetley by
Tata Tea in early 2000. in this case,
Tata Tea set up a SPV in the UK in the
form of Tata Tea (GB) Limited.
The SPV, in turn mobilized GBP 235

million by way of long-term debt on the
security of the assets and cash flows
of the Tetley and acquired 100 per cent
of Tetley at the cost of the GBP 271
million, taking it private.
The acquisition of Corus Plc by Tata

Steel Limited is also a case of
leveraged buyout.
CHAPTER 15
Management Buyout
When the professional management or non-promoter

management of a company carries out a leveraged
buyout of the company from its promoters, the same is
called as Management buyout or MBO.
Partners in growth…
Example
CHAPTER 15
As on 31 March 2005, the balance sheet of XYZ Corporation
The paid-up capital consisted of 5 crore shares of Rs 10 each. The company’s

sales were very stable—rather stagnant—but the profitability was very good. Its
pre-tax cost of borrowing was just 10 per cent per annum. It used to charge
depreciation on straight line basis in its books. The current average rate of book
depreciation was 10 per cent. With regard to depreciation for income tax purpose
for the year 2004–05, the same worked out to Rs 3 crore only.
CHAPTER 15
Thus, earning per share (EPS) in 2004-05 worked out to
Rs.4.4 per share, with a healthy return on net worth (RONW)
of 22 per cent. The company’s professional management
team and particularly its MD were rearing to go for
leveraged investments in the new lines of business.
However, its seventy-three-year old promoter was not

interested in taking any risk.
CHAPTER 15
CHAPTER 15
The management team decided that it would itself take
over the company and take it to the next higher orbit of
growth and approached an investment banker to help
them.
The investment banker estimated that the promoter, who
was holding 40 per cent stake (2 crore shares) would be
happy to exit at a price of Rs 35 per share which he had
never seen in last so many years. Public offer for 35 per
cent and delisting offer for balance 25 per cent will go
through for Rs 40 and Rs 44 per share respectively.
The investment banker confirmed that he can arrange for
borrowed funds at the debt equity ratio of roughly 3:1 by
securing the debt on the assets of XYZ Limited.
This meant that management team had to invest Rs 50
crores, whereas, Rs 145 crores would come in the form of
long-term loans. The management team had decided to
go ahead.
CHAPTER 15
The balance sheet of XYZ Holdings
Limited
CHAPTER 15
After this, the management team decided to
merge XYZ Limited with XYZ Holdings Limited
and change the name of the merged entity to
XYZ Limited.
Management, now in the shoes of the owners,

decided to invests Rs 100 crores in a new but
synergistic line of business that promised Rs
100 crore turnover in the first year itself.
CHAPTER 15
The post merger balance sheet of XYZ
Limited

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What is a leveraged buyout?

What are the steps involved in a typical leveraged buyout?

Mergers,

Copyright © 2009 Vikas

➨ Leveraged buyout (LBO) is a

➨ For domestic acquisition in India

➨ However, Indian companies have

Acquisition of the entire or

Merger of the target company into the

The first major LBO by an Indian

The SPV, in turn mobilized GBP 235

The acquisition of Corus Plc by Tata

When the professional management or non-promoter

The paid-up capital consisted of 5 crore shares of Rs 10 each. The company’s

However, its seventy-three-year old promoter was not

Management, now in the shoes of the owners,

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