Corporate Restructuring

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CORPORATE
RESTRUCTURING
-Corporate Restructuring or rebuilding is a move made by the
corporate element to alter fundamentally either its capital structure
or its tasks.
-Corporate rebuilding happens when a corporate element is
encountering noteworthy issues and is in money related danger.
-Change in the structure of the organization , may be because of the
takeover, merger, antagonistic financial conditions, unfavourable
changes in business, forexample, buyouts, insolvency, absence of
combination between the divisions, over-utilized workforce, and
soforth.
- A buyout is the acquisition of a controlling interest in a company
WHAT IS CORPORATE
RESTRUCTURING?
Any substantial change in a company’s financial structure, or
ownership or control, or business portfolio.
Designed to increase the value of the firm

Restructuring

Improve Improve Change ownership

capitalization debt composition and control
DEFINITION
Any change in the business capacity or portfolio that is carried out
by an inorganic route.
Acquisition of Jaguar Land Rover from Ford by Tata Motors. Merger
of RPL with the RIL.
Any change in the capital structure of the company that is not in
the ordinary course of its business.
FPO. Buyback of shares. IPO.
DEFINITION
Any change in the ownership of a company or control over its
management, or a combination of any 2 or all of the above.
1. Merger of 2 or more companies belonging to different promoters.
2. Demerger of a company into 2 or more with the control of
resulting company passing on to other promoters.
3. Acquisition of a company.
4. Sell-off of a company or its substantial assets.
5. Delisting of company.
OPERATING
RESTRUCTURING
The increase in value that comes from the operating
side:
Better operating margins (usually economies of scale
ie lower costs)
or
Future increased sales/profits from higher growth
FINANCIAL RESTRUCTURING
The increase in value that comes from a purely
financial effect:
Lower taxes
Higher debt capacity
Better use of idle cash
TYPES
1. Mergers
2. Acquisition
3. Joint venture.
4. Divestiture
5. Consolidation.
6. Carve out.
7. Reduction of capital.
8. Buy back of securities.
9. Delisting of securities company.
10. Demerger (spin off/split up/split off)
FRANCHISING
MERGER
Strategic tools in the hands of management to achieve greater efficiency by
exploiting synergies.
Arrangement whereby 2 or more existing companies combine in one
company.
Shareholders of the transferor company receive shares in the merged
company in exchange for the shares held by them in the transferor company
as per the agreed exchange ratio.
Amalgamation includes both merger and consolidation. It is called as merger
by absorption, merger by consolidation.
AMALGAMATION
If three companies are combined into one, the preferred route always is to
merge 2 companies with the 3rd rather than consolidating all 3 companies
into altogether new company.
This is to preserve the identity of the company with the best brand or
corporate equity and take advantage of the same for all businesses
combined.
Consolidation is primarily used when a particular industry gets too
fragmented and the resultant dog eat dog competition becomes detrimental
to all.
Consolidation is used to combine a large number of companies, of which at
east 2 to 3 largest companies are of comparable size.
TYPES
A merger is said to occur when two or more companies combine into one
company.
One or more companies may merge with an existing company or they may
merge to form a new company.
In merger, there is complete amalgamation of the assets and liabilities as
well as shareholders’ interests and businesses of the merging companies.
There is yet another mode of merger. Here one company may purchase
another company without giving proportionate ownership to the
shareholders’ of the acquired company or without continuing the business of
the acquired company.
Laws in India use the term amalgamation for merger.
When an acquisition is a ‘forced’ or ‘unwilling’ acquisition, it is called a
takeover.
MERGER
In case of a merger between A and B, A Ltd Ltd will cease to exist
and B Limited will survive carrying on the businesses of both A and
B. This is called merger.
It is a strategy of inorganic growth. One of the frequently used form
of corporate restructuring in India.
Consolidation involves creation of an altogether new company
owning assets, liabilities, loans and businesses of 2 or more
companies, both are all of which seize to exist.
So A and B Limited will cease to exist and C Limited will carry on
the businesses of both A and B Limited if A and B are consolidated
into C.
AMALGAMATION
Amalgamation term is used only in India which includes both
merger and consolidation.
Amalgamating company or transferor company: it is a company
whose assets and liabilities are transferred to another company and
this seizes to exist through the process of dissolution without
winding up. A limited is amalgamating or transferor company.
Amalgamated or transferee company: It is a company that receives
the assets and liabilities of the other company and continue to
survive or exist. B is amalgamated company.
TYPES
Horizontal merger: Kind of merger exist between 2 companies who compete in the same
industry segment.
Vertical merger: It is a kind in which 2 or more companies in the same industry but in different
fields combined together in business.
Co-generic mergers: It is a kind in which 2 or more companies in association are some way or
the other related to the production processes, business markets or basic required
technologies.
Conglomerate mergers: This is a kind of venture in which 2 or more companies belonging to
different industrial sectors combine their operations.
ADVANTAGES
Does not require cash.
Lets the target realise the appreciation potential of the
merged entity, instead of being limited to sales proceeds.
Allows shareholders of the smaller entities to own smaller
pieces of a larger pie. That is increasing their overall net
worth.
Merger of a privately held company into a publicly held
company allows the target company shareholders to
receive a public company stock.
Allows the acquirer to avoid many of the costly and time-
consuming aspects of asset purchases such as
assignment of lease
REASONS FOR MERGER
 ACQUISITION
Acquisition essentially means ‘to acquire’ or ‘to takeover’.
Here a bigger company will take over the shares and assets of the
smaller company.
REASONS
MODES OF M&A IN INDIA
ACQUISITION
There are many ways in which control over a company can be
acquired.
By acquiring, substantial percentage of the voting capital of the
target company.
By acquiring voting rights of the target company through a power
of attorney.
By acquiring control over an investment or holding company,
whether listed or unlisted, that in turn holds controlling interest in
the target company.
By simply acquiring management control through a formal or
informal agreement with the existing person in control of the target
company.
ACQUISITION
Acquiring control over a company means acquiring the right to
control its management and policy decisions.
So all the policy decisions are made by the board.
Acquiring control can also be defined as acquiring the right to
appoint majority of the directors of the company.
The target companies identity remains intact unless the acquirer
company does not specifically decide to merge the target company
with itself and carries out all the legal processes required to
complete the merger.
The target or acquired company continues to exist as earlier.
ACQUISITION
Common method to acquire is to purchase a substantial voting capital of the
target company.
There cannot be and there is no clear cut answer whether what percentage
would be considered as adequate to qualify as controlling interest.
Absolute control means 100% acquisition of equity or equity shares partially.
So it is at least 75% of the shareholders by value have to vote in favour of a
special resolution general control.
In India, one can acquire control over a company by acquiring much less than
51% of the voting capital of the company, but it differs from country to
country and company to company depending upon the shareholder pattern,
percentage of public shareholding, percentage of shareholding with FIs and
FIIs within the overall percentage of public shareholding.
SLUMP
SALE
JOINT VENTURES
RESTRUCTURING CHECKLIST
Figure out what the business is Use valuation model – present value
worth now of free cash flows
Fix the business mix – divestitures Value assets to be sold
Fix the business – strategic partner Value the merged firm with
or merger synergies
Fix the financing – improve D/E Revalue firm under different
structure leverage assumptions – lowest
WACC
Fix the kind of equity What can be done to make the
equity more valuable to investors?
Fix the kind of debt or hybrid What mix of debt is best suited to
financing this business?
Fix management or control Value the changes new control
would produce
TAKE OVER
The term ‘acquirer’ covers
(i) Persons – both individual and juristic person
(ii) who either directly or indirectly, acquires or agrees to acquire
 a. Shares
 b. voting rights
 c. control of the target company

(iii) by himself or with any person acting in concert.

TAKE OVER
The term ‘Control’ includes
(i) The right to appoint majority of the directors; or
(ii)To control the management or policy decisions exercisable by a person or
persons, acting individually or in concert, directly or indirectly, by
(a) virtue of their shareholding
(b) management rights
(c) shareholding agreements, or
(d) voting agreements, or
(e) in any other manner
In order to come within the definition of ‘control’ it is not necessary that one
should have actually appointed majority of directors, it would be enough if
such a right of appointment is vested in him.
REGULATORY FRAMEWORK
DIVESTITURE
It means an out and out sale of all or substantially all the assets of a company or any of
its business undertakings, usually for cash and not against equity shares.
It means sale of assets, but not in a piecemeal manner.
A company sells all or substantially all the assets of anyone or more of its undertakings
or divisions or of the company as a whole.
That is, fixed assets, capital works in progress, current assets and many a times even
investments are sold as one lump and consideration is also determined as one lump sum
amount and not for each asset separately.
Normally, the secured and unsecured loans are not taken over by the purchaser.
The transferor, that is, the divesting company repays the loans from the consideration
received in cash.
However, the current liabilities are passed on or may be taken over by the transferee or
diversity company and netted out of against the total value of assets to arrive at the net
value of assets taken over, that is, consideration payable to the transfer company.
DIVESTITURE
In some cases, the buying company is not able to raise cash for
entire consideration, and if the divesting company also no need for
all the cash.
Some part of consideration is treated as debt and is paid over a
period of time.
However, no part of consideration is payable in the form of equity
shares.
Divestiture is normally used to mobilise resources for core business
or businesses of the company by realising value of non core
business assets.
So as a result, the price earning multiple and valuation of the
company in the stock market improves.
DEMERGER
It can take 3 forms. Spinoff, split up and split off.
Spinoff and split up
Spin off involves transfer of all or substantially all the assets, liabilities,
loans and business on a going concern basis of one of the business
divisions or undertakings to another company whose shares 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 ongoing concern basis of the company to 2 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 a spin off, the transferor company seizes to exist.
DEMERGER
The transferor company continues to carry on at least one of the businesses
in spin off.
If it were transfer all of its business to different companies and remaining by
the process of liquidation without winding up, it would be called up as split
up.
There is only transfer of assets and also liabilities and loans under the
scheme of demerger which is required to be approved first by the
shareholders and then by the High Court.
In case of both spinoff and split up, consideration is always in the form of
equity shares of the transferee company.
Since the consideration is being paid to the equity shareholders of the
transferor company, normally they will have to be given equity shares of the
transferee company.
 Split up

Split up a company splits into multiple entities, with the parent

company being liquidated and no longer surviving
DEMERGER
In case of both spinoff and split up, the shares of the resulting
company, that is the transferring company have to be issued to the
shareholders of the transferor company in proportion to their
shareholding in the transferor company.
In case it is not done, not only the tax benefits under the Income
Tax Act, 1961 will be lost but the structure itself would not be called
as spin off or split up.
It will be then called off, split off.
DEMERGER
Demerged company means the company whose assets, liabilities, loans and businesses
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 means the company or companies to which assets,
liabilities, loans, business are being transferred in the process of demerger.
For the purpose of demerger, a new company having a small share capital is
incorporated in the demerger process.
The assets, liabilities of the undertaking or division being demerger transferred to this
company which then becomes the resulting company.
However, it is not necessary that one has to float a new company to act as a resulting
company.
One could very well use existing company with or without changing its name.
It is also not necessary that the resulting company should not be having its own running
business prior to demerger
DEMERGER
Spinoff and split ups are normally resorted to achieve focus in the
respective businesses especially if the businesses are unrelated.
They are also used to improve the price earning ratio and
consequently 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
carveout 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.
SPLIT-OFF
It is a spin off with the differences 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 have
shares in the transferor company.
Some of the shareholders get shares in the transferee company in
exchange of the shares in the transferor company.
Normally split off of shares used to realign the holding of promoters
while business are being split off and brought under the control of
respective factions. Post traasaction
EXAMPLE
ABC is promoted by 2 brothers, A and B. Equity capital of the companies Rs. 10 crore consisting of 1
crore shares of ₹10 phase value each.
A and B each hold 20,00,000 shares and balance 60,00,000 Shares are held by public shareholders.
The shares are traded in the market at ₹550 to 600, whereas valuation based on the cash flows
indicates the intrinsic value about ₹525.
Company has 2 business divisions namely Software and BPO which are valued more or less equally.
The BPO division was fun of shares of the resulting company allotted on proportionate basis. Both
shares would rate in the range of ₹250 to 300.
The brothers of flight are not getting along well and want to demerge the BPO business into a separate
company. XYZ Limited, which will be solely controlled by and managed by B. A, will not have any
shareholding in XYZ Limited. B, on the other hand, will get out of ABC Limited completely by transferring
shares to A.
A scheme is worked out in which a new company XYZ is incorporated with authorised capital of
₹1,00,00,000 share face value 10 each.
B is allotted 20,00,000 shares at par prior to demerger. He is not allotted any shares of XYZ Limited.
Rest of the shareholders including B are allotted one share of XYZ for one share of ABC Limited. As a
part of the scheme, shares held by B in ABC Limited are transferred to A.
A will now hold 40,00,000 share in ABC Limited and nothing in XYZ. B will hold 40,00,000 shares in XYZ
Limited and nothing in ABC Limited.
Public shareholders will hold 60,00,000 shares in each of the companies.
CARVE-OUT
It is a hybrid of divestiture and spin off.
A company transfers all the assets, liabilities, loans and business of one of its divisions to
its 100% subsidiary.
At the time of the transfer, the shares are issued to transferor company itself and 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 buy offer for sale
The consideration for transfer of business to a new company eventually comes in the
coffers of the transferor company.
Therefore, they are normally used to mobilise funds for core business or businesses of a
company by realising the value of non core businesses.
There are also used to cardboard capital hungry businesses from the businesses requiring
normal levels of capital so that further fund raising my equity dilution can be restricted to
capital intensive businesses, sparing the other businesses from equity dilution.
LBO
A leveraged buyout (LBO) occurs when the buyer of a company takes on a
significant amount of debt as part of the purchase.
The buyer will use assets from the purchased company as collateral and
plan to pay off the debt using future cash flow.
In a leveraged buyout, the buyer takes a controlling interest in the
company. This lets the buyer set new goals for the business and
restructure the management team to achieve them.
Two common forms of leveraged buyout are:
•Management buyout (MBO)—when a company’s senior management
team purchases all or part of the business
•Buy-in-management buyout (BIMBO)—when external buyers partner
with senior management to purchase the business
 LEVERAGED BUY-OUT
In a leveraged buyout, all of the stock, or assets, of a
public or private corporation are bought by a small
group of investors (“financial buyers aka financial
sponsors”), usually including members of existing
management and a “sponsor.” Financial buyers or
sponsors:
Focus on ROE rather than ROA.
Use other people’s money.
Succeed through improved operational performance,
tax shelter, debt repayment, and properly timing exit.
Focus on targets having stable cash flow to meet debt
service requirements.
 Typical targets are in mature industries (e.g., retailing,
textiles, food processing, apparel, and soft drinks)
MBO
A management buyout (MBO) is a corporate finance transaction where the
management team of an operating company acquires the business by borrowing
money to buy out the current owner(s).
An MBO transaction is a type of leveraged buyout (LBO)and can sometimes be
referred to as a leveraged management buyout (LMBO).
In an MBO transaction, the management team believes they can use their expertise
to grow the business, improve its operations, and generate a return on their
investment.
The transactions typically occur when the owner-founder is looking to retire, or a
majority shareholder wants out.
Lenders often like financing management buyouts because they ensure the
continuity of the business’ operations and executive management team.
The transition often sits well with customers and clients of the business, as they can
expect the quality of service to continue
MBO
•Management buyouts are preferred by large companies seeking the
sale of unimportant divisions or owners of private businesses who
choose to withdraw.
•They are undertaken by management teams because they want to
get the financial incentive for the company’s potential growth more
explicitly than they can otherwise do so as employees.
•Business owners find management buyouts appealing, as they can
be assured of the commitment of the management team and that
the team will provide downside protection against negative press.
MLP
A master limited partnership (MLP) is a business venture in the form of a publicly
traded limited partnership.
It combines the tax benefits of a private partnership with the liquidity of a publicly
traded company.
A master limited partnership trades on an exchange. MLPs generally experience cash
flow stability and are required by the partnership agreement to distribute a set
amount of cash to their investors.
Their structure can also help reduce the cost of capital in capital-intensive
businesses such as the energy sector.
It is a publicly-traded business venture that combines the features of a corporation
with that of a partnership and exists as a publicly-traded limited partnership. Such
business ventures are exempt from corporate tax.
A master limited partnership pools the tax benefits of a private partnership and
liquidity of a publicly-traded business.
MLP
The MLP is a hybrid legal entity that combines elements of two
business structures—a partnership and a corporation.
It is considered to be the aggregate of its partners rather than a
separate legal entity (like a corporation).
An MLP technically has no employees. The general partners are
responsible for providing all necessary operational services.
An MLP issues units instead of shares.
These units can be bought and sold on stock exchanges. As a
result, they are a liquid security. Traditional partnerships cannot
offer the same level of liquidity.
MLP
Limited partners: Limited partners are the investors or unitholders, ordinary, outside
investors.
They provide capital to the company and receive cash distributions but have no role in daily
operations or management and have limited voting rights.
Limited partners are protected from any liability of the enterprise. silent partners.
General partners: The GP oversees the day-to-day operations of the MLP, makes
decisions and exercises board and management controls, and is paid by how well the
business performs.
The GP's payment typically includes a fee for running the operation and a portion of profits
or an equity stake in the enterprise.
They increase their ownership stake when a profit is generated as a reward. In this way, they
are encouraged to perform well for limited partners.
MLPs are known to provide a steady income stream and rich returns. Many individual MLPs
give more than 10% yield because MLPs are obliged to distribute 90% of their income to the
shareholders.
Therefore, they cannot invest an unlimited amount back into the firm or spend it on
expansion as regular companies can.
LLP
A limited liability partnership (LLP) is a legal business structure.
Professional firms such as solicitors and accountants often choose to set
up as limited liability partnerships, but the structure can also be a
beneficial option for other types of business.
It combines the benefits of a partnership firm and a company, offering
the flexibility of a partnership with the limited liability protection of a
company.
The partners in the LLP are directly responsible for compliance with all
the provisions of the Limited Liability Partnership Act and the provisions
specified in the LLP agreement.
Examples: Law firms, accounting firms, medical practices, and wealth
management companies.
LLP
•Separate Legal Entity: Like companies, LLPs enjoy a separate
legal identity, ensuring members' assets remain protected.
•Minimum Two Partners: LLP formation requires a minimum of
two individuals to join as partners, fostering collaboration in
business endeavours.
•Unlimited Partners: Unlike some business structures, LLP places
no upper limit on the number of partners, promoting scalability.
•Designated Partners: At least two partners must be designated
(appointed), and one must be an Indian resident, enhancing
governance and accountability.
•Limited Liability: Partner liability is confined to their contributed
capital, minimising personal risk in the case of business obligations.