Corporate Resturcturing and Merger and Acquisition

8/3/2019 Corporate Resturcturing and Merger and Acquisition

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A

PRESENTATION

ON

CORPORATE RESTURCTURING

&

MERGER AND ACQUISITION

Submitted By: - Submitted To:-

Jitendra Virahyas Dr.

H.O.D.

MBA Part II (Sem III )

Deepshikha College of Technical Education, Jaipur2009-2011


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CONTENT

1. Corporate Restructuring

1.1. Definition And Meaning

1.2. Concept Of Corporate Restructuring

1.3. Factors Affecting Corporate Restructuring

1.4. Areas Of Corporate Restructuring

1.5. Why Corporate Restructuring

2. Merger Or Amalgamation

2.1. Meaning And Definition:

2.2. Types Of Merger

3. Takeovers Or Acquisition

3.1. Meaning And Definition:

4. Financial Problems Of Mergers And Acquisition

5. Managing The Mergers And Acquisitions Process To Create Value

6. Formulas Of Merger/ Acquition

7. Benefits Of Mergers And Acquisitions

8. Disadvantage Of Merger And Acquisition

9. Procedure For Merger And Acquisition


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CORPORATE

RESTRUCTURING

Definition and meaning

Corporate restructuring has become a major force in the financial and economic

environment due to opening up of the economy to international financial markets and

availability of different kinds of instruments.

It is being viewed as a necessary process for corporate survival and growth in

the present economic environment of liberalisation and globalisation leading to global

competition.

Many Indian corporate have difficulties in restructuring due to internal or external

constraints including those which have been created by the inaction of the central/state

governments. Restructuring in India started in 1998, wherein, many large companies

went ahead with mergers, acquisitions, self-offs and spin-offs to increase their

profitability and competitiveness.


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Concept of Corporate restructuring

Corporate restructuring is generally understood as a technique to restructure the

assets and liabilities of a corporate entity including its debt-equity structure to promote

its overall efficiency and growth. But the phase corporate restructuring has a much

deeper meaning.

The restructuring can be for facing domestic and\or global competition,

identification and exploitation of core competencies, technological competitiveness

leading to quality improvement and cost effectiveness, innovative financial strategies

and capital restructuring, transformation of the people involved in restructuring and

achieving an overall turn round.

Restructuring would radically alter a firm capital structure, assets mix and

organisation so as to increase the firm value. Thus, corporate restructuring is a process

by which a company can consolidate its business operations and strengthen its position

for achieving the desired objectives of staying synergetic, competitive and successful.

Restructuring and re-organisation

The basic difference between restructuring and re-organisation is that

restructuring is resorted to keep the business going on and re-organisation is done to

achieve balanced operational results.


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Factors affecting corporate restructuring

Corporate become sick because of unfavourable external environment and/or

due to internal and managerial deficiencies. Hence, the factors affecting the corporate

for resorting restructuring can be classified into external and internal factors:

Unfavourable External Environment which mainly includes the following

Shortage of main raw materials and utilities,

Severe competition,

Shifts in consumer attitudes and preferences,

War and natural calamities,

Adverse domestic as well as global economic and political changes,

Shortage of medium and long-term funds in the financial markets.

The Internal and managerial deficiencies which are responsible for restructuring

can be grouped in four categories as noted bellow-

Production:

a) Obsolete technologies;

B) Imbalance in plant and machinery;

c) Poor location;

d) Lack of research and development;

e) Low quality product;

f) Uneconomical product-mix.


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Marketing:

a) Unrealistic demand and supply estimates;

b) Unreasonable price structure;

c) Poor sales promotion;

d) Improver marketing and distribution choice leading to high costs;

e) Poor after sales and customer service.

Finance:

a) Poor financial planning;

b) Weak budgetary and cost control system;

c) Improper accounting policies;

D) Inadequate management information system;

e) Poor inventory, receivables and cash management;

f) Inadequate tax planning.

Personal Issues:

a) Ineffective human resource;

b) Poor labour relations;

c) Bad human resource policies;

d) Under or over staffing & Irrational compensation structure.

e) Inadequate motivation and training facilities;


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Areas of corporate restructuring

Corporate restructuring has become a major force in the financial and economic

environment. It can take place in a number of fields.

The followings are the broad areas of restructuring-

Financial:

This involves decisions relating to mergers and acquisitions (M & As);

takeovers, joint ventures, and strategic alliances. It also deals with restructuring

the capital base and raise finance for new prefects. The M&A activity is a very

important from of corporate restructuring.

Technological:

This involves investment in research and development, renovation and

modernisation of plant and machinery, divestment of unprofitable plants and

operations, and up gradation of technology. This also deals with alliances with

multinational companies to exploit technological strength.

Marketing:

This involves decisions regarding the product-market segments where the

company plans to operate. This also deals with reformulation of product-market

strategy.

Manpower:

This involves reduction in manpower, improvement in managerial system,

workers participation in management, change of management, and so on. This

can be achieved by establishing internal structure and processes for improving

the capability of the people in the organisation to respond to changes.


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Why corporate restructuring

The basic objective of corporate restructuring is to have efficient and competitive

business operations by increasing the market share.

Beside it, to fulfil this objective, companies resort to restructuring on account of

the following reasons-

Globalisation of business:

Global market concept has forced many companies to restructure,

because producers having lowest cost of their products can only survive in the

competitive global market. Moreover, convertibility of rupee has also attractedmedium-sized industries to operate in the global market.

Revolution in Information technology:

In recent years, India has emerged as information technology huts. This

has made it necessary for companies to adopt new changes for improving

corporate performance.

Competitive business:

Competitiveness in business has necessitated to have sharp focus on

core business activities to minimise the operating costs, to maximise efficiency

in operation and to top managerial skill to the best advantages of the firm.

Changes in fiscal and Government policies:

the government under the economic reform programme since 1992, had

introduced many changes like de-regulation, decontrol, tax simplification etc.

These changes have led many companies to go far newer markets and

customer segments.


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Division into smaller business:

Fierce competition and lack of competitive costing is forcing thecompanies to restructure themselves. Hence, product divisions which do not fit

into the companys main line of business are being divested, thereby divisional

sing into smaller businesses.

Benefits of corporate restructuring:

Many companies have resorted to restructuring on account of the

following benefits-

Economies of scale can be achieved by consolidating the

capacities and by expansion of activities.

Diversification of business activities minimises the business risks.

This enables the firm to achieve the target rate of return.


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Merger or Amalgamation

Meaning and definition:

A merger is a combination of two or more companies into one company. It may

be in the form of one or more companies being merged into an existing company or a

new company may be formed to merge two or more existing companies. The income

tax act, 1961 of india uses the term amalgamation for merger.

According to section 2 (1A) of the income tax act, 1961, the term amalgamation

means the merge of one or more companies with another company or merger of two or

more companies to form one company in such a manner that:

1) All the property of the amalgamating company or companies immediately before

the amalgamation because the property of the amalgamated company by virtue

of the amalgamation.

2) All the liabilities of the amalgamating company or companies immediately before

the amalgamation because the liabilities of the amalgamated company by virtue

of the amalgamation.

3) Shareholder holding not less than nine-tenth in value of the shares in the

amalgamation company or companies (other than shares already held therein

immediately) before the amalgamation by or by a nominee for, the amalgamated

company by virtue of the amalgamation.

Thus, merger may takes any of two forms:

1) Merger through absorption

2) Merger through consolidation


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1) Merger through absorption: a combination of two or more companies into an

existing company is known as absorption. In a merger through absorption all

companies except one go into liquation and lose their separate identities.

Suppose, there are two companies, A Ltd. and B Ltd. Company B Ltd. Are

merged into A Ltd. Leaving its assets and liabilities to the acquiring company A Ltd. and

company B Ltd. is liquidated. It is a case of absorption.

2) Consolidation: a consolidation is a combination of two or more companies into a

new company. In the form of merger, all the existing companies, which combine, go

into liquidation and form a new company with a different entity. The entity of

consolidating corporation is lost and their assets and liabilities are taken over the new

corporation or company. The assets of old concern are sold to new concern and their

management and control also passes into the hand of the new concern.

Suppose, there are two companies called A Ltd. and B Ltd.; and they merge

together to form a new company called AB Ltd. or C Ltd.; it is a case of consolidation.

Types of merger

1) Horizontal merger: when two or more concern dealing in a same product or

services join together, it is known as a horizontal merger. The idea behind this

type of merger is to avoid competition between the units. For example, two

manufacturers of same type of cloth, two transport two book seller companies

operating on the same rout-the merger in all these cases will be horizontal

merger.Besides avoiding competition, there are economies of scale, marketing

economics, elimination of duplication of facilities, etc.


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2) Vertical merger: a vertical merger represents a merger of firms engaged at

different stage of production or distribution of the same product or service. In this

case two or more companies dealing in the same product but at different stage

may join to carry out the whole process itself.

A petroleum producing company may set up its own petrol pump for its

selling. A railway company may join with coal mining company for carrying coal

different industrial centres. The idea behind this type of merger is to take up two

different stages of work to ensure speedy production or quick service.

3) Conglomerate merger:when two concerns dealing in totally different activities

join hands it will be a case of conglomerate merger. The merging concern

neither horizontally nor vertically related to each other.

For example, a manufacturing company may merge with an insurance

company; a textile company may merge with a vegetable oil mill. There may be

some common feature in merging companies, such as distribution channels,

technology, etc. This type of merger is undertaken to diversify the activities.


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Takeovers Or AcquisitionMeaning and definition:

An essential feature of merger through absorption as well as consolidation is the

combination of the companies. The acquiring company take over the ownership of one

or more other companies and combines their operations. However, an acquisition does

not involve combination of companies.

It is simply an act of acquiring control over management of other companies.

The control over management of other company can be acquired through either a

friendly take-over or through forced or unwilling acquisition. When a company take-

over the control of another company through mutual agreement, it is called acquisition

or friendly take-over. On the other hand, if the control acquired through unwilling

acquisition, i.e., when the take-over is opposed by the target company it is known as

take-over.

Financial problems of mergers and acquisition

1) Cash management

2) Credit policy

3) Financial planning4) Dividend policy

5) Depreciation policy


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Managing the mergers and acquisitions process to create value

1) Understanding the needs

2) Merger and acquisition team

3) Candidate size

4) Frequency of merger and acquisition activity

5) Assessing and establishing whether the candidate possesses the requisite

capabilities and skills

6) Synergies

7) Review of culture fit between entities8) Valuation, merger/purchase consideration and source thereof

9) Ongoing pre and post merger and acquisition integration process

Formulas of merger/ acquition

Steps involves in the calculation of the value of the merger :-

1) Determination of the exchange ratio or swap ratio :-

Target company

Exchange ratio = --------------------------------

Acquiring company

2) Determination of earning per share of the merge company:

EATa+ EATt

EPSm = -------------------------

Na+NT


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Where , EPSm = EARNING PER SHARE OF MERGED COMPANY.

EATa =EARNING AFTER TAX OF THE ACQUIRING COMPANY

EATt = EARNING AFTER TAX OF THE TARGET COMPANY

Na = NUMBER OF OUTING SHARE IN ACQUIRING COMPANY

Nt = NUMBER OF EQUITY SHARE ISSUESBY ACQUIRING

COMPANY

TO THE SHARE HOLDER OF THE TARGET COMPANY

3) determination of market price per share(mpsm):-

MPSm = EPSm * P/E RATIOa

MPS = MARKET PRICE PER SHARE OF THE MERGED COMPANY.

P/E RATIO = PRICE EARING RATIO OF ACQURING COMPANY

4) MARKET VALUE OF THE COMPANY = MPSm* Num OF EQUITY SHARES

OUTSTADING.

5) GAIN AND LOSS FOR THE ACQUIRING COMPANY =

GAIN AND LOSSES OF THE ACQUIRING COMPANY =

POST MERGER VALUE OF THE ACQUIRING COMPANY PRE MERGER

MARKET VALUE OF THE ACQUIRING COMPANY.


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6) DIFFERENT PAYMENT PLAN :-

Num OF EQUITY SHARE ISSES TO TARGET COMPONY IN EVERY

YEAR = EXCESS EARNING * P/E RATIOa / MPSa

7) EQUIVALENT EARNING PER SHARE = EPSm * EXCHANGE RATIO / X

This steps have to follow for getting the value of the merger.

Benefits of mergers and acquisitions

The following are the main region of mergers and acquisitions of the companies:

1) Operating economies: Amalgamation of two or more companies results in a

number of operating economics . Duplicate facilities can be eliminate .

Marketing , accounting purchasing and other operation can be can be

consolidate. Thus as a result of amalgamation the amalgamated company would

have more strength and capacity to operate better than the two or more

amalgamating companies individual.

2) Economies of scale: he amalgamated company can have larger volume of

operations as compares to the combined individual operations of the

amalgamation companies . it can thus have economic scale by having intensive

utilisation of production plants, distribution net work, engineering services ,

research and development facilities etc.

3) Tax implication: in several amalgamation schemes tax place a crucial role. A

companies with heavy cumulative losses may have little prospects of taking

advantage of carrying forward the losses and the meeting them out of future

profits and thus taking advantage of the tax benefits .


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However in case this company is merged with another profit making

company ,its losses can be set off against the profit making company resulting in

substantial tax benefits to the amalgamated company.

4) Elimination of competition: the merger of two or more companies into one

would result in elimination of competitors between them they would also save in

terms of advertising cost and thus make available goods to the consumers at

lower price.

5) Better financial planning: merger results in better financial planning and

control.

For Example a company having a long gestation period may merge itself

with another company having short gestation period. As a result of this merger

the profit coming from company with short gestation period can be used to

improve the financial requirement of the company with long gestation period.

Latter company with long gestation period starts giving profits, it will benefit for

the amalgamated company as a whole.

6) Growth: amalgamation helps faster to balanced growth of the amalgamated

company. Growth by acquisition is generally cheaper than the internal growth

since numerous cost and risks involved in developing and embarking upon a

new product line or a new facilities and almost avoiding by acquisition of a going

concern . thus the company can achieve and maintain the desired growth rate

by acquiring other companies.

7) Stabilisation by diversification: amalgamation helps company in achieve

stability in its earning by diversifying its operations. a company

EXPERINCECING wide economic fluctuations and cyclical phase in earning

due to nature of its products or may merge with another company which have

totally different line of product or business .


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thus the merge would act as safeguard against business cycle

fluctuation and bring stability in the earning of the company.

8) Dilution of FEMA: a foreign company investing in India may merge with Indian

company in order to meet the requirements of foreign exchange management

act (FEMA) for diluting its foreign shareholding.

9) Personal reasons: the share holder of a closely held company be desire that

their company be acquired by another company that has an established for its

share. This will also facilitate the valuation of their shareholders for wealth taxpurpose. Moreover shareholder of a company can also improve their liquidity

position by selling some of their shares and diversifying their investment.

10)Economic necessity: the government may also the merger of two or more sick

units into a single unit to make them financial viable. Similarly it may also

requires the merger of a sick units with the healthy unit to ensure better

utilisation of resources improving results and better management.

The above is not an exclusive list of mergers and amalgamation. their may be some

other factors. The changes in socio economic condition, economic, fiscal, trade and

industrial policy of govt, status, governing the company may also the region these.


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Disadvantage of merger and acquisition

In spite of the above benefit mergers and acquisitions has some dangers are as

following:

1) Elimination of healthy competition: merger may involve absorption of small,

efficient and growing unit into a large unit. Thus it eliminate individual

competition necessary for healthy growth of the industrial units.

2) Concentration of economic power: it has been already been stated above

that all type of mergers have the inherent tendency of concentration of

economic power. Monopolistic condition may be created which are ultimately

disadvantage for the consumers.

3) Adverse effects on national economy: Concentration of economic power,

Elimination of healthy competition, etc may ultimately results in deterioration in

the performance of the merged undertakings. It is going to affect adversely to

the national economy.

However merger are essential for the growth of the organizations. Merger lead to

economies of scale, maximum utilisation of the capacity, operating economies ,

mobilisation of financial resources, rehabilitation of sick units.


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Procedure for merger and acquisition

The implementation of merger and acquisition schemes involves the following step:

1) Analysis of the proposal: having concern the idea of merger and

amalgamation between two or more companies the management of respective

companies have to look into the pros and cons of the merger and

amalgamation schemes.

2) Determination of exchange ratio: the merger and amalgamation requires

exchanges of shares. The shareholder of the amalgamated companies are

offers shares in the amalgamated company for their shareholder.

3) Approval by shareholders: a scheme of amalgamation as provide by the

respective boards, before the shareholder of the respective companies for their

approval. Section 390to 396A of the companies act 1956 contain provisions

regarding amalgamation of two or more company.

4) Consideration of the interest of the creditors: the schemesshould also be

discussed with the creditor of the amalgamated company and their views as

certain.

5) Approval of the court: the schemes of amalgamation has to be submitted to

court for its approval .the court is satisfied only when that the schemes is just

and reasonable for all concerns .

6) Approval of the BOARD OF DIRECTOR: THE SCHEMES Of amalgamation,

involve as a result of negotiations , is put finally before the board of directors of

the respective companies for their approval.

7) Transfer of assets and liabilities: from the transferring date all liability and

assets are transfer to the acquiring companies.

8) Payment in cash or securities: As per schemes of amalgamation theacquiring companies will issue the share and debenture or debenture in

exchange of share or debentures of acquired companies or make payment in

cash.


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JitendraVirahyas

[email protected]

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Corporate Resturcturing and Merger and Acquisition