M & a & Corporate Restucturing

7/29/2019 M & a & Corporate Restucturing

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Mergers, Acquisitions &

Corporate Restructuring


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Corporate Restructuring

Definition

A. Change in the capital structure that is not in the

ordinary course of the business or

B. Change in the ownership structure or control overmanagement or

C. Change in the business capacity or portfolio by an

inorganic route.


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Why Corporate restructuring?

Nothing is permanent except change. What could be the reasons for change ?

Increased competition,

Advent of a new & more efficient technology,

Emergence of competing products

Emergence of new markets/ new class of consumers

Demographic changes

Business cycles, etc

To achieve economies of scale /scope.

To avail tax benefits. To achieve synergy

To increase market share /revenue


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Illustrating Economies of Scale

Period 1: Firm A (Pre-merger)

Assumptions: Price = $4 per unit of output sold Variable costs = $2.75 per unit of output Fixed costs = $1,000,000 Firm A is producing 1,000,000 units of output

per year Firm A is producing at 50% of plant capacity

Profit = price x quantity variable costs fixed costs

= $4 x 1,000,000 - $2.75 x 1,000,000- $1,000,000

= $250,000

Profit margin (%)1 = $250,000 / $4,000,000 = 6.25%Fixed costs per unit = $1,000,000/1,000,000 = $1

Period 2: Firm A (Post-merger)

Assumptions: Firm A acquires Firm B which is producing

500,000 units of the same product per year

Firm A closes Firm Bs plant and transfersproduction to Firm As plant

Price = $4 per unit of output sold

Variable costs = $2.75 per unit of output

Fixed costs = $1,000,000

Profit = price x quantity variable costs

fixed costs

= $4 x 1,500,000 - $2.75 x 1,500,000

- $1,000,000

= $6,000,000 - $4,125,000 - $1,000,000

= $875,000

Profit margin (%)2 = $875,000 / $6,000,000 = 14.58%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 = $.252Margin per $ of revenue = $4.00 - $2.75 - $.67 = $.58


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Illustrating Economies of Scope

Pre-Merger: Firm As data processing center

supports 5 manufacturing

facilities

Firm Bs data processing center

supports 3 manufacturingfacilities

Post-Merger: Firm As and Firm Bs data processing

centers are combined into a singleoperation to support all 8manufacturing facilities

By combining the centers, Firm A is

able to achieve the following annualpre-tax savings:

Direct labor costs = $840,000.

Telecommunication expenses =$275,000

Leased space expenses =$675,000

General & administrativeexpenses = $230,000

Key Point: Cost savings due to expanding the scope of a singlecenter to support all 8

manufacturing facilities of the combined firms.


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Activities which are not termed as

corporate restructuring

A. Intial creation of a corporation

B. Change in the internal command structure or

hierarchy

C. Change in the business process

D. Downsizing

E. Outsourcing, ERP, TQM, franchising,networking, licensing


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Forms of Corporate Restructuring

Merger

Consolidation

Acquisition

Divestiture

Demerger

Carve out

Joint venture

Reduction of capital Buy- back of securities

Delisting of securities/ Company


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Merger

Combination of all the assets, liabilities, loans & businesses of 2 or more

companies such that one of them survives.

Merger of JSW Steel & JSW Ispat.

Merger of RTIL & Mynylon.

A ltd. is proposed to be merged with B ltd., wherein based on relative

valuation of both companies , shareholders of A ltd. will be given 2 shares

of B ltd for every 5 shares of A ltd. held by them.

A ltd B ltd B ltd

No. of

Shares

1 Cr of Rs.

10/- each

5 Cr of Rs.

10 each

5.4 of Rs.

10 each Cr

Share

capital

Rs. 10 Cr Rs. 50Cr Rs. 54 Cr


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Consolidation

Creation of an altogether new company owning assets,

liabilities, loans and businesses of 2 or more companies,both/all of which cease to exist.

A ltd. & B Ltd. decide to consolidate into C Ltd.. Based on

relative valuation it is decided that for every 2 shares of A Ltd.

the shareholders of A ltd. will get 1 share of C ltd. and for

every 5 shares of B Ltd. The shareholders will get 2 shares of C

Ltd.

A Ltd B Ltd C Ltd.

Shares 1 Cr. of Rs. 10

each

5 Cr. of Rs. 10

each

2.5 Cr. of Rs. 10 each

Share Capital Rs. 10 Cr Rs. 50 Cr Rs. 25 Cr.


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Example of Consolidation

Federal steel Co., American Steel & wire Co., National

tube Co., American Tin Plate Co., National Tube Co.,

American steel hoop Co. & American Sheet Steel Co.

were consolidated to form

U.S . Steel Co.


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Acquisition

An attempt by which a company, or an individual or a

group of individuals acquires control over othercompany or right to control management & policydecisions. From a legal point of view, in an acquisition,the target company still exists as an independent legalentity, which is controlled by the acquirer.

Ways of acquisition:A. Acquiring substantial percentage of voting capital of

the target company

B. Acquiring control over an investment or holding

company , whether listed or unlisted, that in turnholds controlling interest in the target company

C. Simply acquiring management control through aformal or informal understanding or agreement withthe existing person in control of the target company.


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Divestiture Sale of all or substantially all the assets of the company or

any kind of its business undertakings/ divisions, usually forcash or for a combination of cash & debt and not againstany equity shares.

Also known as slump sale as all assets: fixed assets, netcurrent assets and investments are sold as one lump forone lump sum amount and not for each asset separately.

Normally the loans are not taken over by the purchaser.

Divestiture is normally used to mobilize resources for corebusiness or businesses of the company by realizing value ofnon-core business assets which helps them focus on thecore businesses and hence improve its P/E multiple andhence the market cap.

Example- Camlin Limited.


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Example

Demerger of Indal

Indal demerged its aluminum business intoHINDALCO which acted as the resulting company

whereas the Demerged Indal was left with a smallbusiness of aluminum foil.

Spin-offs & split-ups are normally resorted toachieve focus in the respective businesses,

especially if the businesses are non-synergetic. Split-offs are used to realign the inter se holding

of promoters


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Carve- Out

It is a hybrid of divestiture & spin-off. A company transfers all the assets, liabilities, loans &

business of one of its divisions to its 100% subsidiary

Thus, at the time of transfer the shares of the resultingcompany are issued to the transferor company itself & not

to the shareholders. Later on the company sells the shares in parts to outsiders-

whether institutional investors by private placements or toretail investors by offer for sale.

Carve-outs are used to separate capital hungry businesses

from the businesses requiring normal levels ofcapital so thatfurther fund raising by equity dilution can be restricted toonly capital intensive businesses sparing the otherbusinesses from equity dilution.


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Joint Venture

An arrangement by which two or more

companies called joint venture partners

contribute to the equity capital of a new

company called joint venture in pre-decided

proportion

JVs are formed to pool the resources of the

partners and carry out a business or a specific

project beneficial to both the partners But none of the partners wants to carry out

under its own corporate entity.


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Reverse Takeover & Reverse Merger

A smaller firm will acquiring management controlof a larger and/or longer-established companyand retain the name of the latter for the post-acquisition combined entity. This is known asa reverse takeover.

Reverse merger, a form of transaction thatenables a private company to be publicly listed ina relatively short time frame. A reverse mergeroccurs when a privately held company (often one

that has strong prospects and is eager to raisefinancing) buys a publicly listed shell company,usually one with no business and limited assets.


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A horizontal merger is usually between two companies in thesame business sector. The example of horizontal mergerwould be if a health cares system buys another health care

system. This means that synergy can obtained through manyforms including such as; increased market share, cost savingsand exploring new market opportunities.

A vertical merger represents the buying of supplier ormarketing & distribution channels of a business. In the same

example as above if a health care system buys the ambulanceservices from their service suppliers is an example of verticalbuying. The vertical buying is aimed at reducing overhead costof operations and economy of scale.

Conglomerate M&A is the third form of M&A process which

deals the merger between two irrelevant companies. Theexample of conglomerate M&A with relevance to abovescenario would be if health care system buys a restaurantchain. The objective may be diversification of capitalinvestment.


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Buy-Back Of Securities: A very important tool of Capitalrestructuring ( capital reduction )

When a company holds excess cash, which it does notrequire in the medium term; it is prudent for thecompany to return its excess cash to its shareholders viabuy-back of securities

Manners in which reduction of capital can be effected:

1. By extinguishing or reducing the liability in respect ofshare capital not paid-up (since not called up yet.)

2. By writing off or cancelling the capital which is lost

3. By paying off or returning excess capital that is notrequired by the company

Provisions regarding the buy-back of securities..docx
http://localhost/var/www/apps/conversion/tmp/scratch_8/Provisions%20regarding%20the%20buy-back%20of%20securities..docxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/Provisions%20regarding%20the%20buy-back%20of%20securities..docxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/Provisions%20regarding%20the%20buy-back%20of%20securities..docxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/Provisions%20regarding%20the%20buy-back%20of%20securities..docxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/Provisions%20regarding%20the%20buy-back%20of%20securities..docx


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Delisting of securities

Delisting of securities: delisting of equity

shares from all the stock exchanges.

Refer to the SEBI guidelines for delisting of

securities.SEBI Guidelines for delisting of

securities.pdf
http://localhost/var/www/apps/conversion/tmp/scratch_8/SEBI%20Guidelines%20for%20delisting%20of%20securities.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_8/SEBI%20Guidelines%20for%20delisting%20of%20securities.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_8/SEBI%20Guidelines%20for%20delisting%20of%20securities.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_8/SEBI%20Guidelines%20for%20delisting%20of%20securities.pdf


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Takeover Tactics

1. Dawn raid

2. Bear hug

3. Saturday night special or godfather offer

Successful takeover tactics in India1. Market accumulation followed by an open offer

2. Negotiated deal with FI followed by an open offer

3. Negotiated deal with the partner followed by an open

offer.4. Direct offer to the shareholders of the target company


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Anti Takeover/ Defense Tactics

Crown jewels

Blank Cheque

Shark repellents

a) Poison pill

Issue of rights/warrants Selling shares at a very

high price

Borrow large amount of

long-term loans Leveraged cash out

Leveraged recap

b) Poison put

c) Scorched Earth

d) People pill

e) Golden parachute

f) Pac man

g) Green mail

h) White knight

i) Grey knight

j) Buy-back

Documents

M & a & Corporate Restucturing