CORPORATE RESTRUCTURING

It is the process of changing organisation structure of the group / company to make it more useful in achieving organisational goals . Process of restructuring: 1. Restructuring business portfolio (asset mix ) 2.Financial restructuring (composite of liability )

3.Organisational restructuring (pattern of ownership ) What could be the reasons for all these restructuring activities ? a) intense competition b) technological change

c) initiation of structural reforms in industry

d) foreign investment Rationale behind corporate restructuring : To conduct business operation in an efficient, effective & competitive manner

To increase organisation market value of shares, brand power, synergies To achieve quick growth To flattern organisation so that it could encourage culture of initiation & innovation To increase focus on core areas of work & to get closer to the customer To reduce cost/reduce level of hierarchy/reduce communication delay

To reshape the organisation for the new era

To develop organisation on the guidelines of consultant/stakeholders

Objectives : Growth increase in sales, profit & assets

Technology
eg. software tieups, power projects Government policy Exchange rate fluctuation Economic stability Reduce dependence Right sizing to have right focus

Diversify risk Market penetration -Coke - Parle

-Godrej-GE
- Kelvinator- Whirlpool

Tax advantage
Operating efficiency - HCL-HP(JV) - P&G & GODREJ SOAPS Managerial effectiveness (MCF-UB, VISL- SAIL)

Forms of Corporate Restructuring

1.Mergers & Acquisition

2.Expansion
3.Diversification

4.Collaboration
5.Joint Ventures

New enterprises owned by two or more participants for special purpose for a limited duration.

 Eg.GM Toyota,GM gain from new experience in Japanese management build high quality low cost cars.

Toyota management traditions that made it the number 1 auto producer in the world.
P&G & Godrej P&G utilised the distribution network . Godrej brand product base.

Reasons for JV :

To overcome insufficient financial or

technical ability to enter a particular line

of business .
To share technology and management

skills in organisation ,planning, and

control.

To diversify the risk by engaging in the

production of different things in different locations .

 To obtain distribution channels or raw material supply.

To achieve economies of scale

To take advantage of favourable tax treatment or political incentives. Characteristics of JV :

a) Every JV has a scheduled life cycle which will end sooner or later . b) Every JV has to be dissolved when it has outlived its life cycle

c) Changes in the environment force JV to

be redesigned regularly
Types of JV:

Formation of JV b/w two firms of the same industry of the same country
Of different industries but of the same country Of two countries locating the business in the domestic country Of two countries locating the business in foreign country

Of two countries locating the business in the third country.

Reasons for failure of JV : 1.The hoped technology never developed . 2.Preplanning for JV was inadequate. 3. Agreements could not be reached on alternative approaches to solving the basic objectives of JV .

4.Managers refusing to share the expertise and

knowledge.

5. Management difficulties may be

compounded control or compromise on

difficult issues.
-------------------------------------------------------

Eg for JV: Renault Nissan Technology and Business centre India Pvt Ltd is a JV .French and Japanese automobile alliance.50:50. Japanese automobile companys product development plans for many markets 2010 employ 1500 people

Maruthi Suzuki India Ltd JV (finance & technology) Futaba Industrial Co. for manufacture and sale of exhaust system components for its cars.
Futaba has existing agreement with Mark Exhaust Systems Ltd for manufacture of exhaust system components. Futaba largest manufacturer of exhaust system components for automobile in Japan ,new technology for manufacturing.

Maruthi Suzuki Sona Koyo steering systems Asahi Glass Jay Bharat Maruthi Ltd Denso

NTPC Ltd JV BHEL NTPC countrys largest power generator

50:50 partnership, work jointly to complement their respective core strengths in power sector.

6.Divestiture ( Hive off):

The sale of segment of a company to a third

party. Assets, product lines ,subsidiaries sold

for cash or securities or for both.

Eg: Coromandel fertilisers cement divisionIndia cements Ltd. In London Cadbury schweeps soft drinks division to coca cola. Parle Thumps up- Coca cola. Reasons for Divestiture: Increase the value of shares to share holder. Poor fit of a division Reverse synergy = (4-1=5)

Poor performance
Capital market factors- The combined capital structure may not help the company to attract capital from the investors. Cash flow factors- profitable and valuable

divisions sold to tide over the crises.

To release the managerial talent

To correct the mistakes committed in investment decisions.

To realise profit from the sale of profitable

divisions To reduce the debt burden To help to finance new acquisition MOTIVES: Raising capitaleg. Ceat sold its nylon cord plant to SRF. Curtailment of losses Strategic realignment

 Efficiency gains Types of Divestiture: 1.Spin off: It is a kind of demerger when an existing parent company distributes on a pro-rata basis the shares of the new company to the share holders of the parent company free of cost. No money transaction

Subsidiaries assets are not revalued

Transactions is treated as stock dividend & tax free exchange. Both companies exist and carry on their business independently The share holders of the parent company become the shareholders of the new company .eg: Apple finance spun off to Aptech Ltd .ITC to ITC Hotel Ltd.

Involuntary spin-off : faced with adverse regulatory ruling.

Defensive spin off : take over defense

Tax consequences of spin off: Shares alloted are not taxed as a capital gain or as dividend. 2.Sell-off:
When a firm sells a division to another

company. payment is received in cash or

securities.

 When firm sell poorly performing division,

the asset goes to another owner. Asset could be used more advantageously than the seller. Seller receives cash in the place of asset.

Have positive impact on the market price of shares of both the buyer and seller companies.

3.Voluntary corporate liquidation or bust ups It is a complete sell off. Voluntary liquidation ,create value to the shareholders. 4. Equity carveouts: It resembles Initial Public Offering of some portion of equity stock of wholly owned subsidiary by the parent company.

The parent co. may sell a 100% interest in subsidiary company or it may choose to remain in the subsidiarys line of business by selling only a partial interest. After the sale of shares to the public, the subsidiary companys share will be listed and traded in capital market. It is a means to reduce exposure to a riskier line of business. Have positive impact on the market value of shares due to a combination of factors.

Spin-offs v/s equity carveouts:

Spin-off:
a) There is no new set of share holders.

b) There is no cash inflow to the parent

company.

c) There is a formation of a new company.

Equity carveouts:

a) There will be new shareholders as shares are sold to the public.

b) It results in cash in flow to the parent company as the shares of the subsidiary company are sold to the public. c) No new company that comes into existence. 7.Going Public: Advantages: Access to large capital base. Respect for the company & the people Ability to attract talent Helps in foreign alliance

Disadvantages: Dilution of ownership Loss of flexibility Disclosure becoming inevitable Accoutability eg: Vorin Lab, a pharma co. Privatisation: It is a process of diluting Government control in any business organisation.

Selling the shares held by the govt. in any co. in the open market. Fresh issue is made to increase the capital base govt. contribution in equity capital decreases. Other names : People-isation De nationalisation De govermentalisation Marketisation

Motives for privatisation:

Improvement in efficiency Generation of resources / funds/ cash Reducing loss making units due to mismanagement

Development of economic & infrastructure In India the government considered disinvestment as a source of funds for government expenses .comment.

Leveraged buyouts (LBO) :

It is an acquisition of a company in which the acquisition is substantially financed through debt .

Debt forms 70-90 % of the purchase price. Debt can be secured by the assets of the company. Debt is obtained on the basis of companys future earnings potential. Buyer looks for a company with high growth rate and good market share.

Stages of LBO:

1. Arrangement of finance or raising cash:

Insider Investor group provides about 10% Remaining of equity is supplied by outside investor Managers compensation stock option or warrants about 30%

Secured borrowings 50-60%

Senior /junior subordinated debt

2.Taking private (purchase of all the o/s share of the company) The organising sponsor buys all the o/s share

of the company & takes it private (stock

purchase mode ) or purchases all the assets

of the company (asset purchase mode )

The new owners sell off some parts of the company, begin slashing inventory & reduce debt by paying off bank loans.

3.Restructuring

Increase profit/cash flow, reduce cost, change

market strategy

Consolidation & reorganisation of existing

production

Improve inventory control & a/c receivable

management

Change product mix /price

Trimming employment

4.Reverse LBO Investor group take the company again through public equity offering to create

liquidity for existing stock holders & lower

companys leverage.

Candidates for LBO exercise:

a) The Target firms threatened by takeover

proposals
b) Typical targets If the company does not have 51% holding

 If the company is overleveraging with debt components nearing the maturity Company diversified into unrelated areas ,face problems Company earning low operating profits

Asset structure grossly underutilised

Facing managerial incompetence

Desirable characteristics of LBO:

i) Stable cash flows:

Greater the variability of historical CF ,

higher will be the risk to the lender

ii) Stable & experienced management

Secured feeling
iii) Room for significant cash savings

Debt content is huge ,lenders look for cost

saving, help company to improve debt servicing capacity.

iv) Equity investment of managers: Higher the equity ,greater the security to lenders v) Ability to cut costs : Without damaging the business of the division vi) Seperable non-core business:

If LBO owns non-core business it can be

sold off quickly to reduce the debt of the division.

Stages in LBO:
Step 1: The decision to divest is made. Poor performing division is divested Parent company not interested in the business of the division.

Step 2 : The management of the division decides to purchase the division True potential not realised by parent company
Job security. Approach lender for finance

 Step 3: Financial analysis of division conducted

Test liquidity and dept servicing capacity Estimation of value

Important measures for valuation:

a. Divisions book value of assets : as shown in the balance sheet. b. Replacement value of assets: cost to the purchaser for replacing the assets

c. Liquidation value of assets: amount realised on assets in case of insolvency. Step 4: Purchase price determined. Sale price above liquidity price. Depend on bargaining ability Step 5: Investment by the management is determined: significant part of total wealth of managers. Capital investment in the transaction

Step 6: The lending group is assembled: May be one lender or many depending on the amount

Step 7: External equity investment if required is acquired: if sufficient debt is not available. When managers cannot contribute more to equity, outsiders are invited Step 8 : Cash flow analysis is conducted:

Determine debt equity, analyse CF to determine debt servicing

Step 9: Financing is agreed : CF can service debt , then deal is struck.

Management Buy Outs (MBO):

It is a transaction through which the incumbent management buys out all or most of the other share holders.
When does it occur ? When the management of a company decides to take publicly held company or division of a company

A division or a subsidiary of a company is acquired from the parent company by a purchasing group led by an executive.

Benefits: Generation of value i) Excellent opportunity to management to realise intrinsic value ii) Lower agency cost iii) Source of tax savings interest paid is tax deductible.

Master Limited Partnership (MLP): Limited partnership in which the shares are publicly traded Limited partnership interests are divided into units which are traded as shares of common stock General partner ,one or more limited partners

 General partner runs business and unlimited liability

Treated as partnership and not entity

Different types of MLPs:

1.Roll up MLP

Formed by combining 2 or more partnership into one publicly traded partnership

2. Liquidation MLP Complete liquidation of a corporation

3. Acquisition MLP

Offering of MLP interest to the public with

the proceeds used to purchase the assets

4. Roll out MLP

Corporations contribution of operating assets

in exchange for general & limited partnership interest in MLP 5. Start up MLP
Partnership initially pvt held ,later offers its interest to public to finance internal growth

ESOP: Stock bonus plan investing in securities of the sponsoring employees firm. Company awards stock option to the employees based on their performance

Designed to promote employees stock ownership, raise capital

Employees are more productive Involved in merger & LBO financing vehicle , an anti takeover device

Types of ESOP: 1. Leveraged ESOP Plan borrows funds to purchase securities of the employer firm Firm contributes to ESOP trust to meet annual interest payment, principal payment of loan amount

2. Leverageable ESOP

Plan not used for leveraging .Authorised

but not required to borrow funds

3. Non Leveraged ESOP

Required to invest primarily in the securities of the employer firm 4. Tax credit ESOP

Called as TRASOP (Tax Reduction Act

of ESOP) .Addition to regular investment

credit.

ESOP is an option but not an obligation to buy the shares of the company.
Agreement is signed with the employer.

What is grant or exercise price?

The price the company sets on the stock

Reward the employee

Lower than the market price

Converting options into shares by paying the exercise price is known as exercise of options.

 If company does well & its stock price rises beyond exercise price, option is to buy at exercise price & sell at market price at a profit. If stock price goes down ,no need to exercise option

Vesting has two associated aspects: vesting period & vesting percentage.
Vesting percentage is the portion of total options granted to the employee which he is eligible to excercise

 Vesting period is the period on completion of which the said portion can be excercised If the options are not excercised within the said period , they lapse. This period is called the exercise period