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CORPORATE

RESTRUCTURING
By
Bharat Sai Kiran
Ashok Lahoty
FORMS OF CORPORATE RESTRUCTURING
 Expansion  Corporate Control
 Mergers and Acquisitions  Takeover defenses
 Tender Offers  Share repurchases
 Asset Acquisition  Exchange offers
 Joint Ventures  Proxy contests

 Contraction Changes in Ownership


 Spin offs Structures
 Split offs  Leveraged buyout
 Divestitures  Junk Bonds
 Equity carve-outs  Going Private
 Assets sale  ESOPs and MLPs
EXPANSION

 Expansion is a form of restructuring, which


results in an increase in the size of the firm. It
can take place in the form of a merger,
acquisition, tender offer, asset acquisition or a
joint venture.
MERGERS
 Merger is defined as a combination of two or
more companies into a single company
 Amalgamation is the type of merger that involves fusion of
two or more companies. After the amalgamation, the two
companies loose their individual identity and a new
company comes into existence. This form is generally
applied to combinations of firms of equal size.

A B AB
Brooke Bond Lipton Brooke Bond Lipton
India Ltd India Ltd India Ltd
CITICORP TRAVELERS PLAN
 2nd Largest Commercial  Financial conglomerate that
Bank in USA offers insurance and
 Worlds Leading distributor of investment banking services.
credit cards  $698 billion of assets
 Issuing 60 Million Bank
Cards

This would also be by far the most valuable in the business, with a
market capitalization of about $135 billion. The companies
described the deal as a merger, valuing it at $140 billion, but the
mechanism is essentially a stock swap, with Travelers paying $70
billion for Citi's shares. Travelers will issue 2.5 shares for each
Citicorp share, and current stockholders of each company will own
about half of the new enterprise.
ACQUISITION
 A corporate action where an acquiring company makes a bid for
an acquiree. If the target company is publicly traded, the
acquiring company will make an offer for the outstanding
shares
 Absorption is a type of merger that involves fusion of a small company
with a large company. After the merger the smaller company ceases to
exist.

A B A
Oriental Bank Of Global Trust Oriental Bank Of
Commerce Bank Commerce
JOINT VENTURE
 Cooperation between two or more companies in which the
purpose is to achieve jointly a specified business goal. Upon
the attainment of the goal, the joint venture is terminated. A
joint venture, which is typically limited to one project, differs
from a partnership that can work jointly on many projects.

A B AB
Hero Motor Honda Hero Honda
Corp
TENDER OFFER
 Tender offer is a corporate finance term denoting a type of
takeover bid. The tender offer is a public, open offer or
invitation (usually announced in a newspaper advertisement)
by a prospective acquirer to all stockholders of a publicly traded
corporation (the target corporation) to tender their stock for
sale at a specified price during a specified time, subject to the
tendering of a minimum and To induce the shareholders of the
target company to sell, the acquirer's offer price usually
includes a premium over the current market price of the target
company's shares. maximum number of shares.
B
C
D
Public Offer E
A G
H
I
F

J
K
EXAMPLE ---- TENDER OFFER
 Flextronics International giving an open market offer
at Rs. 548 for 20% of paid up capital in Hughes
Software Systems.
 AstraZenca Pharmaceuticals AB, a Swedish firm,
announced an open offer to acquire 8.4% stake in
AstraZenca Pharma India at a floor price of Rs. 825
per share.
ASSET ACQUISITION
 A buyout strategy in which key assets of the target company are
purchased, rather than its shares. These assets may be
tangible assets like a manufacturing unit or intangible assets
like brands. This is particularly popular in the case of bankrupt
companies, who might otherwise have valuable assets which
could be of use to other companies, but whose financing
situation makes the company un-attractive for buyers
Plant & Plant &
M/C M/C

Patents Stock

A B
B A
A
Land &
Cash Building Patents
EXAMPLES ---- ASSET ACQUISTION
 The acquisition of the cement division of Tata Steel by Laffarge
of France. Laffarge acquired only the 1.7 million tonne cement
plant and its related assets from Tata Steel.

 The asset being purchased may also be intangible in nature.


For example, Coca-Cola paid Rs.170 crore to Parle to acquire
its soft drinks brands like Thums Up, Limca, Gold Spot etc.

 Google acquired the Motorola for its new open source operating
system “Android” for the need of Motorola’s 17000 patents out
of which Google needs around 6000 patents.

 M3M India acquired DLF 28- Acre Plot in Gurgaon as non core
assets for Rs 440 Cr.
FORMS OF CORPORATE RESTRUCTURING
 Expansion  Corporate Control
 Mergers and Acquisitions  Takeover defenses
 Tender Offers  Share repurchases
 Asset Acquisition  Exchange offers
 Joint Ventures  Proxy contests

 Contraction Changes in Ownership


 Spin offs Structures
 Split offs  Leveraged buyout
 Divestitures  Junk Bonds
 Equity carve-outs  Going Private
 ESOPs and MLPs
CONTRACTION
 Contraction is a form of restructuring, which
results in a reduction in the size of the firm. It
can take place in the form of a
 Spin-off,

 Splitoff,
 Divestiture

 Equity carve-out.
SPIN-OFF
 A Company distributes all the shares it owns in a subsidiary to its own
shareholders implying creation of two separate public companies with same
proportional equity ownership. Sometimes, a division is set up as a separate
company. Hence, the stockholders proportional ownership of shares is the
same in the new legal subsidiary as well as the parent firm. The new entity
has its own management and is run independently from the parent
company. A spin-off does not result in an infusion of cash to parent
company.
Shareholders of
Shareholders of
Company A also has
Company A
shares of Company B

A B
A B
Subsidiary
Company
of A
B
EXAMPLES ----- SPIN-OFF
 Air-India has formed a separate company named Air-India
Engineering Services Ltd., by spinning-off its engineering
division.
 Guidant was spun out of Eli Lilly and Company in 1994, formed
from Lilly's Medical Devices and Diagnostics Division.
 Agilent Technologies spun out of Hewlett-Packard in 1999,
formed from HP's former test-and-measurement equipment
division.
 Cenovus Energy was spun out of Encana Corporation in 2009
 Shugart Associates was a spin-out of IBM.
SPLIT- OFF
 In a split off, a new company is created to takeover the operations of an
existing division or unit. A portion of existing shareholders receives stock in
a subsidiary (new company) in exchange for parent company stock Hence
the shareholding of the new entity does not reflect the shareholding of the
parent firm. A split-off does not result in any cash inflow to the parent
company
Shareholders of
Shareholders of Company A
Company A
Shareholders Shareholders
of Company A of Company B
D
A New Company

A B
C D E F C E F D
Operations of Company A
SPLIT-UP
 In a split-up the entire firm is broken up in series of spin-offs, so that the
parent company no longer exists and only the new off springs survive. A
split-up involves the creation of a new class of stock for each of the parent’s
operating subsidiaries, paying current shareholders a dividend of each new
class of stock, and then dissolving the parent company.
Shareholders of
Shareholders of Company A will get
Company A shares of

A A

B C D E
B C D E
Subsidiary Companies of A
EXAMPLES ------ SPLIT-UP
 The Andhra Pradesh State Electricity Board (APSEB)
was split-up in 1999 as part of the Power Sector
reforms. The power generation business and the
transmission and distribution business has
transferred to two separate companies called
APGENCO and APTRANSCO respectively. APSEB
ceased to exist as a result of split-up.
DIVESTITURES
 A divestiture is a sale of a portion of the firm to an outside party, generally
resulting in an infusion of cash to the parent. A firm may choose to sell an
undervalued operation that it determines to be non-strategic or unrelated to
the core business and to use the proceeds of the sale to fund investments
in potentially higher return opportunities.

C Shares Shares
Some Operations of
A
Oper
A
A Cash Patent
s B
B ation
s of A
Assets
Opera
tions Assets
EQUITY CARVE OUT
 A parent has substantial holding in a subsidiary. It sells part of that holding
to the public. "Public" does not necessarily mean a shareholder of the
parent company. Thus the asset item "Subsidiary Investment" in the
balance-sheet of the parent company is replaced with cash. Parent company
keeps control of the subsidiary but gets cash.

A
Issues IPO of B 20% Investors
Shares of B

CCashA
20%
B Shares
of
Subsidiary Company
Company B
of A
FORMS OF CORPORATE RESTRUCTURING
 Expansion  Corporate Control
 Mergers and Acquisitions  Takeover defenses
 Tender Offers  Share repurchases
 Asset Acquisition  Exchange offers
 Joint Ventures  Proxy contests

 Contraction Changes in Ownership


 Spin offs Structures
 Split offs  Leveraged buyout
 Divestitures  Junk Bonds
 Equity carve-outs  Going Private
 Assets sale  ESOPs and MLPs
CORPORATE CONTROL

 Firms can also restructure without necessarily


acquiring new firms or divesting existing
corporations. Corporate control involves
obtaining control over the management of the
firm. Control is the process by which managers
influence other members of an organization to
implement the organizational strategies
TAKEOVER DEFENSES
 Takeover defenses, both pre-bid and post-bid
have been resorted to by the companies.
 Pre Bid: This defense is also called preventive
defense it is employed to prevent a sudden,
unexpected hostile bid from gaining control of the
company.
 Post Bid: When preventive takeover defenses are
not successful in fending off an unwanted bid, the
target implements post-bid or active defenses
 These takeover defenses intend to change the
corporate control position of the promoters.
PREVENTIVE MEASURES
 Green Mail
Buy Back Of its Shares at Premium Price
A Stock Market
Good Bye, Sweet Kisses to Share Holders

 White Knight
I Want to
Acquire me Plzzzz…
Acquire You
A No Thanks C is
B C
Ok, I will pay premium
Acquiring me
to ur Share Holders
CONTD…
 White Squire
I Want to
Acquire me Plzzzz…
Acquire You
A No Thanks C is
B C
Ok, I will Acquire
Acquiring me
Lesser part from U.

 Recapitalization
Buy Back Of its
Shares at Premium
Price
Banks
Stock
Or Lending Money
A OR
Market
Investors
Paying More as
Dividends

“A” is acting as its Own White Knight


FORMS OF CORPORATE RESTRUCTURING
 Expansion  Corporate Control
 Mergers and Acquisitions  Takeover defenses
 Tender Offers  Share repurchases
 Asset Acquisition  Exchange offers
 Joint Ventures  Proxy contests

 Contraction Changes in Ownership


 Spin offs Structures
 Split offs  Leveraged buyout
 Divestitures  Junk Bonds
 Equity carve-outs  Going Private
 Assets sale  ESOPs and MLPs