corporate restucturing
TRANSCRIPT
![Page 1: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/1.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 1/61
CORPORATE RESTUCTURING
Corporate restructuring is necessary when a company needs to improve its
efficiency and profitability and it requires expert corporate management.
A corporate restructuring strategy involves the dismantling and rebuilding of
areas within an organization that need special attention from the management
and CEO.
The process of corporate restructuring often occurs after buy-outs, corporate
acquisitions, takeovers or bankruptcy. It can involve a significant movement of
an organization’s liabilities or assets.
A significant modification made to the debt, operations or structure of a
company. This type of corporate action is usually made when there are
significant problems in a company, which are causing some form of financial
harm and putting the overall business in jeopardy. The hope is that through
restructuring, a company can eliminate financial harm and
improve the business.
![Page 2: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/2.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 2/61
Corporate restructuring are generally categorized into two types of
restructuring:•Operational restructuring
•Financial restructuring
![Page 3: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/3.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 3/61
Operational Restructuring refers to the outright or partial scale of
companies or product lines or downsizing by closing unprofitable or nonprofit
able facilities.
Financial Restructuring describes actions by the firm to change its total
equity and debt structure.
Financial restructuring includes share repurchase or adding debt to either
lower the corporation’s overall cost of capital or as a part of an antitakeover
defense.
![Page 4: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/4.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 4/61
MERGERMergers can be described from either of perspectives such as legal perspective & an
economic perspective.
According to the legal perspective:
A merger is a two or more firms in which all but one legally cease to exit, and the combined
organization continues under the original name of the surviving firm.
In a typical merger share holders of the target firm exchange the shares for those of
acquiring firm ,after the share holders vote approving the merger. Minority share holders,
those are not favor of the merger, are required to accept the merger and exchange their
shares for those of the acquirer.
![Page 5: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/5.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 5/61
If the Parent Firm is the primary shareholder in the subsidiary the merger does not
require approval of the parents shareholder in majority of the states.such a
merger is called a short form of merger.
A Statutory merger is one which is aquiring company assumes that the assets and
liabilities of the target in accordance with the statutes of the state in which the
combined companies will be incorporated.
A Subsidiary merger involves the target becoming a subsidiary of the parent to
the public the target firm may be operated under its brand name ,but it will be
owned and controlled by the acquirer
![Page 6: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/6.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 6/61
An Economic Perspective:
An occurrence that involves the production of a union
The combination of two or more commercial companies, generally by offering
the stockholders of one company securities in the acquiring company in
exchange for the surrender of their stock.
Merger is depends on whether the merging firms are in the same or different
industries and their positions in the corporate value chain .
Horizontal merger occurs between the two firms of same industry
Conglomerate merger are those in which the aquiring company purchasesfirms in largely unrelated industries.
Vertical mergers are those in which two firms participate in different stages of
production or value chain .
![Page 7: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/7.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 7/61
Congeneric merger:
A merger is said to be Congeneric when two companies belong to the sameindustry. They however, do not have any common customer, buyer, supplier
Other types of mergers include:
Reverse mergers.
Dilutive mergers.
Accretive mergers.
Tool for measuring the effect of merger on the market:
A common tool used for studying the aftermath of a merger on the market
conditions include the Herfindahl index.
Regulatory bodies governing mergers:
US Federal Trade Commission, European Commission and United States
Department of Justice are some of the regulatory bodies looking into matters
related to mergers.
![Page 8: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/8.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 8/61
Mergers are not without their downsides. They can consume an incredible amount of timeand money, legal and tax complications, and problems with mixing corporate cultures. It
has been estimated that fully 50 percent never achieve the initial financial and market
goals projected. Interestingly, this percent has remained relatively stable over the past 40
years in spite of the growth of mergers as a viable option for businesses.
The quest for growth and pressure to grow
Internal growth initiatives do not materialize, or there are no other organic growthoptions, merger transactions prove to be the only way to create growth.
External pressure can also force managers to initiate additional Merger transactions.
The demand for double-digit growth from analysts and investors becomes hard to satisfy.
Being a consolidatorCompanies also engage in Mergers in order to survive. Promoters of Merger come up
with alleged opportunities and the motive to buy companies in order to prevent
competitors from doing so is always difficult to evaluate.
![Page 9: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/9.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 9/61
Steps in a Merger
There are three major steps in a merger transaction: planning, resolution,
implementation.
1. Planning, which is the most complex part of the merger process, entails the analysis,the action plan, and the negotiations between the parties involved. The planning stage
may last any length of time, but once it is complete, the merger process is well on the
way.
More in detail, the planning stage also includes:
signing of the letter of intent which starts off the negotiations;
the appointing of advisors who play the role of consultants, examining the strengths,weaknesses, opportunities, and threats of the merger;
detailing the timetable (deadline), conditions (share exchange ratio), and type of
transaction(merger by integration or through the formation of a new company);
expert report on the consistency of the share exchange ratio, for all of the companies
involved.
![Page 10: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/10.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 10/61
2. The resolution is simply management's approval first, then by the
shareholders involved in the merger plan.The resolution stage also includes:
the Board of Directors calling an extraordinary shareholders’ meeting whose
item on the agenda is the merger proposal;
the extraordinary shareholders’ meeting being called to pass a resolution on
the item on the agenda;
any opposition to the merger by creditors and bondholders within 60 days of the resolution;
green light from the Italian Antitrust Authority , that evaluates the impact of
the merger and imposes any obligations as a prerequisite for approving the
merger.
![Page 11: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/11.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 11/61
3.Implementation is the final stage of the merger process, including
enrolment of the merger deed in the Company Register.Normally medium-sized/big mergers require one year from the start-up of
negotiations to the closing of the transaction. This is because, in addition to
the time needed technically, there are problems relating to the share
exchange ratio between the merging companies which is rarely accepted by
the parties without drawn-out negotiations.
During the merger process, share prices will adjust to the share exchangeratio. On the effective date of the merger, financial intermediaries will enter
the new shares with the new quantities in the dossiers. The shareholders
may trade without constraint the new shares and benefit from all rights
(dividends, voting rights).
![Page 12: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/12.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 12/61
![Page 13: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/13.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 13/61
The reciprocation of the target company, the approach of the acquiring company plays a vital role in
the entire process.
The commencement of the process of mergers is marked with a "tender offer".
A tender offer is an offer wherein the purchase of all or some of the shares belonging to the
shareholders is intended.
The price fixed for the same is of a premium rate as compared to the market price.
The laws formulated by the SEC or Securities And Exchange Commission necessitates that if a
company or an individual acquires 5% stock in a company, the same should be conveyed to the SEC.
A tender offer may either be a "friendly" one or an "unfriendly" one. A company, which intends to
acquire a company eventually buys out all the shares of the target company. However the limit isrestricted to only 5% and the outstanding shares are reported as SEC. Declaration about the number
of shares are made before the SEC.
The total price the acquiring company is ready to pay for the target company and its assets is
worked out with assistance from investment bankers as well as the financial advisors. Thereafter the
tender offer is published informing the shareholders about the offer price as well as deadlines foreither rejecting the offer or accepting it.
![Page 14: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/14.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 14/61
Reaction of the target company:
The target company responds to the above course of action in any one of the following ways:
(I) Agree with the Offer terms: In the event it is felt by the top level executives and managers thatthe offer price may be accepted, the deal of merger is struck.
(II) Try to negotiate: If the terms offered by the acquiring company is not acceptable, then the
shareholders of the target company will try to negotiate the deal of merger. The shareholders and
the top level management of the subject company will try to work out issues so that they do not
lose their jobs and simultaneously see the interest of the target company.
(III) Looking for a White Knight: A White Knight is referred to another company, which would like to
go for a friendly take over of the subject company, thereby saving the target or the subject company
from falling prey to that company, which is intending for a hostile takeover of the target company.
(IV) Using a Poison Pill: The target company uses a Poison pill wherein it attempts to make its assets
or shares less appealing to the company, which is attempting the tale over. The target company maydo it by two methods:
(a) By using a "flip in": Permits the prevailing shareholders of the target company to buy shares at a
discounted rate.
(b) By using a "flip over": Permits the shareholders to buy stakes of the acquiring company at a
discounted rate after the merger has taken place.
![Page 15: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/15.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 15/61
Closure of the deal of merger:
When the tender offer has been finally agreed upon by the target company and after
fulfilling certain regulatory criteria, the deal of merger is executed wherein some kind of transaction takes place. During the course of the transaction, the company, which buys
the target company makes payment with stock, cash or with both.
![Page 16: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/16.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 16/61
Impact of mergers
•
On employees•On top management
•On share holders
The Shareholders of the acquiring firm.The shareholders of the target firm.
![Page 17: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/17.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 17/61
Differences between mergers and
acquisition.Mergers Acquisition
Two firms together form a new company. One firm takes over another and establishes its
power as the single owner
After the merger, the separately ownedcompanies become jointly owned and obtain a
new single identity. Generally, mergers take place
between two companies of more or less same
size. In these cases, the process is called Merger
of Equals.
The relatively less powerful, smaller firm loses itsexistence, and the firm taking over, runs the
whole business with its own identity. Unlike the
merger, stocks of the acquired firm are not
surrendered, but bought by the public prior to the
acquisition, and continue to be traded in the
stock market.
When a deal is made between two companies infriendly terms, it is typically proclaimed as a
merger, regardless of whether it is a buy out.
In an unfriendly deal, where the stronger firmswallows the target firm, even when the target
company is not willing to be purchased, then the
process is labeled as acquisition.
![Page 18: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/18.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 18/61
Reasons
Enhancing company productivity. There is also a general tendency that the merged
companies would monopolize the market, thereby ousting others.
Political factors.
Cutting down expenses and increasing revenues.When a company is not self sufficient to operate on its own.
Hindrances may be in the form of insufficient investment capacity, excessive
competition due to which the company is not able to keep pace with other companies.
Under such circumstances, the subsidiaries may merge with the parent company for
better output.
![Page 19: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/19.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 19/61
![Page 20: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/20.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 20/61
Costs of Mergers
Costs of Mergers are calculated in order to check to the viability and profitability of any
Merger deal.
The different methods adopted for this cost calculation are the
• Replacement Cost Method,
•Discounted Cash Flow Method and
•Comparative Ratio calculation method.
Replacement Costs actually refers to the cost of replacing the target firm. Generally, Target
company's value is calculated by adding the value of all the equipments, machinery and the
costs of salary payments to the employees. So, the company which wishes to acquire the
target firm, offers price accounting to this value. But, if the target firm does not agree on the
price offered, then the other firm can create a competitor firm with same costing. So, this
idea of cost calculation is referred as the calculation of Replacement Cost. But, it should bementioned here that, in case of the firms, where the main assets are not equipments and
machinery, but people and their skills, this type of cost calculation is not possible.
![Page 21: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/21.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 21/61
The other methods that are followed in calculating Costs of
Mergers, are the methods of Discounted Cash Flow Method and
Comparative Ratio calculation Method. In Discounted Cash Flow
Method, weighted average costs of capital are calculated, while inComparative Ratio calculation method, Price- Earnings Ratio and
Enterprise Value to Sales Ratio are calculated.
![Page 22: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/22.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 22/61
Merger Accounting
Merger and acquisition accounting is done either by the purchase or pooling of interestsmethods. There are some differences between these two accounting methods
Purchase Method
The asset and liabilities of the merged company are presented at their market values as on the date of acquisition, in
order to ensure that the resulting values of the accounting process are able to reflect the market values. This refers to thevalue, which was recorded before the final settlement of the acquisition deal at the time of bargaining.
In this process, the total liabilities of the joint company equals the sum of individual liabilities of the two separate firms.
The purchase price then determines the amount by which the acquiring firm's equity is going to increase.
However, one of the drawbacks with purchase method is the chance that it may overrate depreciation charges.
This is because the book value of assets used in accounting is generally lower than the fair value if there is inflation in the
economy.
Pooling of Interests Method
In this method, transactions are considered as exchange of equity securities. Here, assets and liabilities of the two firms
are combined according to their book value on the acquisition date.
The total asset value of the joint company equals the sum of assets of the separate firms. In this case, the accounting
income is found to be higher than in the purchase method, as the depreciation in the pooling method is calculated based
on the historical book value of assets.
![Page 23: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/23.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 23/61
![Page 24: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/24.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 24/61
An acquiring firm should pursue a merger only if it
creates some real economic values which may arise
from any source such as better and ensured supply of
raw materials, better access to capital market, better and
intensive distribution network, greater market share, tax
benefits etc. The financial evaluation of a target candidate,
therefore, includes the determination of the total
consideration as well as the form of payment, i.e., in
cash or securities of the acquiring firm.
![Page 25: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/25.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 25/61
Valuation based on assets.
Valuation based on earnings.
Market value approach. Earnings per share.
Share exchange ratio.
Other methods of valuation.
![Page 26: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/26.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 26/61
The worth of the target firm, no doubt, depends
upon the tangible and intangible assets of the
firm.
The value of a firm may be defined as:-
Value of all assets – External Liabilities = Net
AssetsThe assets of firm may be valued on the basis of
the book values or realizable values
![Page 27: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/27.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 27/61
BOOK VALUE OF THE ASSETS In this case, the values of various assets given
in the latest balance sheet of the firm are taken
as worth of the assets.
From the total of the book values of all the
assets, the amount of external liabilities is
deducted to find out the net worth of the firm.
The net worth may be divided by the number
of equity shares to find out the value per share
of the target firm.
![Page 28: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/28.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 28/61
In this case, the current market prices or the realizable
values of all the tangible and intangible assets of the
target firm are estimated and from this the expected
external liabilities are deducted to find out the net
worth of the target firm.
![Page 29: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/29.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 29/61
VALUATION BASED ON EARNINGS In the earnings based valuation, the PAT (Profit after taxes) is
multiplied by the Price – Earnings ratio to find out the value.
MARKET PRICE PER SHARE = EPS * PE RATIO
The earnings based valuation can also be made in terms of
earnings yield as follows:-
EARNINGS YIELD = EPS/MPS *100
Earnings valuation may also be found by capitalizing the total
earnings of the firm as follows:-
VALUE = EARNINGS/ CAPITALIZATION RATE * 100
![Page 30: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/30.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 30/61
MARKET VALUE APPROACH This approach is based on the actual market price of
securities settled between the buyer and seller.
The price of a security in the free market will be its
most appropriate value.
Market price is affected by the factors like demand
and supply and position of money market.
Market value is a device which can be readily appliedat any time.
![Page 31: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/31.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 31/61
According to this approach, the value of a
prospective merger or acquisition is a function
of the impact of merger/acquisition on the
earnings per share.
As the market price per share is a function
(product) of EPS and Price- Earnings Ratio,
the future EPS will have an impact on themarket value of the firm.
![Page 32: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/32.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 32/61
SHARE EXCHANGE RATIO The share exchange ratio is the number of shares that
the acquiring firm is willing to issue for each share of
the target firm.
The exchange ratio determines the way the synergy isdistributed between the shareholders of the merged
and the merging company.
The swap ratio also determines the control that eachgroup of shareholders will have over the combined
firm.
![Page 33: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/33.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 33/61
METHODS OF CALCULATION
BASED ON EARNINGS PER SHARE (EPS)
Share Exchange Ratio = EPS of the target firm / EPS of
the Acquiring firm
BASED ON MARKET PRICE (MP)
Share Exchange Ratio = MP of the target firm’s share /
MP of the Acquiring firm’s share
BASED ON BOOK VALUE (BV)
Share Exchange Ratio = BV of share of the target firm /
BV of share of the Acquiring firm
![Page 34: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/34.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 34/61
OTHER METHODS OF VALUATION ECONOMIC VALUE ADDED
EVA is based upon the concept of economic return which refers to
excess of after tax return on capital employed over the cost of
capital employed.
MARKET VALUE ADDED
MVA is another concept used to measure the performance and as a
measure of value of a firm. MVA is determined by measuring the
total amount of funds that have been invested in the company
(based on cash flows) and comparing with the current market
value of the securities of the company.
![Page 35: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/35.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 35/61
Cash offer
Equity share financing or exchange of shares
Debt and preference share financing
Deferred payment or earn – out plan
Leveraged buy-out
Tender offer
![Page 36: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/36.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 36/61
BENEFITS AND COSTS OF MERGER The advantages of synergy of merger and the
resultant expectation of risk reduction may affect
both the acquiring firm and the target firm.
If synergy is perceived to exist in a takeover, thevalue of a combines firm would be greater than the
sum of the values of the target firm and the acquiring
firm.
V (AT) > V (A) + V (B)
![Page 37: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/37.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 37/61
![Page 38: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/38.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 38/61
Controlling Authorities.
NBFI’s SECP
Banks SBP
Other High Court
The Competition Commission of Pakistan
(CCP-Monopoly Control Authorities) has
oversight in respect of all mergers.
![Page 39: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/39.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 39/61
Legislation Dealing Mergers in a Particular
Sector.
Section 48 of the Banking Companies
Ordinance, 1962
282L of Companies Ordinance, 1984
Section 67 to 71 of the Insurance Ordinance,
2000 and application to High Court
For Banking Companies.
For N.B.F.Cs
For Insurance Companies.
![Page 40: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/40.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 40/61
Specific Laws Dealing Mergers.
Section 287 to 289 read with Section 282L & 284 of the
Companies Ordinance, 1984 applies to mergers involving
companies incorporated under the laws of Pakistan.
Section 2 (1A); 20 (3); 57A, 97; 97A & Clause 62 of Part
IV of Second Schedule to the Income Tax Ordinance,
2001.
Section 11 of Competition Ordinance, 2007.
![Page 41: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/41.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 41/61
Legislation on Foreign Investment.
Board of Investment and Foreign Exchange
Regulation contain certain exceptions and
restrictions for non-residents for which
general or special permission is required.
![Page 42: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/42.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 42/61
Section 2 (1A) of the Income Tax Ordinance, 2001
Amalgamation means the merger of one or more
1. banking companies or
2. non-banking financial institutions, or
3. insurance companies, or
4. companies owning and managing industrial undertakings or
5. companies engaged in providing services and not being a trading company orcompanies.
In such manner that –
The assets of the amalgamating company or companies immediately before the
amalgamation become the assets of the amalgamated company by virtue of the
amalgamation, otherwise than by purchase of such assets by the amalgamated
company or as a result of distribution of such assets to the amalgamated company
after the winding up of the amalgamating company or companies; and
![Page 43: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/43.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 43/61
Section 2 (1A) of the Income Tax Ordinance, 2001
The liabilities of the amalgamating company or companies immediately before the
amalgamation become the liabilities of the amalgamated company by virtue of the
amalgamation
Requisite criterion
One company must be a public company or
A company incorporated under Companies Ordinance,1984 or under any other law
for the time being in force,
Merger/Amalgamation
![Page 44: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/44.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 44/61
Merger/Amalgamation.
From Members/Shareholders
Point of View
From the Point of View of
Company to beMerged/Amalgamating.
From the Point of View of
Amalgamated
Company.
From Amalgamated Company Point of View
![Page 45: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/45.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 45/61
From Amalgamated Company Point of View.
• S 76 - Relating to cost of purchase.
• S 98C, concerning succession.
• The tax value of assets in the hands of
amalgamating company (immediately
before amalgamation) shall be taken
as the tax value for amalgamated
company
Tax value of assets / liabilities acquired?
![Page 46: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/46.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 46/61
From Amalgamated Company’s Point of View.
• Goodwill an intangible or capital asset
– a dilemma?
• Treatment of goodwill?
• Difference between ‘Tax-value’ and
‘Accounting value’ of assets?
What about goodwill taxation?
From the Amalgamated Company’s Point of View
![Page 47: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/47.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 47/61
From the Amalgamated Company s Point of View.
S 20(3) - Only expenditures incurred
under following heads are tax
deductible – •Legal Advisory Services
•Financial Advisory Services
•Administrative expenses –
Planning and Implementation of
amalgamation
What is the treatment of merger related
expenses?
What about carry forward and set-off
of losses sustained by the
amalgamating company ?
S. 57A - In the year of amalgamation only
assessed loss of the amalgamating
companies for the tax year is available
for the set off. The facility to set off
accumulated losses of amalgamating
companies has been taken away from
July 01, 2007.
![Page 48: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/48.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 48/61
Tax Consequence in Case of
Acquisitions.
Acquirer point of view
Acquiree point of view
![Page 49: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/49.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 49/61
Acquirer Point of View.
• In case of non-arm’s length transaction the fair market value may
be treated as consideration as cost of acquisition [S. 76 & 78]
• Tax treatment for payment of goodwill.
• Tax deductibility of consideration paid under restrictive covenants
?
Acquiree Point of View
![Page 50: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/50.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 50/61
Acquiree Point of View.
• Transfer of assets and liabilities have tax implications depending on
the basis of nature of asset.
• Consideration may be taken at higher of the actual selling price or
Fair Market Value [S. 77]
• Slump sale principle – Applicability ? [S. 77]
• Consideration under restrictive covenant – whether capital or
revenue?
![Page 51: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/51.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 51/61
Role of tax Advisor in Mergers &
Acquisitions.
• International mergers and acquisitions requireappropriate planning.
• Planning will end after consideration of domesticlaws effect on home country & other countrylaws.
• Effective consideration will be whether to mergeor acquire.
• If to acquire consideration to be given to manner of acquisition.
•
To acquire the business as a whole, slumptransaction or through shares or as an assetpurchase.
![Page 52: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/52.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 52/61
Going Forward.
• Consistency in Policies.
• Facilitate & Encourage Regional Mergers.
• Level Playing Field.
• Conducive Industrial Environment for Intra
Regional Investment.
•
Common Legislation.• Removal of Trade Barriers.
![Page 53: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/53.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 53/61
![Page 54: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/54.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 54/61
![Page 55: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/55.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 55/61
A number of human resource (HR) issues surface during a merger between companies. Staff
members can be affected personally if layoffs are done or if workers are relocated.
Mergers take time and effort, both for the physical transfer of work equipment as well as for all
affected parties to adjust to the new working environment.
Human resource officers often play the middle in a merger. They secure confidential
information from upper management regarding corporate goals and expected personnel shifts
related to the merger, but they are often the peacemakers as well as the contact people for
staff members to ask questions or address concerns.
Human resources staff should establish a good rapport with both upper management and otherstaff members from both companies. When communicating with staff, HR representatives
should be careful in word choice so as not to be condescending or challenging, and should be
completely honest with them. They shouldn't make promises that can't be kept. In addition,
staff should always know what is expected of them.
New Business Processes
After a merger, new business processes will likely be a combination of both companies businesspractices. Joan Lloyd recommends establishing easy and straightforward business practices first.
HR reps should work with staff to handle each change step by step, and there should be an
acknowledgment that changes take time to implement. The ultimate goal following a merger
should be to establish synergy between the companies, within the given parameters
Mergers may require a dramatic cultural change. When one organization purchases or absorbs another, it
![Page 56: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/56.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 56/61
can affect the core of the acquired organization. Financial, human capital (employees) and material assets
may be scrutinized. Employees at all levels may become insecure about continued employment,
demotions or decreased salaries. Human Resources may play a major role in mergers, and careful planning
for a successful transition is necessary for success.
Layoffs and Downsizing
Main HR issues in mergers is how many employees will be affected and what time lines will be
involved. In some situations, the downsizing is dramatic and the number of layoffs can be high.
Employees are tense, as losing their jobs affects their ability to provide food and shelter for their families.
Planning a fair method of implementing a layoff process can be challenging as the dominant company may
be in charge of the decisions. This requires HR employees to remain businesslike and professional in their
dealings with both companies. This issue calls for good communication and discouragement of rumors toalleviate the concerns of remaining employees.
Assimilation of New Employees
Other HR issue in a merger is the assimilation of new employees. Employees coming into the acquired
company may be a source of tension and stress for the present employees. Careful planning is required to
introduce the employees and facilitate teamwork. HR-planned activities involving all employees may be
helpful to allow for introductions and socializing.
Preparing for Change can be a major HR issue in a merger. Some people may not like change and will resist
any change actions. HR professionals can be helpful by preparing written communications, holding
department meetings, and placing suggestion boxes in various areas. Preparing all employees for the
planned changes within the company and discussing how the changes will affect them can enhance a
successful transition.
![Page 57: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/57.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 57/61
Demerger
Demerger is the converse of a merger. It describes a form of restructure in
which shareholders or unit holders in the parent company gain direct
ownership in a subsidiary (the ‘demerged entity’). Underlying ownership of the
companies and/or trusts that formed part of the group does not change. The
company or trust that ceases to own the entity is known as the ‘demerging
entity’. If the parent company holds a majority stake in the demerged entity ,the resulting company is referred to as the subsidiary.
Tools for Demerger:
•Equity carve outs.
•Selloffs.•Tracking Stock.
•Spin Offs.
![Page 58: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/58.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 58/61
Equity carve outs:
Shareholder value gets enhanced by the use of this de merger method of equity carve outs.
In this process, a subsidiary belonging to a parent firm is made public by IPOs or initial public
offerings. This results in the sell off of shares partially. A new firm, which is publicly listed
comes into being. However, the controlling power remains in the hands of the parent firm.
This process is embraced when it is found that the subsidiary is progressing at a faster pace
than the parent company.
Sell offs:
When a subsidiary of a parent company is sold off, the process is referred to as a "sell off".
Sell off is carried out in case of subsidiaries, which do not find a place in the core strategy of the company.
Tracking stock:
A special type of stock is used to keep track of the value of any one segment of a firm. A
publicly held company issues the tracking stocks.
Spin offs:Spin offs occur when a subsidiary company gets the status of an independent entity. Under
such circumstances, shares belonging to the subsidiary are distributed by the parent firm by
means of stock dividends.
![Page 59: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/59.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 59/61
Advantages of de merger:
The advantage of de merger is that the shareholders get access to
better and updated information about the business as separate financial
details are provided.
Disadvantage of a de merger:
Since the size of the de merged firms are smaller than those of the
parent firm, tapping the credit market may be a difficult task especially for asmall company who may not be able to afford the expensive finances.
![Page 60: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/60.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 60/61
The principal benefits from mergers can be listed as increased value generation, increase in
cost efficiency and increase in market share.
Mergers will generate tax gains, can increase revenue and can reduce the cost of capital.
•When a firm wants to enter a new market
•When a firm wants to introduce new products through research and development
•
When a firms wants achieve administrative benefits•To lower cost of operation and/or production
•To gain higher competitiveness
•For industry know how and positioning
•For Financial leveraging
•To improve profitability and EPS
![Page 61: Corporate Restucturing](https://reader030.vdocument.in/reader030/viewer/2022021301/577cdd451a28ab9e78aca84d/html5/thumbnails/61.jpg)
7/30/2019 Corporate Restucturing
http://slidepdf.com/reader/full/corporate-restucturing 61/61
Why Mergers Fails
The failures of mergers may harm the companies, tarnish their credibility inthe market, and ruin the confidence of their shareholders.
There are several reasons merger failures. Some of the prominent causes are summarized
below:
•If a merger is planned depending on the (bullish) conditions prevailing in the stock
market, it may be risky.
•There are times when a merger may be effected for the purpose of "seeking glory," rather
than viewing it as a corporate strategy to fulfill the needs of the company. Regardless of
the organizational goal, these top level executives are more interested in satisfying their
"executive ego."
•In addition to the above, failure may also occur if a merger takes place as a defensive
measure to neutralize the adverse effects of globalization and a dynamic corporateenvironment.
•Failures may result if the two unifying companies embrace different "corporate cultures."
It would not be correct to say that all mergers fail. There are many examples of mergers that
have boosted the performance of a company and addressed the well-being of its shareholders.
The primary issue to focus on is how realistic the goals of the prospective merger are.