divestiture s

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MEANING, TYPES Divestitures result in contraction of assets or

relinquishment of control

I. Partialsell-off involves the sale of business divisionor plant of one company to another

II. Demerger involves the transfer of its businessdivisions of one company to another newly setup co.

the company whose business division is transferredis called the Demerged company

The company to which the business division istransferred is called the Resultant company


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TYPES OF DEMERGER Spin-off the type of demerger by satisfying these

conditions :

1. The resultant company is a new company2. The purchase consideration is paid only in the form

of shares in the resultant company

Split-up is a method of demerger through breaking

up of the firm in a series of spin-offs, the parentcompany no longer exists


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Equity carve out:

A parent company sells a portion of its equity in a

wholly owned subsidiary for strategic reasons Importance or benefits of Demerger

Sharper focus

Improved incentives and accountability

Division of a business empire


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TAX ASPECTS OF DEMERGER Following conditions to avail tax benefits are :

1. All assets and liabilities of demerged co. should

become the assets and liabilities of resulting co. attheir same book values

2. The shareholders of demerged co. would become theshareholders of resulting co. on proportionate basis

3. The of shareholders of demerged co. become theshareholders of resulting co.


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DEMERGER BAJAJ AUTO LTD BAL demerged into

i. BAL (Auto business)

ii. BFSL Bajaj Finance Services Ltd (wind energygeneration, insurance, consumer finance)

iii. BHIL Bajaj Holding & Investment Ltd ( invests innew business opportunities)


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OTHER TYPES OF MERGER Congenericmergers mergers between entities

engaged in the same general industry and some whatinter-related, but having no common customer-supplier relationship

Use the same sales and distribution channels to reachthe customers of both businesses

Cashmerger 1. the shareholders of one entity receivecash in place of shares in the merged entity

2. Where the shareholders of one of the merging entitiesdo not want to be a part of the merged entity


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OTHER TYPES OF MERGER. Triangular merger:

Often resorted to for regulatory and tax reasons

It is a tripartite agreement in which the target co.merges with a subsidiary of the acquirer

A triangular merger may be forward ( when the targetco merges into the subsidiary and the subsidiary

survives), or Reverse ( when the subsidiary merges into the target

co. and the target survives)


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CORPORATE RESTRUCTURING -IOWNERSHIP

Mergers &

acquisitions Leveraged

buyouts

Buy-back ofshares

Spin-offs Joint-ventures

Strategicalliances

BUSINESS

Diversifications

Out-sourcing divestment

Brandacquisitions

ASSETS

Lease back of

assets Securitization of

debt

Receivablefactoring


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CORPORATE RESTRUCTURING - II

ACQUISITIONS

Mergers

Purchase of aplant / unit

takeovers

DIVESTITURES

Sell offs

Demergers

Equity carveout

OTHER FORMS

Going private

Leveragedbuyouts

privatization


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OTHER FORMS OF

RESTRUCTURING Purchase of a unit/plant:

The acquiring co. acquires the assets and liabilities of

the division and pays cash compensation Going private:

Converting a publicly held co. into a private co.

Privatization :

Transfer of equity shares of public enterprises fromgovernment to individuals

commanding heights


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PRIVATIZATION Rationale:

I. Improvement in efficiency lower agency costs,sharper focus on profitability

II. Generation of resources

III. Promotion of popular capitalism

Drawbacks

I. Confusion in objectivesII. Lack of transparency in the sale of PSU

III. Make up of budgetary deficits

IV. Lack of political consensus


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HOLDING COMPANYA co. owns the stocks of other co. to exercise control

over them

Advantages1. Control with financial ownership

2. Isolation of risk

3. Enormous financial leverage

Disadvantages

1. partial multiple taxation Dividend of subsidiarytaxed holding company shareholders pay tax


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2.Default of debt subsidiary companies ( not legallybinding , reputation is at stake)

3. Magnified risk of debt


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LEVERAGED BUYOUTACQUIRER- SPV-TARGET

SPV 100% subsidiary

Minimum capital Highly leveraged highly debt company

TATA TEA SPV (TATA Tea) Tetley

SPV Tata Tea (Great Britain)

Equity 1. Tata Tea $ 15 mn

2. GDR - $ 45 mn

3. Equity by subsidiary of US Tata Tea - $ 10mn


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TATA- TETLEY.. $235 mn FIIs Mezzaine Financials

Benefits

I. Improve the performance of unitII. Reduce business risk

III. Cost controls

IV. Sell off disposable assets

Best LBO

1.Good management team

2.Stable cash flows


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ACCOUNTING ASPECT OF

AMALGATION3. Potential for operational improvement

4. Easy to exit

Accounting for Amalgamations (AS -14)1. Amalgamation in the nature of merger

2. Amalgamation in the nature of purchase

Amalgamation in the nature of merger (conditions)

1. All assets and liabilities of the transferor companybefore amalgamation should become the assets andliabilities of the transferee company


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ACCOUNTING..2. Not less than 90% of the face value of the equity

shareholders of the transferor company shouldbecome the shareholder of transferor company

3. Payment of purchase consideration in the form ofequity shares only

4. The business of the transferor company is carried on

by the transferee company5. Book value of assets & liabilities of transferor

company as the same in books of transferee company


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ACCOUNTING. Any of the conditions not satisfied amalgamation in

the nature of acquisition

Accounting treatment for merger pooling of interest

method Accounting treatment of acquisition purchase

method

Pooling of interest method

1. Aggregating of book values of assets and liabilities ofboth the companies

2. The adjustment of swap ratio is done in the reserves


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POOLING OF INTEREST METHOD -

FEATURES1. The same value of assets, liabilities and reserves of

the transferor co. are recorded by the transferee co.

2. Purchase consideration is valued at the par value ofthe shares issued

3. Effect of changes in accounting policies as per AS-14

4. Balance of P&L A/c of both transferor and transferee

company need to be aggregated5. The identity of the reserves is preserved

transferors books


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FEATURES.6. The difference between the amount recorded as

purchase consideration and the share capital oftransferor co. should be adjusted in the reserves


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ACCOUNTING.Amalgamation in nature of acquisition/purchase

I. The assets and liabilities are transferred at fairmarket values

II. The excess of the purchase consideration over thenet book values of assets and liabilities is treated asgoodwill

III. The deficit of purchase consideration over the netbook value of assets and liabilities is treated ascapital reserve


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PURCHASE METHOD

(ACQUISITION)1. Assets and liabilities are entered at existing carrying

amounts OR

2. Purchase consideration should be allocated toindividual identifiable assets and liabilities on thebasis of fair value at the date of amalgamation

3. Purchase consideration is valued at the market price

of the shares issued by the transferee company4. All statutory reserves should appear in transferee

companys balance sheet


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PURCHASE METHOD .5. Amalgamation Adjustment A/c Dr. .

To Statutory Reserves A/c ..

6. Statutory reserves Liabilities side7. Amalgamation Adjustment Assets side

8. Good will amortized over 5 years / useful life


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POOLING OF INTEREST METHOD Vs

PURCHASE METHODPOOLING OF INTEREST PURCHASE METHOD

Purchase consideration basis at par value of shares

Assets & liabilities at bookvalue in the transfereecompanys books

Reserves of transferorcompany appear( as adjusted

with difference between sharecapital and p.c ) in transfereecompanys books

Purchase consideration basis of market value of

shares Assets & liabilities at fair

value in the transfereecompanys books

Only statutory reserves of

transferor company appear inthe books of transfereecompany ( Dr. amalgamationadj a/c , Cr. Statutory reserve)


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Pooling of Interest Purchase method

No good will or capitalreserve appears in transfereecompanys books

Goodwill or capital reserveappears in transfereecompanys books

- G.W when P.C> Net assets

- Capital Reserve when P.C

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