forms of corporate restructuring

8/12/2019 Forms of Corporate Restructuring

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FORMS OF CORPORATE RESTRUCTURING

Prof. B.D.Panda


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MERGERIt involves combination of all the assets,

liabilities, loans, and businesses (on a goingconcern basis) of two (or more) companies

such that one of them survives. Merger is primarily a strategy of inorganic

growth.

Merger by absorption and by consolidation.


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MERGERExample:- X limited has a paid up equity capital of

Rs.10 crore consisting of 1 crore shares of face

value of Rs.10 each. Y ltd. has a paid up equity

capital of Rs.50 crore consisting of 5 crore sharesof face value of Rs.10 each. X ltd. is proposed to be

merged with Y ltd., where in based on the relative

valuation of both the companies, shareholders of X

ltd. will be given, two shares of Y ltd for every fiveshares of X ltd held by them. Upon the merger

being carried out,


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MERGER Shares of X ltd. will get cancelled since X ltd. cease to

exhist through a legal process.

All the assets and liabilities of X ltd. will be transferred

to Y ltd.

Balance sheet of Y ltd will have equity capital of Rs.54

crore and will include assets and liabilities of both X

ltd. and Y ltd.

Business of X ltd. will be conducted under the name of

Y ltd along with the erstwhile business of Y ltd.

All rights exercisable by X ltd against the third parties

will now be exercisable by Y ltd.


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CASE STUDY : ICICI BANK

Mergers by ICICI Bank Ltd. in India

S. No. Mergers by ICICI Bank Ltd. in India Year of

Merger

1. SCICI 1996

2. ITC Classic Finance Ltd.

1997

3 Anagram Finance 1998

4. Bank of Madura Ltd. 2001

5. Sangli Bank Ltd.2007

6. The Bank of Rajasthan Ltd. (BoR) 2010


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CONSOLIDATION

It involves creation of an altogether new companyowning assets, liabilities, loans and businesses (on

going concern basis) of two or more companies, both/all

of which cease to exist.

Example:- X ltd has a paid up equity capital of Rs. 10crore

consisting of Rs.10 each. Y ltd has paid up equity capital

of Rs.50 crore consisting of 5 crore shares of face value

of Rs.10 each. X ltd and Y ltd decide to consolidate

themselves into C ltd. In the process, based on relativevaluation of the shares of X ltd and y ltd, it is decided

that for every two shares of X ltd, shareholders of X ltd

will get one share of C ltd and for every five shares of Y

ltd, shareholders of Y ltd will get two shares of C ltd.


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CONSOLIDATION

Shares of X ltd and Y ltd will get cancelled sinceX ltd and Y ltd will cease to exhist through a

legal process.

All the assets and liabilities of X ltd and Y ltd willbe transferred to C ltd.

Business of X ltd and Y ltd will be conducted

under the name C ltd.

All the rights exercisable by X ltd and Y ltd

against the third parties will now be exercisable

by C ltd against them.


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ACQUISITION# Acquisition is an attempt or a

process by which a company or an

individual or a group of individuals

acquires control over anothercompany called target company.

# Acquiring control over a companymeans acquiring the right to control

its management and policy

decisions.


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ACQUISITION# It also means the right to appoint (and

remove) majority of the directors of acompany.

# In acquisition, often the target companysidentity remains intact.

Acquisition of a target company

through acquisition of its shares# The most common method is to acquire i.e.

purchase substantial voting capital (i.e. equitycapital) of the target company.


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ABSOLUTE CONTROL# This would mean an unfettered right to take

any decision. Needless to add that a 100 per

cent acquisition of equity shares of a

company would give such a control

# However, in such a case, the company cannot

become a listed company or continue to belisted company if it was listed earlier.


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ABSOLUTE CONTROL# This can be defined as an ability to get any and all

resolutions passed in the general body meeting of

the shareholders

# Most of the important decisions, such as further

issue of capital other than a rights issue, buy-back

of shares, reduction of capital, delisting of the

company, etc., can be taken, only by passing a

special resolution.


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SUBSTANTIAL ACQUISITION OF SHARES(A) The existing promoters being dislodged as

promoters and the acquirer stepping into their shoes

and becoming the promoter. This would be called a

successful acquisition.(B) The acquirer managing to acquire more or lessthe same percentage or a little less percentage of

shareholding than the existing promoters, thereby

getting fair representation on the board and some

say in the management of the target company but

not being able to dislodge the existing promoters.

This would be a partially unsuccessful acquisition.


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SUBSTANTIAL ACQUISITION OF SHARES(c) The acquirer not managing to get anysubstantial percentage of share capital. This

would be an unsuccessful acquisition.

Acquisition of a target company through power of

attorney, etc.This is not a commonly used way of effecting acquisition of a

company.

It could be used only as a short-term tactic, probably as a

precursor to the substantial acquisition of shares from existing

promoters or a faction of the existing promoters, who, pendingthe conclusion of Memorandum of Understanding (MOU) to sell

their shares to the acquirer, may allow him to vote on their behalf

on certain key resolutions.


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CASE STUDY: DAICHI SANKYO - RANBAXY

Ranbaxy grew at over 10% in 2007 while Daichi

only grew at 4.7%.

Daichi, the third largest drug manufacturer of Japan

purchased 34.81% of Ranbaxy Lab Ltd. at anegotiated price of Rs. 737.

The offer price was 31% over the market price of

the Ranbaxy Lab Ltd.

Two companies ranked at 15 in the world pharma

market.

Combination of these two company reached to 56

companies.


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DIVESTITUREDivestiture means an out and out sale of all or substantially allassets of the company or any of its business

undertaking/divisions, usually for cash (or for a combination of

cash and debt) and not against equity shares.

Divestiture means sale of assets, but not in a piecemealmanner.

Accordingly, all assets, i.e., fixed assets, capital works progress,

current assets and many a times even investments are sold as

one lump and the consideration is also determined as one lumpsum amount and not for each asset separately. Due to this

reason, it is also called slump sale under the Income Tax Act,

1961.


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DIVESTITUREThe consideration is normally payable in cash for two

reasons:

to pay off the liabilities and secured/unsecured loans.

to bring cash into the company for pumping into

remaining business or to start a new business.

No part of consideration is payable in the form of equityshares.


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DEMERGERForms of Demerger:

Spin-off

Split-up

Split-off


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SPIN-OFFSpin-off involves transfer of all or substantially

all the assets, liabilities, loans and business (on

a going concern basis) of one of the business

divisions or undertakings to another company

whose shares are allotted to the shareholders ofthe transferor company on a proportionate basis.

In spin-off, the transferor company continues tocarry on at least one of the businesses.


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SPLIT UPSplit-up involves transfer of all or

substantially all assets, liabilities, loans andbusinesses (on a going concern basis) of the

company to two or more companies in which,again like spin-off, the shares in each of thenew companies are allotted to the original

shareholders of the company on aproportionate basis but unlike spin-off, thetransferor company ceases to exist.


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SPIN-OFF AND SPLIT-UP In case of both, i.e., spin-off and split-up, the shares of the resulting

company, i.e., transferee company have to be issued to the

shareholders of the transferor company in proportion to their

shareholding in the transferor company.

Spin-off and split-ups are normally resorted to achieve focus in the

respective businesses, especially if the businesses are unrelated

(non-synergistic).

They are used to improve the price earning ratio and consequently,the market capitalization by demerging not so profitable businessesinto a separate company or companies.


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EXAMPLE

ABC ltd has three business divisions, A, B and

C. A is engaged in textiles, B is engaged in Steel

and C is engaged in software. If ABC Ltd

transfers the assets, liabilities and business of its

division C, i.e. software business to a separatecompany complying with other conditions

mentioned below and continues its other two

division A and B. It is a case of Spin off.

However if the parent company will transfer allits assets and liabilities of its three divisions to

two or three companies and the ABC limited will

either remain as a shell company or cease to

exist. Then it will be a case of Split-Up.


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SPLIT-OFF

A split-off differs from a spin-off in that theshareholders in a split off must relinquish their

shares of stock in the parent corporation in order to

receive shares of the subsidiary corporation,

whereas the shareholders in a spin off need not doso.

For example :- Viacom announced a split off of its

interest in blockbuster in 2004. Whereby Viacom

offered stock in Blockbuster in exchange for an

appropriate amount of Viacom stock.


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CARVE-OUT It is a hybrid of divestiture and spin-off.

In carve-out, a company transfers all the

assets, liabilities, loans and business ofone of its divisions/undertakings to its 100

per cent subsidiary .

At the time of transfer, the shares are

issued to the transferor company itself and

not to its shareholders.


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CARVE OUT Later on, the company sells the shares

in parts to outsiders - whether

institutional investors by private

placement or to retail investors by offerfor sale.

In case of carve-out, the consideration

for transfer of business to a newcompany eventually comes in the

coffers of the transferor company.


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CARVE-OUT Carve-outs are normally used to mobilize funds

for core business or businesses of a company by

realizing the value of non-core businesses.

They are also used to carve out capital hungrybusinesses from the businesses requiring normal

levels of capital so that further fund raising by

equity dilution can be restricted to capital intensive

businesses sparing the other businesses fromequity dilution.


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JOINT VENTURES It is an arrangement in which two or more

companies (called joint venture partners)

contribute to the equity capital of a new

company (called joint venture) in pre-decidedproportions.

Normally, joint venture partners are limited

companies, one or all of them may not be limited

companies. The biggest joint venture in India,

viz., Maruti Suzuki had the Government of India

as one of the joint venture partners.


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JOINT VENTURE Normally, joint ventures are formed to pool the

resources of the partners and carry out a

business or a specific project beneficial to both

the partners but which none of the partnerswants to carry out under its own corporate entity

for any one of the given reasons:

The venture may be highly risky.

Joint venture partners may otherwise be

competitors but may be wanting to collaborate

only for a specific project or business.


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JOINT VENTURENeither of the partners may be willing to dilute

control on their business by accepting funding,

especially equity funding, in their own balance

sheet.

To ensure that management control of the

common business or project is shared in the

agreed proportion through charter of the joint

venture company.To ensure that rewards of the common business

or the project are shared in the predetermined

ratio without the possibility of manipulation in

favour of either side.


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JOINT VENTURE-BASIC OBJECTIVES To obtain distribution channels or raw materials

supply.

To overcome insufficient financial or technicalability to enter a particular line of business.

To achieve economies of scale.

To share technology and general management

skills in the organization.


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REDUCTION OF CAPITAL This is a legal process underCompanies

Act, 1956, by which a company is allowed

to extinguish or reduce liability on any of

its shares in respect of share capital not

paid up or is allowed to cancel any paid-up

share capital which is lost or is allowed to

pay off any paid-up capital which is inexcess of its requirements.


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REDUCTION OF CAPITAL WHY?(A) By extinguishing or reducing the liability in respect

of share capital not paid-up.

# A company may have come out with an issue ofcapital, wherein shareholders would be required to

pay the issue price in stages, as and when called.

Before all the calls are made, the project may be

over and further funds may not be immediatelyrequired.


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REDUCTION OF CAPITAL WHY?(B) By writing off or cancelling the capital which is

lost.

# If a company has been incurring losses for a long

period of time and the accumulated loss has gonebeyond the reserves (if any) which it had built in past,it would have actually lost a part of its paid-up capital,i.e., a part of the paid-up capital is no morerepresented by any real assets.

Hence, the company would have been showing theaccumulated loss as a fictitious asset on the asset sideof the balance sheet and simultaneously would havebeen showing its paid-up capital at the historical figure.


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REDUCTION OF CAPITAL WHY?(c) By paying off or returning excess capital that is

not required by the company.

# A company may have been extremely profitableand thereby, it may be having excess/ surplus

cash. In such a case, the company may want to

return the excess cash to its shareholders since

idle cash will reduce its ROCE and ROE.


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REDUCTION OF CAPITAL WHY? By returning the excess cash and in process,

reducing either the face value of its shares or

the number of outstanding shares, it can not

only maintain/improve its ROCE and ROE,but also boost its earnings per share,

thereby, pushing the market price up.

It may also want to effect early redemption ofits preference share capital if any.


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BUY BACK OF SECURITIES This is yet another important tool of capital

restructuring.

If the company is holding excess cash and there

is no profitable ventures, then its prudent toreturn this excess cash to its shareholders.

Buy-back of equity shares indirectly increases

the promoters stake in the voting (equity) capital

of the company without being required to make

an open offer and reduces or eliminates the

possibility of takeover bid by an outsider.


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BUY BACK OF SECURITIES ABC ltd. has a paid up capital of Rs.100 crore consisting of

10 crore shares of face value Rs.10 each. The promoters

are holding 3 crore shares i.e. a stake of 30%.ABC ltd.

come with a but back of 25% and reduces the paid up

capital to 7.5 crore shares. The promoter's stake will go upto 46.67 per cent.

Companies find it prudent to reduce the capital base by

either resorting to reduction of capital under sections 100 to104 of the Companies Act, 1956,or to buy-back its equity

(sometimes even preference) shares.


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BUY BACK OF SECURITIES Reasons why a company may still resort to

reduction of capital under section 100 to 104

and not buy-back under section 77A:

# Under section 77A, a company can buy-back

only 25 percent of its paid-up equity capital in a

financial year. If a company wants to effect alarger buy-back, it will have to follow the

reduction of capital route.


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BUY BACK OF SECURITIES# In buy-back under section 77A, shareholders may

or may not participate even after passing a

special resolution in general meeting.

# Other conditions of section 77A, such as, post buy-

back debt equity of 2:1, buy-back amount not to

exceed 25 percent of share capital plus free

reserves, are not applicable to reduction of capital

under sections 100 to 104.


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DELISTINGDelisting of a security is delisting of any of

the securities (and not necessarily all)

from any of the stock exchanges (and not

necessarily all).

Delisting of a company as a form of

corporate restructuring refers to delisting

of its equity shares from all stockexchanges.


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DELISTING WHY? To reduce costs of maintaining large number of

reports and having an expensive work force.

To avoid sharing a lot of information in public

domain. Promoters delist to make use of the level of

freedom that unlisted companies enjoy.

MNCs especially delist so that they do not get

listed at very low prices due to FERA requirements.

forms of corporate restructuring

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