CA Final Course Paper 2 Strategic Financial Management Chapter 13

CA. Biharilal Deora

Mergers, acquisitions and corporate restructuring business has grown by leaps and bounds
during the last few years. From about $4.5 billion in 2004, the market for corporate control
zoomed to $ 13 billion in 2005 and is stated to be worthas much as $62 billion in 2010 and that
is phenomenal growth indeed. As per “New dimensions in M&A regulatory framework 2012”, a
report published by Grant Thornton India LLP and Assocham,

While total M&A deal value was US$ 62 billion (971 deals) in 2010, it was US$ 54 billion (1026
deals) in 2011 and 1st 4 months of 2012 witnessed deal value of US$ 23 billion (396 deals).

The year 2005 has been referred as the year of mergers and acquisitions. In India, M & A
deals in excess of $13 billion were struck in 2005 as compared to $4.5 billion in 2004.In Asia,
India stands next only to China in M & A activity. There were 163 inbound acquisitions in India
valued at $2.83 billion.
The terms ‘mergers;, ‘acquisitions’ and ‘takeovers’ are often used interchangeably in common
parlance. However, there are differences. While merger means unification of two entities into
one, acquisition involves one entity buying out another and absorbing the same. In India, in
legal sense merger is known as ‘Amalgamation’.

The term “amalgamation” is used when two or more companies are amalgamated or where
one is merged with another or taken over by another. In Inland steam Navigation Workers
Union vs. R.S. Navigation Company Ltd., it was observed that in case of amalgamation, the
rights and liabilities of a company are amalgamated into another so that the transferee
company becomes vested with all rights and liabilities of the transferor company.

An acquisition is when both the acquiring and acquired companies are still left standing as
separate entities at the end of the transaction. A merger results in the legal dissolution of one
of the companies, and a consolidation dissolves both of the parties and creates a new one,
into which the previous entities are merged.
A merger is generally understood to be a fusion of two companies. The
term “merger” means and signifies the dissolution of one or more
companies or firms or proprietorships to form or get absorbed into another
company. By concept, merger increases the size of the undertakings.

Horizontal merger - The two companies which have merged are in the
same industry, normally the market share of the new consolidated
company would be larger and it is possible that it may move closer to
being a monopoly or a near monopoly.

Vertical merger - when two companies that have ‘buyer-seller’ relationship

(or potential buyer-seller relationship) come together.
Conglomerate merger - where the two companies that merge are in different fields altogether.

Congeneric merger- In these mergers, the acquirer and the target companies are related
through basic technologies, production processes or markets. The acquired company
represents an extension of product-line, market participants or technologies of the acquirer.
These mergers represent an outward movement by the acquirer from its current business
scenario to other related business activities within the overarching industry structure

Reverse merger - where, in order to avail benefit of carry forward of losses which are available
according to tax law only to the company which had incurred them, the profit making company
is merged with companies having accumulated losses.
 • AB > A+B. A good example of complimentary activities
Synergistic can a company may have a good networking of
branches and other company may have efficient
operating production system. Thus the merged companies will
economics be more efficient than individual companies. Example
– Microsoft acquires Nokia.

• In case of merger between two unrelated companies

would lead to reduction in business risk, which in turn
will increase the market value consequent upon the
Diversification reduction in discount rate/ required rate of return.
Example – CESC acquires the BPO business of 3I
Infotech.
Taxation

• The provisions of set off and carry forward of losses as per

Income Tax Act may be another strong season for the merger and
acquisition.

Growth

• Merger and acquisition mode enables the firm to grow at a rate

faster than the other mode viz., organic growth. Example –
Ultratech cement acquires the cement business of JP Associates.

Consolidation of Production Capacities and

increasing market power
• Due to reduced competition, marketing power increases. Further,
production capacity is increased by combined of two or more
plants. Example – Tata Motors acquisition of JLR.
Accounting Standard 14 on Accounting For Amalgamations, issued by the
Institute of Chartered Accountants of India which came into effect in
respect of accounting periods commencing on or after April 1, 1995 is
mandatory. The Standard prescribes two methods of accounting for
amalgamations namely

(a) the pooling of interests method -

• The pooling of interests method is confined to circumstances which meet the criteria
referred to in the definition of the amalgamation in the nature of merger.
(b) the purchase method -
• The object of the purchase method is to account for the
amalgamation by applying the same principle as are applied
in the normal purchase of assets. This method is used in
accounting for amalgamations in the nature of purchase.
Under the purchase method, the transferee company
accounts for the amalgamation either by incorporating the
assets and liabilities at their existing carrying amounts or by
allocating the consideration to individual identifiable assets
and liabilities of the transferor company on the basis of their
fair value at the date of amalgamation.
Indian corporates are largely promoter-controlled and managed. The ownership stake should,
in the normal course, inhibit any rational judgment on this sensitive issue. It is difficult for either
of the two promoters to voluntarily relinquish management control in favour of the other, as a
merger between two companies implies. In some cases, the need for prior negotiations and
concurrence of financial institutions and banks is an added rider, besides SEBI’s rules and
regulations.

The reluctance of financial institutions and banks to fund acquisitions directly.

The BIFR route, although tedious, is preferred for obtaining financial concessions.
Lack of Exit Policy for restructuring/downsizing.

Absence of efficient capital market system makes the

Market capitalisation not fair in some cases.

Valuation is still evolving in India.

The Companies Act, 1956 and the SEBI’s Takeover Code are the general source of
guidelines governing merges. There are sector specific legislative provisions, which
to a limited extent empower the regulator to promote competition. For example;

(a) Electricity Regulatory Commission has been given powers under the Electricity
Act, 2003 to promote competition.

(b) in the telecom and broadcasting Regulatory Authority of India (TRAI) Regulate
mergers in these sectors and any dispute regarding the same is adjudicated by the
Telecom Dispute Settlement Appellate Tribunal (TDSAT).

(c) Mergers in the banking sector require approval from the RBI.
This refers to the purchase of controlling interest by one company in the share
capital of an existing company. This may be by:

(i) an agreement with majority holder of Interest.

(ii) Purchase of new shares by private agreement.

(iii) Purchase of shares in open market (open offer)

(iv) Acquisition of share capital of a company by means of cash, issuance of

shares.

(v) Making a buyout offer to general body of shareholders.

(i) Acquisition of Companies shares.

(ii) Acquisition of business assets (ABOs).

(iii) Acquisition of Brand’s.

(iv) Acquisition of Companies by Friendly vs. Hostile takeover.

(v) Reverse acquisition

An acquisition by purchase of a controlling interest in the share capital of another
existing company is takeover, another term for acquisition. The two types of
takeovers are:

Friendly acquisition - Acquisition through negotiations and with willingness and

consent of the acquired company’s Board of directors.

Hostile takeover - Hostile takeover arises when the Board of Directors of the
acquiring company decide to approach the shareholders of the target company
directly through a Public Announcement (Tender Offer) to buy their shares
consequent to the rejection of the offer made to the Board of Directors of the target
company.
 • this refers to the technique where the acquiring company
Street Sweep: accumulates larger number of shares in a target before making an
open offer. The advantage is that the target company is left with no
choice but to agree to the proposal of acquirer for takeover.

• When the acquirer threatens the target to make an open offer, the
Bear Hug: board of target company agrees to a settlement with the acquirer for
change of control.

Strategic • This involves disarming the acquirer by offering a partnership rather

than a buyout. The acquirer should assert control from within and
Alliance: takeover the target company.

• This refers to entering into an alliance with powerful brands to

Brand Power: displace the target’s brands and as a result, buyout the weakened
company.
The three tests in a takeover by reverse bid
that are required to be satisfied are, namely,

(i) the assets of the transferor company are greater than the
transferee company,

(ii) equity capital to be issued by the transferee company pursuant

to the acquisition exceeds its original issued capital, and

(iii) the change of control in the transferee company through the

introduction of a minority holder or group of holders.
The acquisition process involves the following essential stages:

1. Defining the Acquisition Criteria

2. Competitive analysis;

3. Search and screen.

4. Strategy development.

5. Financial evaluation.

6. Target contact and negotiation.

7. Due Diligence (in the case of a friendly acquisition

8. Arranging for finance

9. Putting through the acquisition and Post merger integration

A company that has decided to go the inorganic growth route
needs to fit in its acquisition criteria in conjunction with its
acquisition strategy, which in turn should mesh with its
business vision and mission. For example, acquisition
criteria can be articulated as:-
• Annual Revenue of the target firm to be between Rs. xx million and Rs. yy
million
• Annual EBITDA of the target firm to be between Rs. pp million andRs. qq
million
• Target firm should be aged between nn years to mm years
• Target firm should have established operations in Europe and Asia Pacific
• Target firm’s number of customers with 5 million plus shall not less than 2
miilion
• Target firm has its products that are well entrenched in multiple markets
The competitive analysis stage is to identify synergistic inter-
relationship between the buyer and the target’s business
opportunities.

In search and screen stage a list of good acquisition candidates

is developed. The screening process involves identifying a few
of the best candidates that meet the established criteria. Once
best apparent candidates have been identified, more detailed
analysis for each will be initiated.
This phase comprises initial market
evaluation, market study and research and
initial screening. Parts of this initial data-
gathering phase, which could take a few days
at most in the developed countries, where
reliable third-party information is readily
available, could last as long as two to three
months in developing countries, where it is a
far more painstaking and labor-intensive task
to unearth company information.
The strategy development calls for the development
of a blue print for execution of acquisition. In
particular, the strategy for the exploitation of apparent
operational synergies would be delineated. The more
an acquisition depends upon synergistic
interrelationship, the greater is the need to develop a
post-merger integration blueprint beforehand. In
particular, once you have figured out what drives the
value of the target firm, the acquisition strategy should
sure that it is still there after the acquiring firm has
acquired the business.
The central issues addressed in this stage include:

i) What is the maximum price that should be for the target

company?

ii) What are the principal areas of Risk

iii) What are the cash flow and balance sheet implications of the
acquisition? and

(iv) What is the best way of structuring the acquisition?

Once a target Co. is identified, the acquirer company
initiates the process of contacting the target firm. It is now
a reasonably agreed protocol for the CEO/Executive
Chairman of the acquiring company to talk to his/her
counterpart of the target company.

When an acquirer approaches the target for

merger/acquisition, the bidder must assess the target’s
response. This will involve evaluation of:-

• (i) Personalities in the opposite camp

• (ii) Motivations for sale
• (iii) Relation to the target – e.g. Promoters/Prof. Managers
• (iv) Desire for independence
• (v) Post-acquisition expectations from the merger
• (vi) Preference for payment – cash or equity
If the target company is interested, then it will be usually result in an
agreement for exchange of information. At this point, pricing is in the air
but not finalised. This agreement results in Non-Disclosure Agreement
(NDA). NDA does not result in a Yes or No to the proposal – but enables
both parties to start evaluating the deal from close quarters.

The Acquirer will now issue a Letter of Intent (LOI) (also known as Term
Sheet). Most importantly, LOI will contain the business interest to be
acquired, price and warranties. LOI is a non-binding summary of the
primary terms of what will eventually become part of a purchase
agreement.

Once the LOI is signed, the due diligence process will start. Due diligence
will usually be carried out by Statutory Auditors or by an established audit
firm.
Due diligence is one of the two most critical elements in the success of an Mergers and
Acquisitions (M&A) transaction (the other being the proper execution of the integration process).
Areas to evaluate include finance, management, employees, IT, legal, risk management systems,
culture, innovation, intangible assets (IPs, Patents, etc), corporate governance and ethics. There
are different types of due diligence and the purpose of each will vary to assess different aspects of
the target’s business. The other additional purposes of 'Due Diligence' are:-

Identifying potential deal breakers – this will help the acquiring company in drafting the ‘negotiating
strategy’

Identifying key points for ‘post integration 30 days/90 days/180 days strategies’ – the areas that
require immediate management action

Due Diligence process gives the last opportunity to the acquiring company Board of Directors to
make a go or no-go decision. If the decision to ‘go’ is taken, ‘Purchase Agreement’ is signed. This is
otherwise called ‘Definitive Agreement’.
One of the most important decisions is how to pay for the acquisition –
cash or stock or part of each. And this would be part of the Definitive
Agreement.

If the acquisition is an ‘all equity deal’, the CFO’s can breathe easy.
However, if cash payout is significant, the acquirer has to plan for financing
the deal.

Sometimes acquirers do not pay all of the purchase consideration as, even
though they could have sufficient funds. This is part of the acquisition
strategy to keep the war chest ready for further acquisitions.

Another reason to pay by shares would be when the acquirer considers

that their company’s shares are ‘over priced’ in the market.
Every acquirer must build an ‘Integration Plan’ document as soon as possible.
The usual guiding principles that underpin an integration plan are:

(i) integrate the business quickly into one unit which is the right size for the
future

(ii) integrate and retain the best people from both organizations into one high
performing team

(iii) build support for the new organization with employees, customers and
suppliers

(iv) achieve valuation commitments.

It is usual for acquiring companies to make 30 days/90
days/ 180 days transition plan to ensure that immediate
pressing needs of the acquisition are met. A typical 90/100
days plan to cover the initial period of integration will have
the following purposes:
• identify key events and activities that should take place in the first 100
days to achieve the above integration goals
• identify the required resources to integrate the new businesses
• develop a plan for each functional area including sales, marketing,
finance, IT, HR and operations
• ensure open communication
• drive synergy realisation
• achieve transition from integration to business team
Divestiture -

• In a divestiture the target company divests or spins off some of its businesses in the form of an
independent, subsidiary company. Thus, reducing the attractiveness of the existing business to the
acquirer.

Crown jewels -

• When a target company uses the tactic of divestiture it is said to sell the crown jewels. In some
countries such as the UK, such tactic is not allowed once the deal becomes known and is
unavoidable.

Poison pill -

• Sometimes an acquiring company itself becomes a target when it is bidding for another company.
The tactics used by the acquiring company to make itself unattractive to a potential bidder is called
poison pills. For instance, the acquiring company may issue substantial amount of convertible
debentures to its existing shareholders to be converted at a future date when it faces a takeover
threat. The task of the bidder would become difficult since the number of shares to having voting
control of the company increases substantially.

Poison Put -

• In this case the target company issue bonds that encourage holder to cash in at higher prices. The
resultant cash drainage would make the target unattractive.
Greenmail -

• Greenmail refers to an incentive offered by management of the target company to the potential bidder
for not pursuing the takeover. The management of the target company may offer the acquirer for its
shares a price higher than the market price.

White knight -

• In this a target company offers to be acquired by a friendly company to escape from a hostile
takeover. The possible motive for the management of the target company to do so is not to lose the
management of the company. The hostile acquirer may change the management.

White squire -

• This strategy is essentially the same as white knight and involves sell out of shares to a company that
is not interested in the takeover. As a consequence, the management of the target company retains
its control over the company.

Golden parachutes -

• When a company offers hefty compensations to its managers if they get ousted due to takeover, the
company is said to offer golden parachutes. This reduces their resistance to takeover.

Pac-man defence -

• This strategy aims at the target company making a counter bid for the acquirer company. This would
force the acquirer to defend itself and consequently may call off its proposal for takeover.
A due diligence process should focus at
least on the following issues:

• These include examining documents of asset ownership

Legal issues: and associated liabilities; and whether the target company
is in compliance with government regulations.

• These include examining accounting records and reports

Financial and to determine whether the target companies are in
compliance with generally accepted accounting principles.
tax issues: In addition, the target company’s compliance with tax laws
and regulations should be examined.
 Marketing • These include strengths and weaknesses of products and services
provided by the target company and their domestic and foreign
issues: competition.

Cross-border • These include foreign currency exchange risks, foreign laws and
regulations, investment promotional agency and investment
incentives, foreign banking and credit agencies, accounting
issues: principles, and local tax rules.

• These cover cultural differences between the acquirer and target

Cultural and companies and how to deal with these differences; the degree of
compliance with the acquirer’s ethical guidelines; and the exposure
ethical issues: to liabilities and legal proceedings on unethical conduct such as
patent and copyright violations, price fixing and others.
There are several techniques to value a business. We will discuss
each and every technique in detail.
Discounted DCF/FCF Method

Cost to Create

Capitalization earning method

Chop-shop method
This discounted cash-flow being the most common technique
takes into consideration the future earnings of the business and
hence the appropriate value depends on projected revenues and
costs in future, expected capital outflows, number of years of
projection, discounting rate and terminal value of business. There
are six steps involved in the valuation:
• Determine Free Cash Flow - Free cash flow to Firm (FCFF) = NOPAT +
Depreciation and Amortization – (Capital expenditure + Working capital investment)
• Estimate a suitable Discount Rate for the Acquisition - The acquiring company
can use its weighted average cost of capital based on its target capital structure only
if the acquisition will not affect the riskiness of the acquirer. If the acquirer intends to
change the capital structure of the target company, suitable adjustments for the
discount rate should be made. The discount rate should reflect the capital structure
of the company after the acquisition. The appropriate discount rate for discounting
FCFF is the Weighted Average Cost of Capital (WACC) and the discount rate for
discounting FCFE is the Cost of Equity.
(iii) Calculate the Present Value of Cash Flows –
• Since the life of a going concern, by definition, is infinite, the value of the company is, = PV of cash
flows during the forecast period + Terminal value

(iv) Estimate the Terminal Value –

• The terminal value is the present value of cash flows occurring after the forecast period. If we
assume that cash flows grow at a constant rate after the forecast period, the terminal value,

TV = [CFt (1 + g)] / (k – g) where,

• CFt = Cash flow in the last year
• g = Constant growth rate
• k = Discount rate
• Add Present Value of Terminal Value = TV x PVIFk,n

(vi) Deduct the Value of Debt and Other Obligations Assumed by the Acquirer.
In this approach, the cost for building up the
business from scratch is taken into consideration
and the purchase price is typically the cost plus a
margin. This is suitable in cases like build-
operate-transfer deals. The value of a business is
estimated in the capitalized earnings method by
capitalizing the net profits of the business of the
current year or average of three years or
projected years at required rate of return.
Capitalization refers to the return on investment that is expected by an investor. The
value of a business is estimated in the capitalized earnings method by capitalizing the
net profits of the business of the current year or average of three years or a projected
year at required rate of return. There are many variations in how this method is applied.
However, the basic logic is the same. Suppose you hads` 1,00,000 to invest. You might
look at different investment options available e.g. shares, bonds, or savings accounts
etc. You would compare the potential return against the risk of each and make a
judgment as to which is the best deal in your particular situation.

The same return on investment logic holds for buying a business. capitalization
methods (and other methods) for valuing a business are based upon return on the new
entity's investment.
This approach attempts to identify multi-industry
companies that are undervalued and would have
more value if separated from each other. In other
words as per this approach an attempt is made to
buy assets below their replacement value. This
approach involves following three steps:
• (i) Identify the firm’s various business segments and calculate
the average capitalization ratios for firms in those industries.
• (ii) Calculate a “theoretical” market value based upon each of
the average capitalization ratios.
• (iii) Average the “theoretical” market values to determine the
“chop-shop” value of the firm.
 Market
capitalization for • Method of evaluating the market capitalization for listed
companies is same as Capitalized Earning Method except that
listed here the basis is taken earning of similar type of companies.
companies -

Market multiples • This method is mainly concerned with the valuation of unlisted
companies. In this method various Market multiples i.e. market
of comparable value of a company’s equity (resulting in Market Value of
Equity Multiple) or invested capital (resulting in Market Value of
companies for Invested Capital) are divided by a company measure (or
unlisted company fundamental financial variable) – earnings, book
value or revenue- of comparable listed companies are
company - computed.
Net adjusted asset value or economic book value

Intangible asset valuation

Liquidation value
Valuation of a 'going concern’ business by
computed by adjusting the value of its all
assets and liabilities to the fair market value.
This method allows for valuation of goodwill,
inventories, real estate, and other assets at
their current market value. In other words
this method includes valuation of intangible
assets and also allows assets to be adjusted
to their current market value.
 Acceptable methods for the valuation of identifiable
intangible assets and intellectual property fall into three
broad categories.
(i) Market based
(ii) Cost based - Cost-based methodologies, such as the
“cost to create” or the “cost to replace” a given asset,
assume that there is some relationship between cost
and value and the approach has very little to commend
itself other than ease of use. The method ignores
changes in the time value of money and ignores
maintenance.
Estimates of past and present economic benefits – This can
be broken down into four limbs:

1) Capitalization of •- arrives at the value of intangible assets by multiplying the maintainable historic
profitability of the asset by a multiple that has been assessed after scoring the
historic benefits relative strength of the intangible assets.

(ii) Gross profit •are often associated with trade mark and brand valuation. These methods look
at the differences in sale prices, adjusted for differences in marketing costs.
differential method -

•looks at the current value of the net tangible assets employed as the benchmark
(iii) Excess profit for an estimated rate of return. This is used to calculate the profits that are
required in order to induce investors to invest into those net tangible assets. Any
method - return over and above those profits required in order to induce investment is
considered to be the excess return attributable to the intangible assets.

(iv) Relief from •considers what the purchaser could afford, or would be willing to pay, for a licence
of similar intangible assets. The royalty stream is then capitalized reflecting the
royalty - risk and return relationship of investing in the asset.
This approach is similar to the book valuation method, except that the value of
assets at liquidation are used instead of the book or market value of the assets.
Using this approach, the liabilities of the business are deducted from the
liquidation value of the assets to determine the liquidation value of the business.
The overall value of a business using this method should be lower than a
valuation reached using the standard book or adjusted book methods.

The liquidation value of a company is equal to what remains after all assets have
been sold and all liabilities have been paid. It differs from book value in that assets
would be sold at market prices, whereas book value uses the historical costs of
assets. This is considered to be a better floor price than book value for a
company, because if a company drops significantly below this price, then
someone, such as a corporate raider, can buy enough stock to take control of it,
and then liquidate it for a riskless profit. Of course, the company’s stock price
would have to be low enough to cover the costs of liquidating it and the
uncertainty in what the assets would actually sell for in the marketplace.
The aspects relating to expansion or
contraction of a firm’s operations or changes in
its assets or financial or ownership structure are
known as corporate re-structuring. While there
are many forms of corporate re-structuring,
mergers, acquisitions and takeovers, financial
restructuring and re-organisation, divestitures
de-mergers and spin-offs, leveraged buyouts
and management buyouts are some of the
most common forms of corporate restructuring.
These forms are discussed herein as follows:
There are many reasons for demerger or divestments:

(a) To pay attention on core areas of business

(b) The Division’s/business may not be sufficiently

contributing to the revenues

(c) The size of the firm may be too big to handle;

(d) The firm may be requiring cash urgently in view of

other investment opportunities.
Different ways of demerger or divestment are as follows:

(a) Sell off - A sell off is the sale of an asset, factory, division, product
line or subsidiary by one entity to another for a purchase consideration
payable either in cash or in the form of securities. Ex – Sale of generic
division by Piramal Enterprise to Abbott Laboratories.

• (b) Spin-ff - In this case, a part of the business is separated and created as a
separate firm. The existing shareholders of the firm get proportionate ownership. So
there is no change in ownership and the same shareholders continue to own the
newly created entity in the same proportion as previously in the original firm. The
management of spun-off division is however, parted with. Spin-off does not bring
fresh cash. The reasons for spin off may be:
Separate identity to a part/division.

To avoid the takeover attempt by a predator by making the firm

unattractive to him since a valuable division is spun-off.

To create separate Regulated and unregulated lines of

business.

Example: Spin off of Grasim’s Cement Division to Ultratech

Cement (through Samrudhi Cement and Investments Limited)
(c) Split-up: This involves breaking up of the entire firm into a series of spin off (by
creating separate legal entities).The parent firm no longer legally exists and only
the newly created entities survive. For instance a corporate firm has 4 divisions
namely A, B, C, D. All these 4 division shall be split-up to create 4 new corporate
firms with full autonomy and legal status.

(d) Carve outs This is like spin off however, some shares of the new company are
sold in the market by making a public offer, so this brings cash. In carve out, the
existing company may sell either majority stake or minority stake, depending upon
whether the existing management wants to continue to control it or not.

(e) Sale of a division - In the case of sale of a division, the seller company is
demerging its business whereas the buyer company is acquiring a business.
(ii) Demerger or Division of Family-Managed
Business - Around 80 per cent of private sector
companies in India are family-managed companies.
The family-owned companies are, under extraordinary
pressure to yield control to professional
managements. So there are many ways a
restructuring is getting done in family managed
businesses:
• Identify core and non-core operations within the group.
• Reducing interest burden through debt restructuring along with sale
of surplus assets.
(iii) Corporate controls – There are many forms:

Going private - This refers to the situation wherein a listed company is converted into a
private company by buying back all the outstanding shares from the markets.

Equity buyback - This refers to the situation wherein a company buys back its own
shares back from the market. This results in reduction in the equity capital of the
company. This strengthen the promoter’s position by increasing his stake in the equity of
the company.

Restructuring of an existing business - An existing business in the face of impending

onslaught of international competition, or even otherwise, may require restructuring.
Such restructuring may involve, for instance, downsizing and closing down of some
unprofitable departments.
Buy-outs: This has two versions. The classical version where the current
management of a company or business division ‘buys out’ the
company/division from the owners/promoters (i.e., shareholders or the
company). This happens due to the owners/promoters losing interest in the
line of business or due to the accumulating losses. The takeover of Escorts
Auto Components Ltd. by its CEO (Bharat Caprihan) and six other CXOs in
2004 was probably the first such reported transaction. Usually there will be a
banker/financier/PE who will bankroll the transaction. This MBO was followed
up by the PE Firm Actis helping out the CEO team in Phoenix Lamps.

The newer version of MBO relates to an active PE who goes after weak
managements and buys out the stake and the brings in their CXOs to
Manage the Business – the PE gets actively involved in the Management and
turns over the company into a profitable opportunity and exits at the right
time. The Management Team that comes in takes stake in the equity capital
of the company while coming on board and hence the term Management
Buy-in.
Financial restructuring refers to a kind of internal
changes made by the management in Assets and
Liabilities of a company with the consent of its various
stakeholders. This is a suitable mode of restructuring for
corporate entities who have suffered from sizeable
losses over a period of time. Financial restructuring (also
known as internal re-construction) is also aimed at
reducing the debt/payment burden of the corporate firm.
This results into
• 1) Reduction/Waiver in the claims from various stakeholders;
• 2) Real worth of various properties/assets by revaluing them timely;
• 3) Utilizing profit accruing on account of appreciation of assets to write
off accumulated losses and fictitious assets (such as preliminary
expenses and cost of issue of shares and debentures) and creating
provision for bad and doubtful debts.
It is worth mentioning that financial restructuring
is unique in nature and is company specific. It is
carried out, in practice when all shareholders
sacrifice and understand that the restructured
firm (reflecting its true value of assets, capital
and other significant financial para meters) can
now be nursed back to health. This type of
corporate restructuring helps in the revival of
firms that otherwise would have faced
closure/liquidation.
No Audio
Some of the key reasons are :

• Acquirers generally overpay;

• The value of synergy is over-estimated;
• Poor post-merger integration; and
• Psychological barriers.

To make a merger successful,

• Decide what tasks need to be accomplished in the post-merger

period;
• Choose managers from both the companies (and from outside);
• Establish performance yardstick and evaluate the managers on
that yardstick; and
• Motivate them.
The acquirer can pay the target company in cash or exchange shares in
consideration. The analysis of acquisition for shares is slightly different. The
steps involved in the analysis are:

Estimate the value of acquirer’s (self) equity;

Estimate the value of target company’s equity;

Calculate the maximum number of shares that can be exchanged with the
target company’s shares; and

Conduct the analysis for pessimistic and optimistic scenarios.

Cross-border M&A is a popular route for global growth
and overseas expansion. Cross-border M&A is also
playing an important role in global M&A. Other major
factors that motivate multinational companies to engage
in cross-border M&A in Asia include the following:

• Globalization of production and distribution of products and services.

• Integration of global economies.
• Expansion of trade and investment relationships on International level.
• Many countries are reforming their economic and legal systems, and
providing generous investment and tax incentives to attract foreign
investment.
• Privatisation of state-owned enterprises and consolidation of the
banking industry.
 Major policy changes: The major policy
changes introduced since July, 1991 include:
 abolition of industrial licensing;
 lifting of restrictions on the size of firms;
 a drastic reduction in the areas reserved for the
public sector;
 disinvestments of Government equity in public
sector undertakings (PSUs) aimed at eventual
privatisation of most of them;
 liberalisation of foreign investment regulations;
 substantial liberalisation of import tariffs;
 removal of all quantitative restrictions on imports;
 abolition of the office of the Controller of Capital
Issues (CC) and freedom to companies to set premia
on their share issues;
 Freedom to companies to raise capital abroad;
 rationalisation and lowering of excise and Customs
duties
 replacing the draconian FERA with FEMA
 a substantial reduction in corporate and personal
income tax rates and introduction of total current
account convertibility and partial capital account
convertibility