Corporate Restructuring

 Corporate Restructuring refers to the change in ownership,

business mix, assets mix and alliances with a view to enhance the
shareholders value.
 Hence it may involve
1. ownership restructuring through mergers and acquisitions,
leverage buy-outs, buy back of shares, spin offs, joint venture and
strategic alliances.
2. Business restructuring involves the reorganization of business
units or divisions. It also includes diversification into new
businesses, out-sourcing, divestment, brand acquisitions etc.
3. Asset restructuring involves the acquisition or sale of assets and
their ownership structure.
 Corporate Restructuring includes mergers and acquisitions,
amalgamation, take-overs, spinoffs, leverage buy-outs, buy back
of shares, capital reorganization, sale of business units and assets
etc.
 Purpose of Restructuring:
The basic purpose of Corporate restructuring is to enhance the
shareholder value. By this it can design new innovative securities that
help to reduce the cost of capital.
Types of Corporate Restructuring
 Financial Restructuring: This type of restructuring may take place
due to a severe fall in the overall sales because of the adverse
economic conditions. Here, the corporate entity may alter its
equity pattern, debt-servicing schedule, the equity holdings, and
 cross-holding pattern. All this is done to sustain the market and
the profitability of the company.
 Organizational Restructuring: The Organizational Restructuring
implies a change in the organizational structure of a company,
such as reducing its level of the hierarchy, redesigning the job
positions, downsizing the employees, and changing the reporting
relationships. This type of restructuring is done to cut down the
cost and to pay off the outstanding debt to continue with the
business operations in some manner.
Reasons for Corporate Restructuring
 Corporate restructuring is implemented in the following
situations:
 Change in the Strategy: The management of the distressed entity
attempts to improve its performance by eliminating its certain
divisions and subsidiaries which do not align with the core
strategy of the company. The division or subsidiaries may not
appear to fit strategically with the company’s long-term vision.
Thus, the corporate entity decides to focus on its core strategy
and dispose of such assets to the potential buyers.
 Lack of Profits: The undertaking may not be enough profit making
to cover the cost of capital of the company and may cause
economic losses. The poor performance of the undertaking may
be the result of a wrong decision taken by the management to
start the division or the decline in the profitability of the
undertaking due to the change in customer needs or increasing
costs.
 Reverse Synergy: This concept is in contrast to the principles of
synergy, where the value of a merged unit is more than the value
 of individual units collectively. According to reverse synergy, the
value of an individual unit may be more than the merged unit.
This is one of the common reasons for divesting the assets of the
company. The concerned entity may decide that by divesting a
division to a third party can fetch more value rather than owning
it.
 Cash Flow Requirement: Disposing of an unproductive
undertaking can provide a considerable cash inflow to the
company. If the concerned corporate entity is facing some
complexity in obtaining finance, disposing of an asset is an
approach in order to raise money and to reduce debt.
Characteristics of Corporate Restructuring
 To improve the Balance Sheet of the company (by disposing of the
unprofitable division from its core business)
 Staff reduction (by closing down or selling off the unprofitable
portion)
 Changes in corporate management
 Disposing of the underutilized assets, such as brands/patent
rights.
 Outsourcing its operations such as technical support and payroll
management to a more efficient 3rd party.
 Shifting of operations such as moving of manufacturing
operations to lower-cost locations.
 Reorganizing functions such as marketing, sales, and distribution.
 Renegotiating labor contracts to reduce overhead.
  Rescheduling or refinancing of debt to minimize the interest
payments.
 Conducting a public relations campaign at large to reposition the
company with its consumers.
Types of Business Combination
 Major types of Business combination are:
1. Merger or Amalgamation
2. Acquisition
3. Take over
4. Tender offer & Hostile takeover
5. Integration
6. LBO
7. Divestment
1. Merger or Amalgamation
 A merger is said to occur when two or more companies combine
into one company. In merger there is a complete amalgamation of
the assets and liabilities as well as shareholder’s interest and
interest of the merging company.
 Amalgamation can be defined as the merger of one or more
companies (called amalgamating company or companies) with
another company (called amalgamated company) or the merger
of two or more companies to form a new company in such a way
that all assets and liabilities of the amalgamating company or
companies become assets and liabilities of the amalgamated
company.
  Merger or amalgamation may take two forms:
 1. Merger through Absorption
 2. Merger through Consolidation
 Absorption is a combination of two or more companies into an
existing company. All companies except one lose their identity in a
merger through absorption.
 Consolidation is a combination of two or more companies into a
new company. In this type of merger all companies are legally
dissolved and a new company is created.
 Forms of merger
• Horizontal Merger: Horizontal merger occurs when
two companies that are in direct competition and share
the same product lines and markets merge together.
• Vertical Merger:  Vertical merger occurs when a
customer and company or a supplier and company
merge together.
• Market-Extension Merger:  Market-extension merger
occurs when two companies that sell the same products
in different markets merge together.
• Product-Extension Merger: Product-extension merger
occurs when two companies selling different but related
products in the same market merge together.
 Conglomeration: Conglomeration occurs when two
companies that have no common business areas merge
together

Motives behind Merger:

The following motives are considered to improve financial
performance:
 Synergy: Synergy is the magic force that allows for enhanced cost
efficiencies of the new business. Synergy takes the form of
revenue enhancement and cost savings.
   Economy of Scale: This refers to the fact that the combined
company can often reduce its fixed costs by removing duplicate
departments or operations, lowering the costs of the company
relative to the same revenue stream, thus increasing profit
margins.
   Increased Market Share: This assumes that the buyer will be
absorbing a major competitor and thus increase its market power to set
prices
 Cross-selling: Through the merger process, a manufacturer can
acquire and sell complementary products.
   Taxation: A profitable company can buy a loss maker to use the
target’s loss as their advantage by reducing their tax liability.
   Resource Transfer: Resources are unevenly distributed across
firms and the interaction of target and acquiring firm resources
can create value through either overcoming information
asymmetry or by combining scarce resources.
 Hiring: some companies use acquisitions as an alternative to the
normal hiring process. This is especially common when the target
is a small private company or is in the startup phase.
   Absorption of Similar Businesses under Single
Management: Sometimes the similar types of business entities
are merged to bring them under the single management
2. Acquisition
 Acquisition may be defined as an act of acquiring effective control
over assets or management of a company by another company
without any combination of business or companies.
 An acquirer may be a company or person acting in concert that
act together for the purpose of substantial acquisition of shares or
voting rights or gaining control over the target company.
Business Valuation:
 Naturally, both sides of an M&A deal will have different ideas
about the worth of a target company: its seller will tend to value
the company at as high of a price as possible, while the buyer will
try to get the lowest price that he can. The company can be
valuated as:
 Comparative Ratios: The following are two examples of the many
comparative metrics on which acquiring companies may base
their offers:
Price-Earnings Ratio (P/E Ratio): With the use of this ratio, an acquiring
company makes an offer that is a multiple of the earnings of the target
company.
Enterprise-Value-to-Sales Ratio (EV/Sales): With this ratio, the
acquiring company makes an offer as a multiple of the revenues, again,
while being aware of the price-to-sales ratio of other companies in the
industry.
  Replacement Cost: In a few cases, acquisitions are based on the
cost of replacing the target company. For simplicity’s sake, the
value of a company is simply the sum of all its equipment and
staffing costs. The acquiring company can literally order the
 target to sell at that price, or it will create a competitor for the
same cost. Naturally, it takes a long time to assemble good
management, acquire property and get the right equipment
   Discounted Cash Flow  (DCF): A key valuation tool in M&A,
discounted cash flow analysis determines a company’s current
value according to its estimated future cash flows. Forecasted
free cash flows (net income + depreciation/amortization – capital
expenditures – change in working capital) are discounted to a
present value using the company’s weighted average costs of
capital (WACC). Admittedly, DCF is tricky to get right, but few
tools can rival this valuation method.
3.Takeover
Takeover occurs when the acquiring firm takes over the control of the
target firm. A distinction between takeover and acquisition is that
takeover is understood to connote hostility. When an acquisition is a
‘forced’ of ‘unwilling’ acquisition, it is called a takeover.
The investment in shares of other companies in excess of 10% of the
subscribed capital can result into their takeovers
4. Tender offer and Hostile takeover

 A tender offer is a formal purchase a given number of shares at a

specific price. The price is generally quoted at a premium order to
induce the shareholders to tender their shares.
 It can be used in two situations.
1. Direct approach through tender offer
2. Hostile takeover
5. Integration
 The most important part of merger and acquisition is the
integration of the acquired company into the acquiring company.
There are two types of integration:
 1. Forward Integration
2. Backward Integration
6. Leverage Buy-outs
 LBO is an acquisition of a company in which the acquisition is
substantially financed through debt. When the managers buy their
company from their owners employing debt , the leverage buy-out
is called management buy-out (MBO).

 LBO Targets:
 High growth, high market share firms
 High profit potential firms
 High liquidity and high debt capacity firms
 Low operating risk firms
 7. Divestment
A divestment involves the sale of a company’s assets, or product
lines, or division or brand to the outsiders. It is reverse of
acquisition.
Motives for Divestment:
 Strategic Changes
 Selling cash cows
 Disposal of unprofitable business
 Consolidation
 Unlocking values
Types of Divestment
 There are two types of divestment:
1. Sell Off
2. Spin offs
 When a company sells part of business to a third party, it is called
sell-off.
 When a company creates a new from the existing single entity, it is
called spin off. The spin off company would usually be created as
a subsidiary.
 Advantages of Sell off & Spin offs (try yourself)