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MF 0011 Mergers & Acquisitions

Unit 5-Corporate Restructuring

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Program : MBA

Semester : III

Subject Code : MF 0011

Subject Name : Mergers & Acquisitions

Unit number : 5

Unit Title : Corporate Restructuring

Lecture Number :

Lecture Title : Corporate Restructuring

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Objectives:

After studying this unit, you should be able to:

Explain the meaning of corporate restructuring

Identify the characteristics of corporate restructuring

Discuss the different types of corporate restructuring

Describe the various methods of corporate restructuring

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Corporate Restructuring

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Introduction

Corporate Restructuring: Meaning Corporate Restructuring: Characteristics

Corporate Restructuring: Types

Corporate Restructuring: Methods

Joint Venture

Sell-Off

Spin-Off Divesture

Equity Carve-out

Leveraged Buy-out

Management Buy-out

Master Limited Partnerships

Employee Stock Ownership Plans

Summary

Glossary

Check Your Learning

Answers

Case Study

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Lecture Outline

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Corporate Restructuring is a complex phenomenon.

All companies find it necessary to choose between diversification andrefocusing on core businesses after a merger/ acquisition.

Diversifyingindicates an expansionof company's business.

Refocusmeans concentrating more on the core business. From this pointof view, corporate restructuring means reduction or contraction.

Reasons for Restructuring

Positioning the company to be more competitive

Surviving adverse economic climate

Getting the corporation ready to move in an entirely new direction.

Corporate restructuring is a broad-based business initiative that results inmajor change of size, ownership, control and/or management.

Introduction

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Corporate Restructuringcan be defined as the processof redesigning one or more features of a business firm.

Forms of Corporate Restructuring

Expansion

Contraction

Change of ownership

Change of corporate control.

Corporate Restructuring: Meaning

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Selling or closing of unprofitable divisions from its core business, there byachieving staff reduction and a stronger balance sheet.

Revamping of corporate management.

Sale of under utilized assets such as patents/brands.

Outsourcing of operations like payroll and technical support to a more

efficient third party.

Moving of operations like manufacturing to lower-cost locations.

Reorganization of major functions like sales, marketing and distribution.

Renegotiation of labor contracts at reduced costs.

Refinancing of corporate debt to reduce interest payments.

A major public relations campaign to change the position of the companyin the market.

Corporate Restructuring:Characteristics

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Corp

orate

Restru

cturing

Financial Restructuring: Reorganizing acompany's financial assets and liabilities so that the

most favorable financial environment is created

Organizational Restructuring: Reorganizing themanagement or internal corporate governancestructures in order to keep their organizations

perfectly suited to the changing business conditions

Corporate Restructuring: Types

Click here for details on theneed for financial and

organizational restructuring

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Joint venture

Sell-off

Spin-off

Divestiture

Equity carve-out

Leveraged Buyout (LBO)

Management Buyout (MBO)

Master Limited Partnership

Employee Stock Option Plan (ESOP)

Corporate Restructuring: Methods

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Enterprises formed by coming together of two or more participantsfor special purposes for a limited duration

Combination of subsets of assets contributed by two or morebusiness entities

Each partner continues functioning as a separate firm, and thejoint venture represents a new business project

Contract among participants who not only agree to work togetherand expect to gain from the venture, but also agree to make acontribution

JointVenture

Example of GM-Toyota Joint Venture: GM hoped to learn from the newexperience of management techniques of the Japanese in building high-quality,low-cost compact and subcompact cars. Toyota was seeking to learn themanagement traditions that had made GM the numero uno in the production ofauto in the world.

Methods: Joint Venture

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Sell-off means selling a part or the whole of a firm through a sale,liquidation or spin-off

A partial sell-off/slump sale involves the sale of a subsidiary, abusiness unit or a plant

Sell-Off

Strategic Objectives

Unlocking hidden value

Divesting non-core business

Institutional sponsorship

Public currency

Motivating management

Strengthening synergies

Anti-trust

Corporate defence

Methods: Sell-Off

Click here for a detailed viewon the Strategic Objectives of

sell-off

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New legal entity is created, but shares are issued to the existing

stockholders on a pro rata basis (stockholder base in the newcompany is the same as that of the old company).

Here the firm has its own management team and its activities arecarried out as a separate company.

Spin-

Off

Companytakes

decision tospin-off adivision

Parentcompany

does thepaper workwith SEBI

Unit

Registeredand filedwith SEBI

Shares ofnew

company

distributed toshareholdersof previouscompany

Companygoes public

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PROCESS OF SPIN-OFF

Methods: Spin-Off

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Reason why spin-off entitys shares are distributed among the parent companyshareholders:

Parent company shareholders who are not interested in holding shares of thespun off unit are free to sell the shares once the new company goes public.

Large institutional stock holders in the parent company are not allowed to keepshares in spin-offs due to smaller market capitalisation and increased risk andthey look to sell their shares soon.

Split-up

A split-up is defined as the separation of a company into two or more parts.

Restructuring where the firm strategically breaks up the entire corporate body.

Firm is broken up into a number of spin-offs, after which the parent company

does not exist any longer, and only the newly formed companies exist. The stockholders in the companies may not be the same, as the stockholders

trade their shares in the parent company with shares in one or more of theunits that are spun off.

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Methods: Spin-Off (Contd.)

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A transaction through which a firm sells a portion of itsassets, a product line, a subsidiary or a division to another

company for cash or securities is called divesture

Divestiture is a form of contraction. Mergers, asset purchases andtakeovers lead to expansion and are based on the principle ofsynergy which says 2 + 2 = 5. Divesture on the other hand isbased on the principle of reverse synergy which says 5 3 = 3!

Divestiture

Reasons for Divesture:

Poor fit

Abandoning Core business

Cash Flow Effect

Reverse Energy

Reaping benefits of past successes

Financing prior acquisitions

Discouraging takeovers

Meeting regulatory norms

Methods: Divestiture

Click here for a detaileddescription of reasons for

divesture

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The sale of equity interest in a subsidiary. Here, a new legalentity will be created having a stockholder base that may be

quite different from that of the parent company.

The divested company will have a different management team andwill be considered as a separate firm. This mode of restructuringcreates a new publicly traded company with partial or completeautonomy from the parent firm.

EquityCarve-Out

Features of equity carve-out

It is the sale of a minority or majority voting control in a subsidiary by theparent company to outside investors. These are also referred to as split-offIPOs

A new legal entity is formed.

The equity holders in the new entity may be different from the equity holdersin the original company. Immediately, a new control group is formed.

Methods: Equity Carve-out

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Spin-Off

Shares are distributed to theshareholders of the selling companyon a pro-rata basis in the form of

dividend, a form of non-cash

payment to shareholders

Stock of subsidiary is sold to thepublic for cash

Equity Carve-out

Stock of subsidiary is sold to thepublic for cash

Only a minor interest in thesubsidiary company is sold and theparent company is still in control

Many firms consider equity carve-outs to be a means of reducing theirexposure to a riskier line of business.

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Methods: Equity Carve-out

Click here for examples ofEquity Carve-out

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A buyout is a contract under which a person, group of people,or organisation buys a company or a controlling share in the

stock of a company.

Here, borrowed funds are used to finance the buyout; asmuch as 90% of the purchase price may be borrowed.

This is risky as the assets of the company are usually given as

collateral. If the company fails to perform, it can lead tobankruptcy because the people involved in the buyout will not beable to service the debt

LeveragedBuy-Out

Methods: Leveraged Buyout (LBO)

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The management of the company buys the company, and they

may be joined by employees in the venture

Management can have unfair advantages in negotiations, andcould potentially manipulate the value of the company in orderto bring down the purchase price

When a company's managers buy or acquire a major part of the

company, the employees and management, a management buyoutserves as a motivation to make the company robust.

ManagementBuy-Out

Purpose of MBO

To strengthen the managers concern for making the company successful

Saving the jobs of the employees. The employees may lose their jobs and anMBO will help in avoiding such a situation.

Maximizing financial benefits from the success they bring to the company bytaking the profits for themselves.

Discouraging aggressive buyers.

Methods of Restructuring:Management Buyout (MBO)


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Limited partnerships dealing with publicly-traded shares.

The limited partnership interests are divided into units whichare traded as shares of common stock. Units are shares ofownership.

Combines the liquidity of a publicly traded company with the taxbenefits of a limited partnership. No tax on profits is paid by the

partnership. When the unit holders receive distribution, they aretaxed

MasterLimitedPartnership

MasterLimited

Partnership

LimitedPartner

The person or group that gives capital tothe MLP and gets income distributions

regularly from the cash flow of the MLP's

GeneralPartner

The party that manages the MLP'soperations and receives compensationthat is linked to the performance of the

venture

Methods: Master Limited Partnership


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A defined contribution benefit plan that buys and holds stock

a qualified, defined contribution, an employee benefit plandesigned to invest primarily in the stock of the sponsoringemployer

Qualified implies, the sponsoring company, the selling shareholderand participants receive various tax benefits. With an ESOP,employees may rarely have to buy or hold stocks directly.

ESOP

Features of ESOP

It is an employee benefit plan.

The scheme enables the employees to own stocks of the company. It is a kind of profit-sharing plan.

Employers have benefits of profitability, liquidity (the stocks could be collateralfor loans) and asset acquisition.

ESOPs provide tax advantages to the employer.

Methods : Employee Stock Option Plan(ESOP)


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Summary

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Corporate restructuring is necessary when a company needs to

improve its efficiency and profitability and it requires expert corporatemanagement.

A corporate restructuring strategy involves the dismantling andrebuilding of areas within an organisation that need special attentionfrom the management and CEO.

Different methods of corporate restructuring are venture capital, spin-off, split-up, equity carve-out etc.

The process of corporate restructuring often occurs after buyouts,corporate acquisitions, takeovers or bankruptcy. It can involve asignificant movement of an organisations liabilities or assets.

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Glossary

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Split-up: A split-up is defined as the separation of a company into

two or more parts. ESOP: Employee Stock Ownership Plans

MLP: Master Limited Partnerships is a type of limited partnership inwhich the shares are publicly traded.

MBO: Management Buyouts

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Check Your Learning

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1. Corporate restructuring is the process of ____________ one or moreaspects of a company.

2. A corporate restructuring may call for spinning off some departments into____________.

3. Change in management is not the part of corporate restructuring.(True/False)

4. Organisational restructuring focuses on management and internal____________ structures.

5. ____________ may be undertaken as a means of eliminating waste from theoperations of the company.

6. Spin-off does not create a separate business entity. (True/False)

7. A split-up is defined as the separation of a company into two or more parts.(True/False)

8. In MBO, the management of the company buys the company. (True/False)

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Check Your Learning

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9. Employee Stock Ownership Plan (ESOP) is an employee benefit plan.(True/False)

10. A new entity is created in a joint venture. (True/False)

11. Divestiture involves a _______________ into the parent corporation.

12. The spin-off entitys shares are distributed to the parent company_________________.

13. Divestitures reflect continuous efforts by companies to adjust to_________________.


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Answers

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1. Redesigning

2. Subsidiaries3. False

4. Corporate governance

5. Financial restructuring

6. False

7. True8. True

9. True

10. True

11. Cash inflow

12. Shareholders13. Changing environment

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Case Study

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Answer the following questions, based on the

given case:

QuestionMake an analysis of the case.

Hint answer:The decision by First Data Corp to spin off of

Western Union, its profitable division, might helpthe company to protect shareholders from thelosses of First Data, and allow management tofocus on rebuilding First Datas business andmarket.

Click on the icon besides, toanalyse the case on Corporate

Restructuring

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