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Introduction to Corporate Restructuring

Chandigarh

Corporate restructuring implies activities related to expansion/contraction of a firms operations or changes in its assets or financial or ownership structure. The "Corporate restructuring" is an umbrella term that includes mergers and consolidations, divestitures and liquidations and various types of battles for corporate control.

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Corporate Restructuring Chandigarh continued.

The essence of corporate

restructuring lies in achieving


the long run goal of wealth maximization.

It helps us to know, if restructuring generates value gains for shareholders (both those who own the firm before the restructuring and those who own the firm after the restructuring), how these value gains have be created and achieved or failed.

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Reasons For Corporate Restructuring

Chandigarh

The emergence of buyers driven market that is putting pressure on the companies, particularly in the wake of increased competition. The increased competition caused by deregulation and liberalization. The increased assertiveness on the part of the share holders who expect increasing return on equity.

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of any Organization Chandigarh

Wealth Maximization

Internal Growth Product Extension Capacity Expansion

External Growth Mergers Acquisitions

Rationale behind Mergers and acquisitions (M&A) and corporate restructuring Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. One plus one makes three: this equation is

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Chandigarh

the special alchemy of a merger or an acquisition.


The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies.

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Rationale behind Mergers and acquisitions (M&A) and corporate restructuring continued.

Chandigarh

This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive,

cost-efficient company.
The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

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Chandigarh

What is Merger?
A Merger involves a combination of two firms such that only one firm survives.

Mergers tend top occur when one


firm is significantly larger than the other and the survivor is usually the larger of the two.

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Chandigarh

Types of Mergers
Horizontal Mergers

Vertical Mergers
Conglomerate Mergers

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TYPES OF MERGERS

Chandigarh

HORIZONTAL MERGER SIMILAR LINES OF ACTIVITY as Ford announced the sale of the two British iconic cars to Tata Motors Ltd. Ford acquired Jaguar for $2.5 bn in 1989 and Land Rover for $2.75 bn in 2000 but put them on the market last year after posting losses of $12.6 bn in 2006 - the heaviest in its 103-year history.

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Chandigarh

HDFC Bank's merger with Centurion Bank of Punjab and Walt Disney Company's acquisition of 17.2per cent stake in UTV Software Communication to increase its stake to 32.10 per cent in the company. In February 2008, as many as 38 cross-border deals were announced with total value of $2.80 billion, of which 27 were outbound deals with a value of $2.57 billion.

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Horizontal mergers

Chandigarh

A Horizontal mergers involves two

firms operating and competing in the same kind of business activity.


Lipton india and brooke bond

Motives:
i. ii. Elimination or reduction in competition Putting an end to price-cutting

iii.
iv.

Economies of scale in production


R&D, marketing and management

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Vertical Mergers

Chandigarh

Vertical mergers occur between firms in different stages of production operations Upstream & Downstream Mergers Eg Apple with intel Sony ericsson

Motives : i. Lower buying cost of materials

ii.
iii. iv.

Lower distribution costs


Assured supplies and market Increasing or creating barriers to

entry for potential competitors

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VERTICAL MERGER

Chandigarh

FIRMS SUPPLYING RAW MATERIALS MERGE WITH FIRM THAT SELLS ADVANTAGE LOWER BUYING COST OF MATERIAL LOWER DISTRIBUITION COST ASSURED SUPPLIES AND MARKET COST ADVANTAGE

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CONGLOMERATE MERGER Chandigarh

UNRELATED INDUSTRIES MERGE PURPOSE DIVERSIFICATION OF RISK Ex:Time warner-(they were into media & movie production) & AOL-(leading American website)

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Conglomerate mergers Chandigarh

Conglomerate mergers involves firms engaged in unrelated types of business activity. Product extension mergers Market extension mergers

Pure Conglomerate mergers


Eg walt disney and American broadcasting company Motive: Diversification of risk.

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Motives behind mergers


Chandigarh

Economies of scale

i. Production activity ii. R&D/ technological activities iii. Marketing and distribution activities

iv. Transport, storage ,inventories


Fast growth Tax benefits Diversification

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Chandigarh

Efficiency Theories
These theories hold that mergers and other forms of asset redeployment have potential for social benefits.

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Chandigarh

Efficiency theories
Differential efficiency theory. Inefficient management theory. Synergy. Pure diversification. Strategic realignment to changing environment.
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Chandigarh

Differential managerial efficiency


If the management of firm A is more efficient

than the management of firm B and if after firm


A acquires firm b, the efficiency of firm b is brought up to the level of efficiency of firm A, efficiency is increased by merger Differential efficiency would be most likely to be

a factor in mergers between firms in related


industries where the need for improvement could be more easily identified.

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Insufficient management
May simply represent management that is inept
in an absolute sense. Almost anyone could do better The theory suggests that target management is so incapable that virtually any management

could do better, and thus could be an explanation


for mergers between firms in unrelated industries.

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Operating synergy

Chandigarh

The theory is based on operating synergy assumes that economies of scale do exist in the industry and that prior to the merger, the firms are operating at levels of activity that fall short of achieving the potentials for economies of scale. It includes the concept of complementarities of capabilities

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Operating synergy continued


weak in marketing while another has a strong marketing department without the R&D

Chandigarh

For e.g.: one firm might be strong in R&D but

capability. Merging the two firms would result in operating synergy.

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Chandigarh

Pure diversification
The firm may simply lack internal growth opportunities for lack of requisite resources or due potential excess capacity in the industry.
Pure diversification as a theory of mergers differs from share holders portfolio diversification.

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Pure diversification continued

Chandigarh

Therefore, firms may diversify to encourage

firm-specific human capital investments which


make their employees more valuable and productive

and to increase the probability that the


organization and reputation of the firm will be preserved by transfer to another line of business owned by the firm in the event its initial business declines.

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Strategic realignment to changing environments

Chandigarh

It says that mergers take place in response to environmental changes. External acquisitions of needed capabilities allow firms to adapt more quickly and with less risk than developing capabilities internally
Rationale is that by mergers the firm acquires management skills for needed augmentation of its present capabilities.

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Chandigarh

Agency problems
Agency problems arise basically because
contracts between managers (decision or control agents) and owners (risk bearers) cannot be enforced. May result from conflict of interest between

managers and shareholders or between


shareholders and debt holders.

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Agency problems continued


cause managers to work less vigorously than otherwise and consume more perquisites

Chandigarh

An agency problem arises when managers own only a fraction of the ownership shares of the firm. This may

In large corporations with widely dispersed ownership, there is not sufficient resources to monitor the behavior of managers. Takeovers as a solution to agency problems (Fama & Jensen, 1983)

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Chandigarh

Operating synergy

Economies of scale Economies of scope Vertical integration economies Managerial economies

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synergies

Chandigarh

Complementarities between merging firms in matching the availability of investment

opportunities and internal cash flows


Lower cost of internal financing redeployment of capital from acquiring to acquired firm's industry Increase in debt capacity which provides for

greater tax savings


Economies of scale in flotation of new issues and lower transaction costs of financing

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Managerial synergy

Chandigarh

If a firm has an efficient management team

whose capacity is in excess of its current


managerial input demand, the firm may be able to utilize the extra managerial resources by

acquiring a firm that is inefficiently managed due


to shortages of such resources. Managerial Synergy hypothesis can be formulated more vigorously and may be called as differential efficiency theory

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Chandigarh

Circumstances favoring merger over internal growth

Lack of opportunities for internal growth

Lack of managerial capabilities and other resources

Potential excess capacity in industry


Timing may be important mergers can achieve growth and development of new areas more quickly Other firms may be competing for investments in traditional product lines

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Chandigarh

Mergers and Acquisitions


A faster way to grow As a strategic decision As a capital budgeting decision As a Corporate Restructuring decision

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Acquisitions as Chandigarh a Strategic decision

Involves diversification Forward integration Backward integration Product or market extension

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Acquisitions as Chandigarh a capital Budgeting Decision

Huge capital outlays Influence the future cash flows of the merged firms Element of irreversibility

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Acquisitions as a Chandigarh Corporate Restructuring Decision

Changes in ownership structure Changes in business mix Changes in asset mix

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Purpose

Chandigarh

To study the motivating factors focusing companies to go for Mergers and Acquisitions. To study to what extent, mergers and acquisitions have resulted in improving the financial performance. For this purpose, financial performance of pre and post (M & A) period is measured, analyzed and compared in selected cases. To study the outcome of mergers and acquisitions i.e. to measure the impact of mergers and acquisitions on the companies performance including its impact on shareholders. To draw certain findings and make

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Mergers

Chandigarh

Combining of two things especially companies, to one. A fusion between two or more firms. Integration of operations with a view to bring in operational efficiencies. Assets and liabilities of the merging companies get transferred to the merged company. Shareholder of the merging companies become shareholders in the merged firm.

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Roles of M&As

Chandigarh

Strengthen existing product line by adding capabilities or extending geographic markets Add new product line Foreign acquisitions to obtain new capabilities or needed presence in local markets Obtain key scientists for development of particular R&D programs

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Roles of M&As continued


activities and shrinking capacity to

Chandigarh

Reduce costs by eliminating duplicate improve sales to capacity relationships Divest activities not performing well Harvest successful operations in advance of competitor programs to expand

capacity and output


Round out product lines

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Roles of M&As continued


Strengthen distribution systems Move firm into new growth areas

Chandigarh

Attain critical mass required for effective

utilization of large investment outlays


Create broader technology platforms Achieve vertical integration Revise and refresh strategic vision

AMITY GLOBAL BUSINESS SCHOOL Disadvantages

of M&As

Chandigarh

Buyer may not have full information of acquired assets

Implementation may be difficult


Considerable executive talent and time commitments

Different organization cultures


Wide use of joint ventures and strategic alliances Combine different expertise and capabilities of different companies Reduce size of investments and risks