Corporate Restructuring

AMITY GLOBAL BUSINESS SCHOOL
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.
AMITY GLOBAL Introduction BUSINESS SCHOOLto
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.
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.
AMITY GLOBAL Ultimate Objective BUSINESS SCHOOL
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
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.
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.
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.
Chandigarh
Types of Mergers
Horizontal Mergers
Vertical Mergers
Conglomerate Mergers
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.
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.
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

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
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
CONGLOMERATE MERGER Chandigarh
UNRELATED INDUSTRIES MERGE PURPOSE DIVERSIFICATION OF RISK Ex:Time warner-(they were into media & movie production) & AOL-(leading American website)
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.
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
Chandigarh
Efficiency Theories
These theories hold that mergers and other forms of asset redeployment have potential for social benefits.
Chandigarh
Efficiency theories
Differential efficiency theory. Inefficient management theory. Synergy. Pure diversification. Strategic realignment to changing environment.
18
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.
Chandigarh
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.
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
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.
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.
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.
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.
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.
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)
Chandigarh
Operating synergy
Economies of scale Economies of scope Vertical integration economies Managerial economies
AMITY GLOBAL Financial BUSINESS SCHOOL
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
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
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
Chandigarh
Mergers and Acquisitions

A faster way to grow As a strategic decision As a capital budgeting decision As a Corporate Restructuring decision
AMITY GLOBAL Mergers and BUSINESS SCHOOL
Acquisitions as Chandigarh a Strategic decision
Involves diversification Forward integration Backward integration Product or market extension
AMITY GLOBAL Mergers and BUSINESS SCHOOL
Acquisitions as Chandigarh a capital Budgeting Decision
Huge capital outlays Influence the future cash flows of the merged firms Element of irreversibility
AMITY GLOBAL Mergers BUSINESS SCHOOL and
Acquisitions as a Chandigarh Corporate Restructuring Decision
Changes in ownership structure Changes in business mix Changes in asset mix
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
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.
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
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
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

Corporate Restructuring

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Corporate Restructuring

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AMITY GLOBAL BUSINESS SCHOOL

Introduction to Corporate Restructuring

AMITY GLOBAL Introduction BUSINESS SCHOOLto