Chapter 1

CORPORATE RESTRUCTURING

Mergers, Acquisitions And Corporate Restructuring

Prasad G. Godbole

Section 1: CONCEPTS, STRATEGIES AND TACTICS

Forms of Restructuring
Portfolio Restructuring
takes place through the sale of, or spin-off as well as mergers and acquisitions of lines of business

Financial Restructuring
encompasses LBOs, stock repurchases, ESOPs, and equity carve outs or recapitalizations

Organizational Restructuring
is intended to increase efficiency through changes in organizational structure, internal reorganizations or downsizing

Corporate Restructuring Strategies

With constantly changing competitive environments, firms must consistently adjust Managers have many options to change firm structure without taking part in a merger or acquisition Corporate restructuring should occur within the framework of the firms overall strategy No one-size-fits-all approach to corporate decision making

Restructuring Motives
Many possible motives for a firm to restructure Direct relation between corporate strategy and corporate restructuring Corporate focus often cited as restructuring reason, but focused companies also must review strategic alternatives in due to market changes Divestiture reasons: learning, reversing mistakes, changing strategies (Weston, 1989) Firms restructure to remain competitive and to respond to change forces in the economy

Why Corporate Restructuring? Increased Competition Advent of a new and more efficient
technology Emergence of new markets Emergence of new classes of consumers Demographic changes Business cycles

Why Corporate Restructuring?

Wise organizations undertake changes to increase their cutting edge over the competitors and enhance their leadership position.
However, not all the changes that a company undergoes would qualify to be termed as corporate restructuring.

Corporate Restructuring Definition

1. CORPORATE RESTRUCTURING can be defined as any change in the business capacity or portfolio that is carried out by an inorganic route OR 2. Any change in the capital structure of a company that is not a part of its ordinary course of business OR 3. Any change in the ownership of or control over the management of the company or a combination of any two or all of the above

Corporate Restructuring
I. (a) Any change in the business capacity or portfolio carried out by inorganic route
Tata Motors launched Sumo and later, Indicaleading to an expansion of its business portfolio. However, these products were launched from Tata Motors own manufacturing capacity in through an organic route. Hence, it would not qualify as corporate restructuring Tata Motors acquisition of Jaguar Land Rover from Ford, through Jaguar Land Rover Limited is corporate restructuring Grasims acquisition of Larsen & Toubros (L&T) cement division through UltraTech Cement Limited is an example of corporate restructuring

Corporate Restructuring
(cont.)

I. (b) Change in the business portfolio could also be in the nature of reduction of business handled by a company

In the case of Grasim and L&T, the demerger of L&Ts cement business into UltraTech Cement Limited was reduction of its business portfolio and thus, amounted to corporate restructuring of L&T.

Corporate Restructuring
(cont.)

II. Any change in the capital structure of a company that is not in the ordinary course of its business Capital structure refers to debt equity ratio, i.e. the proportion of debt and equity in the total capital of a company.

This capital structure is never static and changes almost daily.

(cont.)

Corporate Restructuring
(cont.) Within a targeted or planned range if the debt/equity ratio fluctuates, such changes in the capital structure do not amount to capital restructuring.

Borrowing of a significant amount of term loan or an issue of five year non-convertible debenture do not qualify to be called corporate restructuring .
An initial public issue, or a follow-on public issue or buy-back of equity shares would permanently alter the capital structure of a company, and thus, would amount to corporate restructuring.

Corporate Restructuring
(cont.)

III.

Any change in the ownership of a company or control over its management

a) Merger of two or more companies belonging to different promoters b) Demerger of a company into two or more with control of the resulting company passing on to other promoters c) Acquisition of a company d) Sell-off of a company or its substantial assets e) Delisting of a company

All these would qualify to be called exercises in corporate restructuring.

The Activities or Changes which are not termed Corporate Restructuring

I. Initial creation of a corporate structure
Its various examples are: Incorporation of a limited company Conversion of a proprietary concern into a company Conversion of a partnership firm into a company Conversion of a private company into a public company

The Activities or Changes which are not termed Corporate Restructuring (cont.)
II. Change in the internal structure or hierarchy command

The command structure of an organization or its hierarchy simply means the reporting relationships among the employees, managers, top management and their various functions. Functional organization Divisional organization Matrix organization

The Activities or Changes Which are Not Termed Corporate Restructuring (cont.)
With businesses having become more complex along with the acceptance of newer concepts of organization building such as tutorship, mentorship, etc., the hierarchies have stopped strictly falling into one of the three types mentioned in the earlier slide. Any migration of an organization from functional to divisional or to matrix type or to any new or hybrid type or vice-versa would not be a case of corporate restructuring.

The Activities or Changes Which are Not Termed Corporate Restructuring (cont.)
III. Change in the business process
This is also called reengineering. Reengineering, properly, is the fundamental rethinking and redesign of business processes to achieve dramatic improvement in critical, contemporary measures of performance, such as cost, quality, service and speed. It refers to the radical redesigning of business processes and not to the ownership and control or to the capital structure of the organization. Reengineering is also outside the ambit of corporate restructuring.

The Activities or Changes Which are Not Termed Corporate Restructuring (cont.)
IV. Downsizing It is another form of organizational change in which the business organization substantially cuts down on its manpower, recurring cost and/or capital expenditure, either as an objective itself or as a result of reengineering. Downsizing is also outside the purview of corporate restructuring.

V.

Other activities Activities such as outsourcing, enterprise resource planning, total quality management, franchising alliances, networking alliances and licensing do not classify as corporate restructuring activities.

Major Forms of Corporate Restructuring

1. Merger 2. Consolidation 3. Acquisition 4. Divestiture 5. Demerger (Spin Off/Split Up/Split Off) 6. Carve Out 7. Joint Venture 8. Reduction of Capital 9. Buy-back of Securities 10.Delisting of Securities/Company

Major Forms of Corporate Restructuring (cont.)

11.Amalgamation 12.Tracking Stocks 13.Assets Sell Off 14.Leverage Buyout (LBO) 15.Employee Stock Option Plans (ESOPs) 16.Master Limited Partnership (MLP)

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