Pondicherry University

Programme: MBA
Course: Strategic Financial Management

Faculty: POORNIMA SREERAGHAVAN

Session 3 - August 17, 2018

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Corporate restructuring
• Reorganizing the corporate structure to suit company’s strategic needs
• Why corporate restructuring?
• Internal changes – Improvement, deterioration, change
• External impact – competition, regulation, innovation
• Overhaul of the business strategy

Objectives

• Realignment of the firm’s activities

• Developing core competencies Comprises a range of activities
• Reallocation of the firm’s finances/resources • In one or several domains
• Exploiting dependencies / inter-dependencies
• Risk reduction
• Distress call

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Mergers and Acquisitions
• Merger • Acquisition
• Voluntary amalgamation of two firms to • One company acquires most of the
form a new legal entity. target company’s ownership to
• Merging of identities (incl. assets and form the third entity
liabilities, shareholding, etc.) of the two • May or may not be between equals
existing companies
• Can be friendly or hostile
• Merger is between equals
• Strategic advantage is the goal
• Synergy is the goal

• Takeover
– Acquiring control over the management of another company directly or indirectly
– Can be friendly or hostile or even as bail out
• Exercising control is the goal
– Acquiring company responsible for all of target company’s operations, holdings & debt

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The merger/takeover/alliance scenario

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Mergers: Related terms
• Upstream merger – Subsidiary merges into the parent firm
• Short-form merger – a type of upstream merger
• Parent company adopts merger resolution, informs shareholders of subsidiary & initiates legal work
• Downstream merger – Parent firm merges into the subsidiary
• Cash merger (also called cash-out merger)
• Acquiring firm buys stock - pays cash instead of exchange of shares of the two firms
• Happens when the shareholders do not want to be a part of the merged entity

• Defacto merger
• Not exactly declared as a merger but involves acquisition of assets/voting stock of the
firm.
• Has the economic effect of a statutory merger. Can be differentiated from a legal
perspective. Not common in India

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Triangular merger & Reverse merger
• Forward triangular merger
Parent firm Parent firm
• Reverse Merger
• Acquisition of a public
company (often smaller)
Wholly owned Target firm Wholly owned by a private company
subsidiary subsidiary (often larger)
• Alternative to going
• Reverse triangular merger public (to gain listing
benefits and lowering
Parent firm Parent firm listing costs)
• Advantages of synergy

Wholly owned Target firm Subsidiary

subsidiary

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Mechanics of a merger
• Impact?
• Options?
A possible merged entity
• Target selection
Deal acceptability
Friend / foe Terms and
conditions B
Strategic Implications
advantage of the deal
• Options for B if NO
• Poison pill / hostile
takeover defence
• Enlist the help of a
white knight
• Initiate proceedings
• Tasks on hand for A
• Valuation of A, B and the
• Study of finances, tax, legal
Tender
and other implications
offer • Decision on the process
• Initiating the deal
• Options for B if YES
• Accept the offer
• Negotiate for better terms
• Valuations of A, B and the
possible merged entity
• Study of finances, tax, legal &
other implications
• Communication of decision
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Costs and benefits
• Benefit (cost savings) of the merger = PVAB – (PVA + PVB)
• Cost of the merger
• Cash compensation
• NPVA = [PVAB – (PVA + PVB)] – [Cash – PBV] = PVAB - PVA – Cash
• NPVB = [Cash – PBV]
• Stock compensation
• Precise exchange of net benefits depends on the share exchange ratio in terms of the
market prices of the shares of both firms
• NPVA = [PVAB – (PVA + PVB)] – [aPVAB – PVB]
• NPVB = [aPVAB – PBV]
• Where ‘a’ is the fraction of the combined entity received by B’s shareholders

• Compensation evaluated on the basis of:

Valuation Risk/Reward Tax implications Discipline

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Impact of the deal
General public Shareholders

Competitors Management

Stock market, Employees,

Merger
related agencies Labour unions

Creditors &
Vendors
debtors

Banks, Financial
Regulators
institutions

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Merger process - 1
1. Check whether
memorandum authorizes
merger. If not, amend it

2. Convene preliminary
board meeting
3. Prepare valuation
report & swap ratio 4. Prepare
amalgamation scheme
5. Convene board
meeting for approval
6. Inform stock exchanges
about outcome of meeting

7.Apply for listing

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Merger process - 2
7. Application under Clause 24
of listing agreement for filing
proposed scheme

8. Application to court to seek

direction to call general
meeting & creditors meeting
9. Convene
general
meeting
10. Report results of meeting
to High Court and Inform stock
exchanges

11. Petition to court for

confirmation of the scheme.
Get court sanction
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Merger process - 3
11. High Court
sanction

12. File copy of court

order with ROC
13. Transfer of assets
and liabilities 14. Allotment of shares to
merged company’s
shareholders
15. List shares of merged
entity in stock exchange

16. Post merger integration

activities

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 B (Amalgamating company)
Mergers: Tax implications
A (Amalgamated company)

• Business losses and unabsorbed • Unabsorbed • Transfer of capital

depreciation of B are carried capital asset of B to A will
forward by A (subject to some expenditure on not be considered
conditions) scientific as transfer for the
• Unrecovered amounts of B research of B purpose of capital
pertaining to acquisition of patent can be carried gains
rights/copyrights and/or licenses are forward by A. • Shares obtained by
written off by A in the same number • Amortization of shareholders in
of instalments preliminary accordance with
• After the last payment, such expenses of B the share exchange
rights/licenses may or may not be can be ratio will not be
retained deduced in the treated as capital
• Bad debts of B are carried forward same manner gains for tax
by A in the same manner by A purposes.

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Disinvestment and Privatization
• Disinvestment
• Government selling or liquidating an asset (partly or fully) of a government-owned
enterprise
• Partial dilution of control over the enterprise
• Government still retains ownership
• Purpose: Resource optimization

• Privatization
• Complete liquidation of assets
• Government transfers both ownership and control.
• After privatization, the firm would be under the purview of the Companies Act.

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Demergers - 1
• Sell-off or Outright sale
• Different ownership – cash generated
• Lack of synergy between parent & subsidiary firms

• Spin-off
• Separate legal entity
• Shares of subsidiary distributed to shareholders through stock
dividend - no cash generated
• Carve-out
• Subsidiary newly created
• Equity offering through IPO - Partial sell-off – cash generated
• Separate board but parent firm retains controlling stake

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Demergers - 2
• Split up
• Parent company ceases to exist.
• Two separate legal entities – independent companies formed

• Slump sale
• A direct sale of business as a whole and as a going concern, for a lump sum
consideration (without values being assigned to the individual assets and liabilities)
• Slump sale ≠ Asset purchase

• Split off
• Shareholders of parent company get shares in the subsidiary company in exchange of
their shares in parent company.
• Re-organisation of controlling interest

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Demergers - 3
• Bailout
• Funds provided to prevent an organization from total collapse
• Collapse has a very big impact on the industry and even the economy as a whole
• Can be stock, bonds, loan or even cash

• Standstill agreement
• Contract to stop a hostile takeover or to avoid bankruptcy
• Involves renegotiation of terms
• Re-purchase of equity from hostile bidder

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Assignment
• What is the technical difference between merger and amalgamation?
• What are the main reasons for mergers? What are the major benefits of mergers?
• Which Act and the section under it is applicable for amalgamated companies to
avail tax benefits? Cite the two conditions upon fulfilment of which an
amalgamated company can avail tax benefits.
• What are the 5 basic types of strategic alliances? Explain in a sentence or two.
• What are the advantages and disadvantages of privatization?

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