Jitendra Virahyas

JVIRAHYAS@GMAIL.COM

PRESENTATION ON

CORPORATE RESTURCTURING & MERGER AND ACQUISITION

Submitted By: Jitendra Virahyas

Submitted To:Dr. H.O.D.

MBA Part II (Sem III )

Deepshikha College of Technical Education, Jaipur

2009-2011

CONTENT

1. Corporate Restructuring 1.1. Definition And Meaning 1.2. Concept Of Corporate Restructuring 1.3. Factors Affecting Corporate Restructuring 1.4. Areas Of Corporate Restructuring 1.5. Why Corporate Restructuring 2. Merger Or Amalgamation 2.1. Meaning And Definition: 2.2. Types Of Merger 3. Takeovers Or Acquisition 3.1. Meaning And Definition: 4. Financial Problems Of Mergers And Acquisition 5. Managing The Mergers And Acquisitions Process To Create Value 6. Formulas Of Merger/ Acquition 7. Benefits Of Mergers And Acquisitions 8. Disadvantage Of Merger And Acquisition 9. Procedure For Merger And Acquisition
3

CORPORATE RESTRUCTURING

Definition and meaning

Corporate restructuring has become a major force in the financial and economic environment due to opening up of the economy to international financial markets and availability of different kinds of instruments. It is being viewed as a necessary process for corporate survival and growth in the present economic environment of liberalisation and globalisation leading to global competition. Many Indian corporate have difficulties in restructuring due to internal or external constraints including those which have been created by the inaction of the central/state governments. Restructuring in India started in 1998, wherein, many large companies went ahead with mergers, acquisitions, self-offs and spin-offs to increase their profitability and competitiveness.

Concept of Corporate restructuring

Corporate restructuring is generally understood as a technique to restructure the assets and liabilities of a corporate entity including its debt-equity structure to promote its overall efficiency and growth. But the phase corporate restructuring has a much deeper meaning. The restructuring can be for facing domestic and\or global competition, identification and exploitation of core competencies, technological competitiveness leading to quality improvement and cost effectiveness, innovative financial strategies and capital restructuring, transformation of the people involved in restructuring and achieving an overall turn round. Restructuring would radically alter a firm capital structure, assets mix and organisation so as to increase the firm value. Thus, corporate restructuring is a process by which a company can consolidate its business operations and strengthen its position for achieving the desired objectives of staying synergetic, competitive and successful. Restructuring and re-organisation The basic difference between restructuring and re-organisation is that restructuring is resorted to keep the business going on and re-organisation is done to achieve balanced operational results.

Factors affecting corporate restructuring

Corporate become sick because of unfavourable external environment and/or due to internal and managerial deficiencies. Hence, the factors affecting the corporate for resorting restructuring can be classified into external and internal factors: Unfavourable External Environment which mainly includes the following Shortage of main raw materials and utilities, Severe competition, Shifts in consumer attitudes and preferences, War and natural calamities, Adverse domestic as well as global economic and political changes, Shortage of medium and long-term funds in the financial markets. The Internal and managerial deficiencies which are responsible for restructuring can be grouped in four categories as noted bellow Production: a) Obsolete technologies; B) Imbalance in plant and machinery; c) Poor location; d) Lack of research and development; e) Low quality product; f) Uneconomical product-mix.

Marketing: a) Unrealistic demand and supply estimates; b) Unreasonable price structure; c) Poor sales promotion; d) Improver marketing and distribution choice leading to high costs; e) Poor after sales and customer service.

Finance: a) Poor financial planning; b) Weak budgetary and cost control system; c) Improper accounting policies; D) Inadequate management information system; e) Poor inventory, receivables and cash management; f) Inadequate tax planning.

Personal Issues: a) Ineffective human resource; b) Poor labour relations; c) Bad human resource policies; d) Under or over staffing & Irrational compensation structure. e) Inadequate motivation and training facilities;
7

Areas of corporate restructuring

Corporate restructuring has become a major force in the financial and economic environment. It can take place in a number of fields. The followings are the broad areas of restructuringFinancial: This involves decisions relating to mergers and acquisitions (M & As); takeovers, joint ventures, and strategic alliances. It also deals with restructuring the capital base and raise finance for new prefects. The M&A activity is a very important from of corporate restructuring. Technological: This involves investment in research and development, renovation and modernisation of plant and machinery, divestment of unprofitable plants and operations, and up gradation of technology. This also deals with alliances with multinational companies to exploit technological strength. Marketing: This involves decisions regarding the product-market segments where the company plans to operate. This also deals with reformulation of product-market strategy. Manpower: This involves reduction in manpower, improvement in managerial system, workers participation in management, change of management, and so on. This can be achieved by establishing internal structure and processes for improving the capability of the people in the organisation to respond to changes.

Why corporate restructuring

The basic objective of corporate restructuring is to have efficient and competitive business operations by increasing the market share. Beside it, to fulfil this objective, companies resort to restructuring on account of the following reasonsGlobalisation of business: Global market concept has forced many companies to restructure, because producers having lowest cost of their products can only survive in the competitive global market. Moreover, convertibility of rupee has also attracted medium-sized industries to operate in the global market. Revolution in Information technology: In recent years, India has emerged as information technology huts. This has made it necessary for companies to adopt new changes for improving corporate performance. Competitive business: Competitiveness in business has necessitated to have sharp focus on core business activities to minimise the operating costs, to maximise efficiency in operation and to top managerial skill to the best advantages of the firm. Changes in fiscal and Government policies: the government under the economic reform programme since 1992, had introduced many changes like de-regulation, decontrol, tax simplification etc. These changes have led many companies to go far newer markets and customer segments.

Division into smaller business: Fierce competition and lack of competitive costing is forcing the companies to restructure themselves. Hence, product divisions which do not fit into the companys main line of business are being divested, thereby divisional sing into smaller businesses.

Benefits of corporate restructuring: Many companies have resorted to restructuring on account of the following benefitsEconomies of scale can be achieved by consolidating the capacities and by expansion of activities. Diversification of business activities minimises the business risks. This enables the firm to achieve the target rate of return.

10

Merger or Amalgamation

Meaning and definition:

A merger is a combination of two or more companies into one company. It may be in the form of one or more companies being merged into an existing company or a new company may be formed to merge two or more existing companies. The income tax act, 1961 of india uses the term amalgamation for merger. According to section 2 (1A) of the income tax act, 1961, the term amalgamation means the merge of one or more companies with another company or merger of two or more companies to form one company in such a manner that: 1) All the property of the amalgamating company or companies immediately before the amalgamation because the property of the amalgamated company by virtue of the amalgamation. 2) All the liabilities of the amalgamating company or companies immediately before the amalgamation because the liabilities of the amalgamated company by virtue of the amalgamation. 3) Shareholder holding not less than nine-tenth in value of the shares in the amalgamation company or companies (other than shares already held therein immediately) before the amalgamation by or by a nominee for, the amalgamated company by virtue of the amalgamation. Thus, merger may takes any of two forms: 1) Merger through absorption 2) Merger through consolidation
11

1) Merger through absorption: a combination of two or more companies into an existing company is known as absorption. In a merger through absorption all companies except one go into liquation and lose their separate identities. Suppose, there are two companies, A Ltd. and B Ltd. Company B Ltd. Are merged into A Ltd. Leaving its assets and liabilities to the acquiring company A Ltd. and company B Ltd. is liquidated. It is a case of absorption. 2) Consolidation: a consolidation is a combination of two or more companies into a new company. In the form of merger, all the existing companies, which combine, go into liquidation and form a new company with a different entity. The entity of consolidating corporation is lost and their assets and liabilities are taken over the new corporation or company. The assets of old concern are sold to new concern and their management and control also passes into the hand of the new concern. Suppose, there are two companies called A Ltd. and B Ltd.; and they merge together to form a new company called AB Ltd. or C Ltd.; it is a case of consolidation.

Types of merger
1) Horizontal merger: when two or more concern dealing in a same product or services join together, it is known as a horizontal merger. The idea behind this type of merger is to avoid competition between the units. For example, two manufacturers of same type of cloth, two transport two book seller companies operating on the same rout-the merger in all these cases will be horizontal merger. Besides avoiding competition, there are economies of scale, marketing economics, elimination of duplication of facilities, etc.

12

2) Vertical merger: a vertical merger represents a merger of firms engaged at different stage of production or distribution of the same product or service. In this case two or more companies dealing in the same product but at different stage may join to carry out the whole process itself. A petroleum producing company may set up its own petrol pump for its selling. A railway company may join with coal mining company for carrying coal different industrial centres. The idea behind this type of merger is to take up two different stages of work to ensure speedy production or quick service.

3) Conglomerate merger: when two concerns dealing in totally different activities join hands it will be a case of conglomerate merger. The merging concern neither horizontally nor vertically related to each other. For example, a manufacturing company may merge with an insurance company; a textile company may merge with a vegetable oil mill. There may be some common feature in merging companies, such as distribution channels, technology, etc. This type of merger is undertaken to diversify the activities.

13

Takeovers Or Acquisition
Meaning and definition:
An essential feature of merger through absorption as well as consolidation is the combination of the companies. The acquiring company take over the ownership of one or more other companies and combines their operations. However, an acquisition does not involve combination of companies. It is simply an act of acquiring control over management of other companies. The control over management of other company can be acquired through either a friendly take-over or through forced or unwilling acquisition. When a company takeover the control of another company through mutual agreement, it is called acquisition or friendly take-over. On the other hand, if the control acquired through unwilling acquisition, i.e., when the take-over is opposed by the target company it is known as take-over.

Financial problems of mergers and acquisition

1) Cash management 2) Credit policy 3) Financial planning 4) Dividend policy 5) Depreciation policy

14

Managing the mergers and acquisitions process to create value

1) Understanding the needs 2) Merger and acquisition team 3) Candidate size 4) Frequency of merger and acquisition activity 5) Assessing and establishing whether the candidate possesses the requisite capabilities and skills 6) Synergies 7) Review of culture fit between entities 8) Valuation, merger/purchase consideration and source thereof 9) Ongoing pre and post merger and acquisition integration process

Formulas of merger/ acquition

Steps involves in the calculation of the value of the merger :1) Determination of the exchange ratio or swap ratio :-

Target company Exchange ratio = -------------------------------Acquiring company

2) Determination of earning per share of the merge company:

EATa+ EATt EPSm = ------------------------Na+NT

15

Where , EPSm = EARNING PER SHARE OF MERGED COMPANY. EATa =EARNING AFTER TAX OF THE ACQUIRING COMPANY EATt = EARNING AFTER TAX OF THE TARGET COMPANY Na = NUMBER OF OUTING SHARE IN ACQUIRING COMPANY Nt = NUMBER OF EQUITY SHARE ISSUESBY ACQUIRING COMPANY TO THE SHARE HOLDER OF THE TARGET COMPANY 3) determination of market price per share(mpsm):-

MPSm = EPSm * P/E RATIOa

MPS = MARKET PRICE PER SHARE OF THE MERGED COMPANY.

P/E RATIO = PRICE EARING RATIO OF ACQURING COMPANY

4) MARKET VALUE OF THE COMPANY = MPSm* Num OF EQUITY SHARES OUTSTADING.

5) GAIN AND LOSS FOR THE ACQUIRING COMPANY =

GAIN AND LOSSES OF THE ACQUIRING COMPANY = POST MERGER VALUE OF THE ACQUIRING COMPANY PRE MERGER MARKET VALUE OF THE ACQUIRING COMPANY.

16

6) DIFFERENT PAYMENT PLAN :-

Num OF EQUITY SHARE ISSES TO TARGET COMPONY IN EVERY YEAR = EXCESS EARNING * P/E RATIOa / MPSa

7) EQUIVALENT EARNING PER SHARE = EPSm * EXCHANGE RATIO / X This steps have to follow for getting the value of the merger.

Benefits of mergers and acquisitions

The following are the main region of mergers and acquisitions of the companies: 1) Operating economies: Amalgamation of two or more companies results in a number of operating economics . Duplicate facilities can be eliminate . and other operation can be can be

Marketing , accounting purchasing

consolidate. Thus as a result of amalgamation the amalgamated company would have more strength and capacity to operate better than the two or more amalgamating companies individual.

2) Economies of scale: he amalgamated company can have larger volume of operations as compares to the combined individual operations of the

amalgamation companies . it can thus have economic scale by having intensive utilisation of production plants, distribution net work, engineering services , research and development facilities etc.

3) Tax implication: in several amalgamation schemes tax place a crucial role. A companies with heavy cumulative losses may have little prospects of taking advantage of carrying forward the losses and the meeting them out of future profits and thus taking advantage of the tax benefits .
17

However in case this company is merged with another profit making company ,its losses can be set off against the profit making company resulting in substantial tax benefits to the amalgamated company.

4) Elimination of competition:

the merger of two or more companies into one

would result in elimination of competitors between them they would also save in terms of advertising cost and thus make available goods to the consumers at lower price.

5) Better financial planning: control.

merger results in better financial planning and

For Example a company having a long gestation period may merge itself with another company having short gestation period. As a result of this merger the profit coming from company with short gestation period can be used to improve the financial requirement of the company with long gestation period. Latter company with long gestation period starts giving profits, it will benefit for the amalgamated company as a whole.

6) Growth: amalgamation helps faster to balanced growth of the amalgamated company. Growth by acquisition is generally cheaper than the internal growth since numerous cost and risks involved in developing and embarking upon a new product line or a new facilities and almost avoiding by acquisition of a going concern . thus the company can achieve and maintain the desired growth rate by acquiring other companies.

7) Stabilisation by diversification: amalgamation helps company in achieve stability in its earning by diversifying its operations. a company

EXPERINCECING wide economic fluctuations and cyclical phase in earning due to nature of its products or may merge with another company which have totally different line of product or business .
18

thus the merge would fluctuation and

act as safeguard against business cycle

bring stability in the earning of the company.

8) Dilution of FEMA: a foreign company investing in India may merge with Indian company in order to meet the requirements of foreign exchange management act (FEMA) for diluting its foreign shareholding.

9) Personal reasons: the share holder of a closely held company be desire that their company be acquired by another company that has an established for its share. This will also facilitate the valuation of their shareholders for wealth tax purpose. Moreover shareholder of a company can also improve their liquidity position by selling some of their shares and diversifying their investment.

10) Economic necessity: the government may also the merger of two or more sick units into a single unit to make them financial viable. Similarly it may also

requires the merger of a sick units with the healthy unit to ensure better utilisation of resources improving results and better management.

The above is not an exclusive list of mergers and amalgamation. their may be some other factors. The changes in socio economic condition, economic, fiscal, trade and industrial policy of govt, status, governing the company may also the region these.

19

Disadvantage of merger and acquisition

In spite of the above benefit mergers and acquisitions has some dangers are as following: 1) Elimination of healthy competition: merger may involve absorption of small, efficient and growing unit into a large unit. Thus it eliminate individual

competition necessary for healthy growth of the industrial units.

2) Concentration of economic power: it has been already been stated above that all type of mergers have the inherent tendency of concentration of

economic power. Monopolistic condition may be created which are ultimately disadvantage for the consumers.

3) Adverse effects on national economy: Concentration of economic power, Elimination of healthy competition, etc may ultimately results in deterioration in the performance of the merged undertakings. It is going to affect adversely to the national economy. However merger are essential for the growth of the organizations. Merger lead to economies of scale, maximum utilisation of the capacity, mobilisation of financial resources, rehabilitation of sick units. operating economies ,

20

Procedure for merger and acquisition

The implementation of merger and acquisition schemes involves the following step: 1) Analysis of the proposal: having concern the idea of merger and

amalgamation between two or more companies the management of respective companies have to look into the amalgamation schemes. 2) Determination of exchange ratio: the merger and amalgamation requires are pros and cons of the merger and

exchanges of shares. The shareholder of the amalgamated companies offers shares in the amalgamated company for their shareholder.

3) Approval by shareholders: a scheme of amalgamation as provide by the respective boards, before the shareholder of the respective companies for their approval. Section 390to 396A of the companies act 1956 contain provisions regarding amalgamation of two or more company. 4) Consideration of the interest of the creditors: the schemes should also be discussed with the creditor of the amalgamated company and their views as certain. 5) Approval of the court: the schemes of amalgamation has to be submitted to court for its approval .the court is satisfied only when that the schemes is just and reasonable for all concerns . 6) Approval of the BOARD OF DIRECTOR: THE SCHEMES Of amalgamation, involve as a result of negotiations , is put finally before the board of directors of the respective companies for their approval. 7) Transfer of assets and liabilities: from the transferring date all liability and assets are transfer to the acquiring companies. 8) Payment in cash or securities: As per schemes of amalgamation the

acquiring companies will issue the share and debenture or debenture in exchange of share or debentures of acquired companies or make payment in cash.

21

Jitendra Virahyas
JVIRAHYAS@GMAIL.COM

22