Corporate Restructuring

CORPORATE RESTRUCTURING Meaning: “To give a new structure, to rebuild or to rearrange”

CR Comprehensive process

Consolidates its business operations

Looking for new avenues

Achievement of Objectives

Justice Chandrachud : Corporate restructuring is one of the means that can be employed to meet the challenges which confront business

Pioneers of CR Process in India

NEED: Examples

R.P. GOENKA M.R.CHABRIA SUDERSHAN BIRLA SRICHAND HINDUJA VIJAYA MALLYA MURUGAPPA FAMILY DHIRUBHAI AMBANI DILIP SANGHVI

1. Assume ABC ltd has surplus funds but it is not able to consider viable projects worth investing. Whereas XYZ ltd has identified viable projects but has no money to fund the cost of the project.

Hence, merger of both the companies could be a viable option which gives more strategic benefits to both the companies. 2. Harish is a CA in practice. His income will not be regular as would be of a CA in employment. Harish has a girlfriend, Geeta who happens to be a CA in employment. Assume Harish married Geeta. This marriage helps both to grow and complement each other without bothering about regularity of cash inflows. 3. Growth through Diversification NEED: 1. Operational synergy and efficient allocation of managerial capabilities and infrastructure. 2. Focus on core strengths. 3. Economies of scale by expansion /diversification. 4. Revival and rehabilitation of a sick unit by adjusting loses of the sick unit with profits of a healthy unit. 5. Acquiring constant supply of raw material 6. Access to scientific research/technological developments. 7. Capital restructuring by appropriate mix of loan and equity funds to reduce the cost of servicing and improve return on capital employed. 8. Improve corporate performance to bring it at par with competitors by adopting the radical changes brought out by IT

KINDS /FORMS OF RESTRUCTURING •

FINANCIAL RESTRUCTURING Mergers, acquisitions, joint ventures, strategic alliances etc.

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TECHNOLOGICAL RESTRUCTURING Alliances with other companies to exploit technological expertise.

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MARKET RESTRUCTURING Decisions regarding product market segments based on core competencies.

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ORGANISATIONAL RESTRUCTURING

CHOICE OF RESTRUCTURING 1. EXPANSION Mergers and acquisitions Takeovers/tender offers Joint ventures/strategic alliances 2. REFOCUSING Divestitures/demergers Spin offs Split ups Sell offs Equity carve outs 3. CORPORATE CONTROL Buy back 4. CHANGE IN OWNERSHIP STRUCTURE Exchange offers Delisting LBOs/MBOs •

Mergers and acquisitions

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Tender offers: Generally a company seeking a controlling interest in another company, wants to control the other by acquiring controlling stake

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Joint ventures: Companies usually enter into an agreement to provide certain resources towards the achievement of a particular business goal for a limited duration.

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Divestitures: Reduction of the asset structure or reorganization of the business portfolio.

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Demerger: In a demerger, the demerged company sells and transfers one or more of its undertaking to the resulting company for an agreed consideration. The resulting company issues its shares at the

agreed exchange ratio to the shareholders of the demerged company. •

Slump sale: A company sells/ disposes of the whole or substantially the whole of its undertaking for a lump sum pre determined consideration.

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Spin offs: A form of divestitures that creates a new legal entity with its shares distributed on a pro-rota basis among the existing shareholders of the parent company. Thus, existing stockholders have the same proportion of ownership in the new entity as in the original firm. An important feature of spin offs is that no cash is received by the original parent company.

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Split ups: Sale of a portion of the firm to a third party . Cash or equivalent is received by the divesting firm.

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Equity carve out: Sale of a portion of the firm via equity offers to outsiders. A new legal entity is created with the constitution of a new controlling group.

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Buy back:

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Exchange offers:Exchange of debt or preferred stock for equity in order to create leverage.

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Delisting: Delisting of shares from the stock exchanges.

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LBOs : Acquisition of a company through huge debt funds.

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MBOs: Management buying out the company

MOTIVES OF MERGERS AND ACQUISITIONS Exogenous Factors 1. Industrial and regulatory policies 2. Competitive impact 3. Pre emptive motive Endogenic Factors 1. Growth 2. Portfolio strategy 3. Scale economies and synergy 4. Corporate control/ defensive strategy 5. Tax shield

6. Long term financial consideration CASE STUDY The Transport Corporation of India(TCI) has diversified into other businesses which was supposes to be an extension of their core business. Initially, TCI was into cargo movers. Later on they diversified into transport services, car rentals, forex services etc. Soon the company felt that the over diversified portfolio was recognized to have no synergy between them. …………………………………………………………….. and thus the company in April 1998 undertook a restructuring exercise by reorganizing the whole business into Gati ltd and Wheels India ltd. You are required to identify which restructuring strategy would have best suited to TCI ? Assignment 1. What are the important strategies available to the companies for growth? 2. Identify various corporates which have gone through restructuring process fitting into the different forms of corporate restructuring discussed in the class? 3. Post liberalization, Indian corporate sector has undertaken business restructuring exercise in a massive scale. In the exercise of business restructuring, following types of patterns have emerged. •

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Many companies have sold some of their businesses and acquired other businesses. For example, TISCO has sold its cement division to LAFARGE and acquired bearing division of Metal Box. Many of the businesses have been transferred from one company to another company within the same group. For example, Birla group.

There are many such examples because business restructuring has become order of the day. What strategic lessons do you draw from the new strategic repositioning of the companies concerned?