CORPORATE RESTRUCTURING By Bharat Sai Kiran Ashok Lahoty FORMS OF CORPORATE RESTRUCTURING Expansion Mergers and Acquisitions Tender Offers Asset Acquisition Joint Ventures Contraction Spin offs Split offs Divestitures Equity carve-outs Assets sale Corporate Control Takeover defenses Share repurchases Exchange offers Proxy contests Changes in Ownership Structures Leveraged buyout Junk Bonds Going Private ESOPs and MLPs EXPANSION Expansion is a form of restructuring, which results in an increase in the size of the firm. It can take place in the form of a merger, acquisition, tender offer, asset acquisition or a joint venture. MERGERS Merger is defined as a combination of two or more companies into a single company Amalgamation is the type of merger that involves fusion of two or more companies. After the amalgamation, the two companies loose their individual identity and a new company comes into existence. This form is generally applied to combinations of firms of equal size. A B AB Brooke Bond India Ltd Lipton India Ltd Brooke Bond Lipton India Ltd CITICORP 2nd Largest Commercial Bank in USA Worlds Leading distributor of credit cards Issuing 60 Million Bank Cards TRAVELERS PLAN Financial conglomerate that offers insurance and investment banking services. $698 billion of assets This would also be by far the most valuable in the business, with a market capitalization of about $135 billion. The companies described the deal as a merger, valuing it at $140 billion, but the mechanism is essentially a stock swap, with Travelers paying $70 billion for Citi's shares. Travelers will issue 2.5 shares for each Citicorp share, and current stockholders of each company will own about half of the new enterprise. ACQUISITION A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares Absorption is a type of merger that involves fusion of a small company with a large company. After the merger the smaller company ceases to exist. A Oriental Bank Of Commerce B Global Trust Bank A Oriental Bank Of Commerce JOINT VENTURE Cooperation between two or more companies in which the purpose is to achieve jointly a specified business goal. Upon the attainment of the goal, the joint venture is terminated. A joint venture, which is typically limited to one project, differs from a partnership that can work jointly on many projects. A Hero Motor Corp B AB Honda Hero Honda TENDER OFFER Tender offer is a corporate finance term denoting a type of takeover bid. The tender offer is a public, open offer or invitation (usually announced in a newspaper advertisement) by a prospective acquirer to all stockholders of a publicly traded corporation (the target corporation) to tender their stock for sale at a specified price during a specified time, subject to the tendering of a minimum and To induce the shareholders of the target company to sell, the acquirer's offer price usually includes a premium over the current market price of the target company's shares. maximum number of shares. B A Public Offer G C H D I E J F K EXAMPLE ---- TENDER OFFER Flextronics International giving an open market offer at Rs. 548 for 20% of paid up capital in Hughes Software Systems. AstraZenca Pharmaceuticals AB, a Swedish firm, announced an open offer to acquire 8.4% stake in AstraZenca Pharma India at a floor price of Rs. 825 per share. ASSET ACQUISITION A buyout strategy in which key assets of the target company are purchased, rather than its shares. These assets may be tangible assets like a manufacturing unit or intangible assets like brands. This is particularly popular in the case of bankrupt companies, who might otherwise have valuable assets which could be of use to other companies, but whose financing situation makes the company un-attractive for buyers Plant & M/C Plant & M/C A Patents Cash B B Stock Land & Building A A Patents EXAMPLES ---- ASSET ACQUISTION The acquisition of the cement division of Tata Steel by Laffarge of France. Laffarge acquired only the 1.7 million tonne cement plant and its related assets from Tata Steel. The asset being purchased may also be intangible in nature. For example, Coca-Cola paid Rs.170 crore to Parle to acquire its soft drinks brands like Thums Up, Limca, Gold Spot etc. Google acquired the Motorola for its new open source operating system “Android” for the need of Motorola’s 17000 patents out of which Google needs around 6000 patents. M3M India acquired DLF 28- Acre Plot in Gurgaon as non core assets for Rs 440 Cr. FORMS OF CORPORATE RESTRUCTURING Expansion Mergers and Acquisitions Tender Offers Asset Acquisition Joint Ventures Contraction Spin offs Split offs Divestitures Equity carve-outs Corporate Control Takeover defenses Share repurchases Exchange offers Proxy contests Changes in Ownership Structures Leveraged buyout Junk Bonds Going Private ESOPs and MLPs CONTRACTION Contraction is a form of restructuring, which results in a reduction in the size of the firm. It can take place in the form of a Spin-off, Split off, Divestiture Equity carve-out. SPIN-OFF A Company distributes all the shares it owns in a subsidiary to its own shareholders implying creation of two separate public companies with same proportional equity ownership. Sometimes, a division is set up as a separate company. Hence, the stockholders proportional ownership of shares is the same in the new legal subsidiary as well as the parent firm. The new entity has its own management and is run independently from the parent company. A spin-off does not result in an infusion of cash to parent company. Shareholders of Company A also has shares of Company B Shareholders of Company A A Subsidiary Company of A B B A B EXAMPLES ----- SPIN-OFF Air-India has formed a separate company named Air-India Engineering Services Ltd., by spinning-off its engineering division. Guidant was spun out of Eli Lilly and Company in 1994, formed from Lilly's Medical Devices and Diagnostics Division. Agilent Technologies spun out of Hewlett-Packard in 1999, formed from HP's former test-and-measurement equipment division. Cenovus Energy was spun out of Encana Corporation in 2009 Shugart Associates was a spin-out of IBM. SPLIT- OFF In a split off, a new company is created to takeover the operations of an existing division or unit. A portion of existing shareholders receives stock in a subsidiary (new company) in exchange for parent company stock Hence the shareholding of the new entity does not reflect the shareholding of the parent firm. A split-off does not result in any cash inflow to the parent company Shareholders of Company A Shareholders of Company A Shareholders of Company A D A New Company A C D E Operations of Company A F Shareholders of Company B C E B F D SPLIT-UP In a split-up the entire firm is broken up in series of spin-offs, so that the parent company no longer exists and only the new off springs survive. A split-up involves the creation of a new class of stock for each of the parent’s operating subsidiaries, paying current shareholders a dividend of each new class of stock, and then dissolving the parent company. Shareholders of Company A will get shares of Shareholders of Company A A A B C D E Subsidiary Companies of A B C D E EXAMPLES ------ SPLIT-UP The Andhra Pradesh State Electricity Board (APSEB) was split-up in 1999 as part of the Power Sector reforms. The power generation business and the transmission and distribution business has transferred to two separate companies called APGENCO and APTRANSCO respectively. APSEB ceased to exist as a result of split-up. DIVESTITURES A divestiture is a sale of a portion of the firm to an outside party, generally resulting in an infusion of cash to the parent. A firm may choose to sell an undervalued operation that it determines to be non-strategic or unrelated to the core business and to use the proceeds of the sale to fund investments in potentially higher return opportunities. Shares Shares C Some Operations of A Cash A A Patent s B B Assets Opera tions Assets Oper ation s of A EQUITY CARVE OUT A parent has substantial holding in a subsidiary. It sells part of that holding to the public. "Public" does not necessarily mean a shareholder of the parent company. Thus the asset item "Subsidiary Investment" in the balance-sheet of the parent company is replaced with cash. Parent company keeps control of the subsidiary but gets cash. A Issues IPO of B 20% Shares of B CCashA B Subsidiary Company of A Investors 20% Shares of Company B FORMS OF CORPORATE RESTRUCTURING Expansion Mergers and Acquisitions Tender Offers Asset Acquisition Joint Ventures Contraction Spin offs Split offs Divestitures Equity carve-outs Assets sale Corporate Control Takeover defenses Share repurchases Exchange offers Proxy contests Changes in Ownership Structures Leveraged buyout Junk Bonds Going Private ESOPs and MLPs CORPORATE CONTROL Firms can also restructure without necessarily acquiring new firms or divesting existing corporations. Corporate control involves obtaining control over the management of the firm. Control is the process by which managers influence other members of an organization to implement the organizational strategies TAKEOVER DEFENSES Takeover defenses, both pre-bid and post-bid have been resorted to by the companies. Pre Bid: This defense is also called preventive defense it is employed to prevent a sudden, unexpected hostile bid from gaining control of the company. Post Bid: When preventive takeover defenses are not successful in fending off an unwanted bid, the target implements post-bid or active defenses These takeover defenses intend to change the corporate control position of the promoters. PREVENTIVE MEASURES Green Mail A Buy Back Of its Shares at Premium Price Stock Market Good Bye, Sweet Kisses to Share Holders White Knight A I Want to Acquire You No Thanks C is Acquiring me Acquire me Plzzzz… B Ok, I will pay premium to ur Share Holders C CONTD… White Squire A I Want to Acquire You No Thanks C is Acquiring me Acquire me Plzzzz… B Ok, I will Acquire Lesser part from U. C Recapitalization Banks Or Investors Buy Back Of its Shares at Premium Price Lending Money A OR Paying More as Dividends “A” is acting as its Own White Knight Stock Market FORMS OF CORPORATE RESTRUCTURING Expansion Mergers and Acquisitions Tender Offers Asset Acquisition Joint Ventures Contraction Spin offs Split offs Divestitures Equity carve-outs Assets sale Corporate Control Takeover defenses Share repurchases Exchange offers Proxy contests Changes in Ownership Structures Leveraged buyout Junk Bonds Going Private ESOPs and MLPs