Strategy is the pattern of objectives, purposes or goals, stated in such a way as to define what

business the company is in or is to be in and the kind of company it is or is to be”.

“Strategy is the determination of basic long-term goals and objectives of an enterprise, and the
adoption of course of action and the allocation of resources necessary for carrying out these
goals".

Based on these definitions of strategy, its following features can be identified. 1. Strategy is the
action of relating the organization with its environment, particularly the external environment,
management and treats an organization as part of a society consequently affected by it. 2.
Strategy is the right combination of factors both external and internal. In relating an organization
to its environment, management must also consider the internal factors too, particularly in terms
of its strengths and weaknesses, that is, what it can do and what it cannot do. 3. Strategy is a
relative combination of actions. The combination is to meet a particular condition, to solve
certain problems, or to attain a desirable objective. It may take any form; for various situations
vary and, therefore, require somewhat different approach. 4. Strategy may involve even
contradictory action. Since strategic action depends on environmental variables, a manager may
take an action today and may revise or reverse his steps tomorrow depending on the situation. 5.
Strategy is forward looking. It has to do orientation towards the future, Strategic action is
required in a new situation. Nothing new requiring solutions can exist in the past, therefore,
strategy is relevant only to future. It may take advantages of the past analysis.

Strategic planning refers of a unified, comprehensive and integrated plan aimed at relating the
strategic advantages of the firm to the challenges of the environment. It is concerned with
appraising the environment in relation to the company, identifying the strategies to obtain
sanction for one of the alternatives to be interpreted and communicated in an operationally useful
manner. Thus, strategic planning provides the framework within which future activities of the
company are expected to be carried out. Compared with project planning, the time span of
discretion in strategic planning is much longer, the degree of uncertainly and corresponding risks
involved are much greater, and judgment to be exercised is more important.

Importance of Financial Planning

One of the most important functions of the financial manager is that of planning. In order to
formulate plans, he must first know his company’s immediate position. Like a doctor, he needs
to know the condition of his patient before prescribing a remedy. You would not launch a
financial weak company on a programme of expansion and heavy promotional activity any more
than you would send out a patient with a heart condition to do two hour of road work each
morning. In other words, plans must fit the financial capabilities of the concern. Planning
business finances and carrying out financial plans is a continuous process in the day-to-day
administration of a business.
Financial planning is essentially concerned with the economical procurement and profitable use
of funds – a use which is determined by realistic investment decisions. This approach requires a
sensible appraisal of the economic, industrial and share market patterns which are likely to
emerge as plans are developed and operationally assessed. In this connection, G. D. Bond says:
Whilst making profit is the mark of corporation success, money is one energizer which makes it
possible. The aim in financial planning should be to match the needs of the company with those
of the investors with a sensible gearing of short-term and longterm fixed interest securities.
Ernest W. Walker and William H. Baughn state that in view of the complex nature of the
business enterprise today, management places a great emphasis upon financial planning.

The primary advantage accrued to financial planning is the elimination of waste resulting from
complexity of operation. For example, technological advantages, higher taxes, increasing cost of
social legislation, fluctuations tend to cause management to exert wasteful effort. Financial
planning helps management to avoid waste by providing policies and procedures which make
possible a closer co-ordination between various functions of the business enterprise. It aids the
company in preparing for the future. A firm which performs no financial planning depends upon
past experience for the establishment of its objectives, policies and procedures. Since the
company in which the firm operates is dynamic in character, past experience cannot be relied
upon in dealing with future conditions. To plan effectively requires that forecasts be made of
future trends, and when these are used as a basis for plans, many unprofitable ventures are
eliminated.

Step in Financial Planning

➢ Establishing Objectives

➢ Policy Formulation

➢ Fore Casting

➢ Formulation of Procedures

According to Ernest W. Walker and William H. Baughn, there are four steps in financial
planning:

Establishing Objectives

The financial objectives of any business enterprise is to employ capital in whatever proportion
necessary to increase the productivity of the remaining factors of production over the long run.
Although the extent to which capital is employed varies from firm to firma, the objective is
identical in all firms. Business enterprises operate in a dynamic society, and in order to take
advantages of changing economic conditions, financial planners should establish both short-term
and long-run objectives. The long-run goal of any firm is to use capital in the correct proportion.
Policy Formulation Financial policies are guides to all actions which deal with procuring,
administering and disbursing the funds of business firms. These policies may be classified into
several broad categories. i. Policies; governing the amount of capital required for firms to
achieve their financial objectives. ii. Policies which determine the control by the parties who
furnish the capital iii. Policies which act as a guide in the use of debt or equity capital iv. Policies
which guide management in the selection of sources of funds. v. Policies which govern credit
and collection activities of the enterprise.

Estimating Financial Requirements

A forecast of financial requirements is the core of accounting and financial decisions in a firm.
There are three methods of projecting financial requirements.

[Link] simple traditional method of approach to forecasting financial requirements indicates a

firm’s needs in terms of the number of days for which its sales are tied up in an individual
balance sheet item. It is a tie-in between forecasting sales and forecasting financial requirements.

2. The second method involves an engineering analysis, which is a combination of technical

know-how and judgement.

3. The third method involves an operation analysis which is not necessarily technical in nature
and which relies mainly on judgement and on an understanding of the kinds of operations in
which a firm is engaged.

The following factors be considered while estimating financial requirements.

[Link]: The cost of finance is an obvious consideration. It should be the minimum.

2. Repayment Date: Due regard should be given to the period time for which finance is required.
A scheme should be drawn up which fixes the repayment date of the debt.

3. Liquidity: Liquidity is an important consideration, as liquidity may lead to insolvency

4. Interest Payment: Heavy interest charges are embarrassing and should be kept at the desired
level.

5. Claim on Assets: Borrowings may result in a charge on the assets and thus restrict their use.
This may seriously impair the maneuverability of the enterprise.

6. Control: Control is an important consideration for interference is likely to be increased if many

people are allowed to control the company.

7. Risk: It is better not to launch risky projects, particularly if equity finance is not available to
the desired extent.

8. Availability: Financial planning can be affected only when finance is available.

 9. Seasonality: Financial requirements, influenced by seasonality or growth, cannot be easily
anticipated. There are, moreover, unpredictable events strikes, product failure, changes in the
supply price, changes in technology or consumer tastes- which significantly affect financial
requirements.

10. Requirements: The financial manager should estimate the financial requirements of his firm
before he decides whether adequate finance is available. For this purpose, he should consider
marketing, production and accounting estimates of reserve and costs, as these are the starting
point for financial planning for purposes of promotion.

11. Cost Initial Promotional Outlays: These include the cost of the development of a product or a
process, the cost of market surveys, legal and incorporation expenditure, outlays on preliminary
contract, if any, and compensation for promotion.

12. Fixed Asset Needs: Fixed Assets need should be based on estimates supplied by the
production and engineering departments.

13. Current Assets: Current asset needs should be assessed on the basis of estimated sales and
production schedules or projections. Cost budgets and inventory estimates should be prepared
and customer trade terms should be fixed.

14. Distribution Outlays: Distribution outlays should be estimated on the basis of the distribution
system to be adopted by an enterprise. For this purpose, the advertising commission of the
intermediaries, etc., should be taken in to account.

15. Gestation Period: Funds are needed to absorb initial operating losses during the gestation
period of an enterprise. It may be some time before it reaches the “break-even” or pay its own
way.

16. Margin of Safety: Contingent funds should be provided for a margin of safety to take care of
inaccurate projections or unforeseen events.

17. Need for Additional Funds: Financial forecasting involves the relation of sales to assets and
liabilities. The financial manager should be able to anticipate the need for additional funds on the
basis of projected income statements, projected balance sheet, cash budgets, statements of
sources and uses of funds and such other tools of financial forecasting.

Investments Decisions under Risk and Uncertainty

Risk is inherent in almost every business decision. More so, in Capital Budgeting decisions as
they involve costs and benefits extending over a long period of time during which many things
can change in unanticipated ways. For the sake of expository convenience, we assumed so far
that all investments being considered for inclusion in the capital budget had the same risk as
those of the existing investments of the firm. Hence the average cost of capital was used for
evaluating every project. Investment proposals, however, differ in risk. A research and
development project may be more risky than an expansion project and the latter tends to be more
risky than a replacement project. In view of such differences, variations in risk need to be
evaluated explicitly in capital investment appraisal. Risk analysis is one of the most complex and
slippery aspects of capital budgeting. Many different techniques have been suggested and no
single technique can be deemed as best in all situations.

Sources of Risk

The first step in risk analysis is to uncover the major factors that contribute to the risk of the
investment. Four main factors that contribute to the variability of results of a particular
investment are cost of project, reinvestment of cash flows, variability of cash flows and the life
of the project.

(a) Size of the Investment A large project involving greater investments entails more risk
than the small project because in case of failure of the large project the company will
have to suffer considerably greater loss and it may be forced to liquidation. Furthermore,
cost of a project in many cases is known in advance. There is always the chance that the
actual cost will vary from the original estimate. One can never foresee exactly what the
construction, debugging, design and developmental costs will be. Rather than being
satisfied with a single estimate it seems more realistic to specify a range of costs and the
probability of occurrence of each value within the range. The less confidence the
decision-maker has in his estimates, the wider will be the range.
(b) (b) Re-Investment of Cash Flows Whether a company should accept a project that offers
a 20 per cent return for 2 years or one that offers 16 per cent return for 3 years would
depend upon the rate of return available for reinvesting the proceeds from the 20 per cent
2-year period. The danger that the company will not be able to return funds as they
become available is a continuing risk in managing fixed assets and cash flows.
(c) Variability of Cash Flows It may not be an easy job to forecast the likely returns from a
project. Instead of basing investment decision on a single estimate of cash flow it would
be desirable to have range of estimates.
(d) Life of the Project Life of a project can never be determined precisely. The production
manager should base the investment decision on the range of life of the project.

Measures of Risk

Project Standing Alone: Ignores Diversification within the firm and within the shareholder’s
portfolio.

➢ Project from the Company’s Perspective: Ignores diversification within the share-
holder’s portfolio but allows for diversification within the firm.
➢ Shareholders’ Perspective: Allows for diversification within the firm and within the
shareholder’s portfolio

Before we began our discussion of how to adjust for risk, it is important to determine just
what type of risk we are to adjust for. In capital budgeting, a project’s risk can be looked at
three levels. First, there is the project standing alone risk, which is a project’s risk ignoring
the fact that much of this risk will diversified away as the project is combined with the firm’s
other projects and assets.

Second, we have the Project’s contribution-to-firm risk, which is the amount of risk that the
project contributes the firm as a whole: this measure considers the fact that some of the
project’s risk will be diversified away as the project is combined with the firm’s other
projects and assets, but ignores the effects of diversification of the firm’s shareholders.
Finally, there is systematic, which is the risk of project from the viewpoint of a well-
diversified shareholder, this measure considers the fact that some of a project’s risk will be
diversified away as the project is combined with the firm’s other projects, and, in addition,
some of the remaining risk will be diversified away by shareholders as they combine this
stock with other stocks in their portfolios. This is shown graphically in the following figure.
Should we be interested in the project standing alone risk?

Risk-Adjusted Discount Rates

A finance manager being risk averter when given choice between two projects promising the
same rate of return but different in risk would prefer the one with the least perceived risk. He
will require compensation for bearing risk so that overall value of the company remains
unaffected by assumption of the risky project. There are several methods of adjusting risk in
investment decisions, which can be classified broadly in two groups, viz., formal and
informal methods.

Formal Method

Among the formal methods of adjusting risk in capital budgeting decisions, the most popular
ones are: Risk adjusted discount rate and certainty equivalent approach.

Informal Method

This is the most common method of adjusting risk. The finance manager recognizes that
some projects are more riskier than others. He also finds that riskier projects would yield
more than what risk free or less risky projects promise. To choose a project carrying greater
risk as against the less risky one, the finance manager decides on subjective basis (by using
his discretion), the margin of difference in rate of return of both types of projects. The
manner of fixing the standard is strictly internal known to the finance manager himself and is
not specified.
The use of the risk-adjusted discount rates is on the notion that the investors expect higher
returns for more risky projects. In this method of incorporating risk, the risk-free rate of
return, i, is adjusted upward by adding a suitable risk premium, Φ, representing
compensation, the riskaverse investors in the market would require before they will consent
to the risk of the investment.

Thus, if k is the required rate of return, we have

k=1+Φ

Corporate Restructuring

It is very difficult for any firm to survive without restructuring the firm in the growing stages.
It may be possible to run a firm successfully for a short period, but in the long run it may not
be possible without restructuring because business environment changes. Scanning of
business environment helps in identifying business opportunities and threats. Corporate
restructuring is necessary whenever there is change in business environment. For example,
with liberalization, privatization, and globalisation (LPG) many firms felt that there are lots
of profitable investment opportunities, and it also means increasing competition. A firm that
feels globalisation is opportunity for the firm, and then it needs to leverage the benefits,
which require lot of funds and resources, and also need to go for restructuring. On the other
hand a firm that feels globalisation or liberalization or privatization is as competition, it has
to compete with the new competitors, by manufacturing products at high quality and sell at
reasonable prices, but it needs more technological support and needs more funds. So firm
needs to go for restructuring.

Today, restructuring is the latest buzzword in corporate circles. Companies are vying with
each other in search of excellence and competitive edge, experimenting with various tools
and ideas. Many firms try to turn the business around by cutting jobs, buying companies,
selling off or closing unprofitable divisions or even splitting the company up. And the
changing national and international environment is radically changing the way business is
conducted. Moreover, with the pace of change so great, corporate restructuring assumes
paramount importance. It is because profitable growth is one of the objectives of any
business firm. Maximization of profit is possible either by internally, by change of
manufacturing process, development of new products, or by expanding the existing products.
On the other hand company would be able to maximize profit by externally merging with
other firm or acquiring another firm. The external strategy of maximizing profit may be in
the form of mergers, acquisitions, amalgamations, takeovers, absorption, consolidation, and
so on.
Put in simple words the concept of restructuring involves embracing new ways of running an
organization and abandoning the old ones. It requires organisations to constantly reconsider
their organisational design and structure, organisational systems and procedures, formal
statements on organisational philosophy and may also include values, leader norms and
reaction to critical incidences, criteria for rewarding, recruitment, selection, promotion and
transfer.

Meaning of Corporate Restructuring

Restructuring is the corporate management term for the act of partially dismantling and
reorganizing a company for the purpose of making it more efficient and therefore more
profitable. It generally involves selling off portions of the company and making severe staff
reductions. Restructuring is often done as part of a bankruptcy or of a takeover by another
firm, particularly a leveraged buyout by a private equity firm. It may also be done by a new
CEO hired specifically to make the difficult and controversial decisions required to save or
reposition the company.

It indicates to a broad array of activities that expand or contract a firm’s operations or

substantially modify its financial structure or bring about a significant change in its
organisational structure and internal functioning. It includes activities such as mergers,
buyouts, and takeovers, business alliances, slump sales, demergers, equity carve outs, going
private, leverage buyouts (LBOs), organisational restructuring, and performance
improvement initiatives.

Reasons for Corporate Restructuring

There are a good number of reasons behind corporate restructuring. Corporate restructure
their firms with a view to:

1 Induce higher earnings

2 Leverage core competencies

3 Divestiture and make business alliances

4 Ensure clarity in vision, strategy and structure

5 Provide proactive leadership

6 Empowerment of employees, and

7 Reengineering Process

1. Induce Higher Earnings: The prime goal of financial management is to maximize profit
there by firm’s value. Firm may not be able to generate constant profits throughout its life.
When there is change in business environment, and there is no change in firm’s strategies.
The two basic goals of corporate restructuring may include higher earnings and the creation
of corporate value. Creation of corporate value largely depends on the firm’s ability to
generate enough cash. Thus corporate restructuring helps to firms to increase their profits.

2. Leverage Core Competence: Core competence was seen as a capability or skill running
through a firm’s business that once identified, nurtured, and developed throughout the firm
became the basis for lasting competitive advantage. For example Dell Computer built its first
10-year of unprecedented growth by creating an organisation capable of the speedy and in
expensive manufacture and delivery of custom-built PCs. With the concept of organisational
learning gaining momentum, companies are laying more emphasis on exploiting the rise on
the learning curve. This can happen only when companies focus on their core competencies.
This is seen as the best way to provide shareholders with increased profits.

3. Divestiture and Business Alliances: Some times companies may not be able to run all the
companies, which are there in-group, and companies which are not contributing may need to
be divested and concentrate on core competitive business. Companies, while keeping in view
their core competencies, should exit from peripherals. This can be realised through entering
into joint ventures, strategic alliances and agreements.

4. Ensure Clarity in Vision, Strategy and Structure: Corporate restructuring should focus on
vision, strategy and structure. Companies should be very clear about their goals and the
heights that they plan to scale. A major emphasis should also be made on issues concerning
the time frame and the means that influence their success.

5. Provide Proactive Leadership: Management style greatly influences the restructuring

process. All successful companies have clearly displayed leadership styles in which
managers relate on a one-to-one basis with their employees.

6. Empowerment of Employees: Empowerment is a major constituent of any restructuring

process. Delegation and decentralized decision making provides companies with effective
management information system.

7. Reengineering Process: Success in a restructuring process is only possible through

improving various processes and aligning resources of the company. Redesigning a business
process should be the highest priority in a corporate restructuring exercise.

The above discussed are the prime reasons for corporate restructuring.

Types / Forms of Corporate Restructuring

Business firms engage in a wide range of restructuring activities that include expansion,
diversification, collaboration, spinning off, hiving off, mergers and acquisitions. Privatisation
 also forms an important part of the restructuring process. The different forms of restructuring
may include:

1. Expansion, (2) Mergers (Amalgamation), (3) Purchasing of a Unit or Division or Plant,

(4) Takeover, (5) Business Alliances, (6) Sell-Off, (7) Hive-Off, (8) Demerger or
Corporate Splits or Division, (9) Equity Carve out, (10) Going Private, and (11)
Leveraged Buyout (LBO)

Expansion

It is the most common and convenient form of restructuring, which involves only increasing the
existing level of capacity and it does not involve any technical expertise. Expansion of business
needs more funds to be raised either in the form of equity or debt or both and the funds are used
to finance the fixed assets required for manufacturing the expanded level of production. This
increase firm’s profitability, thereby value of the firm.

Merger

The term merger refers to a combination of two or more companies into a single company where
one survives and the others lose their corporate existence. The acquired company (survivor)
acquires the assets as well as liabilities of the merged company or companies.

For example A Ltd., acquires the business of B Ltd. and C Ltd. Generally, the company, which
survives, is the buyer, which retains its identity, and the seller company is extinguished.

Merger is also defined as amalgamation.

Merger is the fusion of two or more existing companies. All assets, liabilities and stock of one
company stand transferred to Transferee Company in consideration of payment in the form of
equity shares of Transferee Company or debentures or cash or a mix of the two or three modes.

Mergers per se, may either be horizontal mergers, vertical mergers or conglomerate mergers.

Amalgamation

Ordinarily amalgamation means merger. Amalgamation refers to a situation where two or more
existing companies are combined into a new company formed for the purpose. The old
companies cease to exist and their shareholders are paid by the new company in cash or in its
shares or debentures or combination of cash, shares, and debentures.

But there is technical difference between merger and amalgamation. In case of merger, one
existing company takes over the business of another existing company or companies, while in the
case of amalgamation; a new company takes over the business of two or more existing
companies.
The term amalgamation includes merger also.

Purchasing of a Unit

Purchasing a unit or plant or division is becoming common practice in corporate restructuring

activity. This is because purchasing a unit reduces the time involved in setting up of new unit,
which is generally a lengthy period and also brings some tax benefits. When a firm purchases
one unit of the other firm then it becomes to divesture for the selling firm.

Takeover

A ‘takeover’ is acquisition and both the terms are used interchangeably. Takeover differs from
merger in approach to business combinations i.e. the process of takeover, transaction involved in
takeover, determination of the share exchange or cash price and fulfillment of goals of
combination all are different in takeovers than in mergers.

For example, process of takeover is unilateral and the offeror company decides about the
maximum price. Time taken in completion of transaction is less in takeover than in mergers, top
management of the offered company being more co-operative.

Business Alliances

The following are more commonly used forms of business alliance:

Joint Ventures

A joint venture is set up an independent legal entity in, which two or more separate firms
participate. The joint venture agreement clearly indicates how the cooperating members will
share ownership, operational responsibilities, and financial risks and rewards

Strategic Alliances

A strategic alliance is cooperative relationship like JV, but is does not create a separate legal
entity. In other words companies involved do not take an equity position in one another. In many
instances, strategic alliances are partnerships that exist for a defined period during which partners
contribute their skills (transfer technology, or provide R&D service, or grant marketing rights
etc.) and expertise to a cooperative project. For example, service and franchise based firms like
Coca-Cola, McDonald’s and Pepsi have long engaged in licensing arrangements with foreign
distributors as a way to enter new markets.

Franchising

A special form of licensing is franchising, which allows the franchisee to sell a highly publicized
product or service, using the parent’s brand name or trademark, carefully developed procedures,
and marketing strategies. In exchange, a franchisee pays a fee to parent firm, typically based on
the volume of sales of the franchisor in its defined market area. Most attractive franchisees are
Coca-Cola, Kentucky Fried Chicken, and Pepsi.

Licensing / Contract Manufacturing

License is an agreement whereby a foreign licensee buys the right to produce a company’s
product in the licensee’s country for a negotiated fee (normally, royalty payments on the sales
volume).

There are two popular types of licensing.

First type involves granting license for product, or process, or specific technology

The second type of licensing involves granting licensing for trademark or copyright.

Sell-Off:

Sell-Off may be either through a spin-off or divestiture. Spin-Off creates a new entity with shares
being distributed on a pro rata basis to existing shareholders of the parent company. Split-Off is a
variation of Sell-Off. Divestiture involves sale of a portion of a firm/company to a third party.

Hive-Off:

It refers to the sale of loss making division or product or product line, by a company. Put it
simple it is discontinuing manufacture of a product or closing down a division. This is beneficial
for both the buyer and the seller.

Demerger or Corporate Splits or Division:

Demerger or split or division of a company are the synonymous terms signifying a movement in
the company just opposite to combination in any of the forms defined above. Such types of
demergers or ‘divisions’ have been occurring in developed nations particularly in UK and USA.

Equity Carveout:

Equity carveout is the sale of its equity by parent company in a wholly owned subsidiary. The
sale of equity may be to the general public or strategic investors.

Equity carve out differs from spin off in two ways. First, in equity carveout the equity shares are
sold to the new investor, whereas in the spin off the equity shares are sold to the existing
shareholders.

Secondly, equity carveout brings cash to the firm (since the shares are sold to the new investor),
whereas in the spin off there is no cash infusion to the company because the shares value is
broken into small and the same are distributed to the existing shareholders.
Going Private:

Generally public company stock is held with public. Going private means converting public
company into private company.

Leveraged Buyout (LBO):

Leveraged buyout means buying anything with borrowed funds. For example, Dream Well Co.,
interested in divesting one of its division, for ` 50 crores (whose value is ` 80 crores). Five
executives of the same division are keen on buying the division but each executive is able to
contribute ` 10 lakhs. Here they fall short of funds to buy the division, still they want to buy the
same with a borrowings ` 30 lakhs from a bank. It is known as leveraged buyout.

Other Terms Used in Corporate Restructuring:

Apart from the above discussed form of corporate restructuring the following are other terms
used: Acquisition, consolidation, absorption, combinations, holding company, takeover,
restructuring, reconstructing and diversification.

Acquisition:

Acquisition in general sense is acquiring the ownership in the property. In the context of
business combinations, an acquisition is the purchase of by one company of a controlling
interest in the share capital of another existing company. An acquisition may be affected by

(a) agreement with the persons holding majority interest in the company management like
members of the board or major shareholders commanding majority of voting power;

(b) purchase of shares in open market;

(c) to make takeover offer to the general body of shareholders;

(d) purchase of new shares by private treaty;

(e) acquisition of share capital of one company may be by either all or any one of the
following form of considerations viz. means of cash, issuance of loan capital, or insurance of
share capital.

Consolidation:

Consolidation is known as the fusion of two existing companies into a new company in which
both the existing companies extinguish. Thus, consolidation is mixing up of the two companies
to make them into a new one in which both the existing companies lose their identity and cease
to exist. The mix-up assets of the two companies are known by a new name and the shareholders
of two companies become the shareholders of the new company. None of the consolidating firms
legally survives. There is no designation of buyer and seller. All consolidating companies are
dissolved.

In other words, all the assets, liabilities and stocks of the consolidating companies stand
transferred to new company in consideration of payment in terms of equity shares or bonds or
cash or combination of the two or all modes of payments in proper mix.

Absorption:

Absorption is a combination of two or more firms into an existing corporation. All firms except
one lose their identity in merger through absorption. For example this type of absorption is
absorption of Tata Fertilisers Ltd. (TFL) by Tata Chemicals Ltd. (TCL). TCL, an acquiring firm.
Survived after merger, while TFL an acquired company, ceased to exist.

Combination: Combination refers to mergers and consolidations as a common term used

interchangeably but carrying legally distinct interpretation. All mergers, acquisitions, and
amalgamations are business combinations.

Takeover: A ‘takeover’ or acquisition and both the terms are used interchangeably. Takeover
differs from merger in approach to business combinations i.e. the process of takeover, transaction
involved in takeover, determination of the share exchange or cash price and fulfillment of goals
of combination all are different in takeovers than in mergers. For example, process of takeover is
unilateral and the offeror company decides about the maximum price. Time taken in completion
of transaction is less in takeover than in mergers, top management of the offeree company being
more co-operative.

Reconstruction: The term ‘reconstruction’ has been used in section 394 along with the term
‘amalgamation’. The term has not been defined therein but it has been used in the sense not
synonymous with amalgamation.

In the Butter worth publication, the term has been explained as under:

“By a reconstruction, a company transfers its undertaking and assets to a new company in
consideration if the issue of the new company’s shares to the first company’s members and, if
the first company’s debentures are not paid off, in further consideration of the new company
issuing shares or debentures to the first company’s debentures holders in satisfaction of their
claims. The result of the transaction is that the new company has the same assets and members
and, if the new company issues debentures to the first company’s debenture holders, the same
debenture holders as the first company, the first company has no undertaking to operate and is
usually wound up or dissolved”.

Major Categories of Corporate Restructuring

As we read in the above that corporate restructuring entails any fundamental change in a
company’s business or financial structure, designed to increase the company’s value to
shareholders or creditor. Corporate restructuring is often divided into two parts:

1. Operational restructuring, and

2. Financial restructuring.

1. Operational Restructuring: Operational restructuring is the process of increasing the

economic viability of the underlying business model. Examples include mergers, the sale of
divisions or abandonment of product lines, or cost-cutting measures such as closing down
unprofitable facilities. In most turnarounds and bankruptcy situations, both financial and
operational restructuring must occur simultaneously to save the business.

2. Financial Restructuring: It relates to improvements in the capital structure of the firm.

Corporate financial restructuring involves restructuring the assets and liabilities of corporations,
including their debt-to-equity structures, in line with their cash flow needs to promote efficiency,
support growth, and maximize the value to shareholders, creditors and other stakeholders.
Otherwise viable firms under stress it may mean debt rescheduling or equity-for-debt swaps
based on the strength of the firm. If the firm is in bankruptcy, this financial restructuring is laid
out in the plan of reorganization.

Financial restructuring may mean refinancing at every level of capital structure, including: a.
Securing asset-based loans (accounts receivable, inventory, and equipment) b. Securing
mezzanine and subordinated debt financing c. Securing institutional private placements of equity
d. Achieving strategic partnering e. Identifying potential merger candidates

Mergers and Acquisitions

Meaning of Mergers and Acquisition

The term merger refers to a combination of two or more companies into a single company where one
survives and the others lose their corporate existence. The acquired company (survivor) acquires the
assets as well as liabilities of the merged company or companies. For example A Ltd. acquires the
business of B Ltd. and C Ltd. Generally, the company, which survives, is the buyer, which retains its
identity, and the seller company is extinguished. Merger is also defined as amalgamation. Merger is the
fusion of two or more existing companies. All assets, liabilities and stock of one company stand
transferred to Transferee Company in consideration of payment in the form of equity shares of
Transferee Company or debentures or cash or a mix of the two or three modes.

Acquisition in general sense is acquiring the ownership in the property. In the context of business
combinations, an acquisition is the purchase of by one company (called the acquiring firm) of a
controlling interest in the share capital of another existing company (called the target). An acquisition
may be affected by (a) agreement with the persons holding majority interest in the company
management like members of the board or major shareholders commanding majority of voting power;
(b) purchase of shares in open market; (c) to make takeover offer to the general body of
shareholders;(d) purchase of new shares by private treaty; (e) acquisition of share capital of one
company may be by either all or any one of the following form of considerations viz. means of cash,
issuance of loan capital, or insurance of share capital. The effort to control may be a prelude

➢ To a subsequent merger or

➢ To establish a parent-subsidiary relationship or

➢ To break-up the target firm, and dispose off its assets or

➢ To take the target firm private by a small group of investors.

Types of Takeovers

There are broadly two kinds of takeover bids or strategies that can be employed in corporate
acquisitions. These include:

(1) Friendly Takeover, and

(2) Hostile Takeover

1. Friendly Takeover: Friendly takeovers are those takeovers that could be through negotiations, i.e.,
acquiring company negotiates with the Executives or BoDs of target firm, and gets their consent for
takeover. The acquiring firm makes a financial proposal to the target firm’s management and board. This
proposal might involve the merger of the two firms, the consolidation of two firms, or the creation of
parent/subsidiary relationship. If both the parties do not reach to an agreement during negotiation
process the proposal of acquisition stands terminated and dropped out.

2. Hostile Takeover: Hostile takeover is the takeover in which acquiring company may not offer to target
company the proposal to acquire its undertaking but silently and unilaterally may pursue efforts to gain
controlling interest in it against the wishes of the management. Put in simple, a hostile takeover may not
follow a preliminary attempt at a friendly takeover. For example, it is not uncommon for an acquiring
firm to embrace the target firm’s management in what is colloquially called a bear hug. There are
various ways in which an acquirer company may pursue the matter to acquire the controlling interest in
a target firm. The various ways of acquirer are known as “raids” or “takeover raids” in the corporate
world. The raids when organized in systematic ways are called “takeover bids”.

Forms / Types of Mergers

Mergers or acquisition types depend upon the offeror company’s objectives, profiles, combinations
which it wants to achieve. What ever may be the technical differences between mergers, acquisitions,
and amalgamations, mergers can usually distinguished into the following three types:

(1) Horizontal Mergers, (2) Vertical Mergers, and (3) Conglomerate Mergers.
Horizontal Mergers

This type of merger involves when two or more competitive firms that operate and compete in a similar
kind of business and same stage of industrial process. The merger is based on the assumption that it will
provide economies of scale from the larger combined unit; it eliminates competition, thereby putting an
end to price cutting wars, possibility of starting R&D, effective marketing and management.

Vertical Mergers

Vertical mergers take place between firms in different stages of production/operation, either as forward
or backward integration. It occurs when a firm acquires ‘upstream’ from it and or firms ‘downstream’
from it. Upstream stream merger extends to the firms supplying raw materials and to those firms that
sell eventually to the customers in the event of a downstream merger. The basic reason is to eliminate
costs of searching for prices, contracting, lower distribution cost, payment collection and advertising and
may also reduce the cost of communicating and coordinating production and also has assured supplies
and market, increasing or creating barriers to entry for potential competitors.

Unlike horizontal mergers, which have no specific timing, vertical mergers take place when both firms
plan to integrate the production process and capitalise on the demand for the product. Forward
integration take place when a raw material supplier finds a regular procurer of its products while
backward integration takes place when a manufacturer finds a cheap source of raw material supplier.

Conglomerate Mergers

Conglomerate mergers are affected among firms that are in different or unrelated business activity. In
other words, firms engaged in two different / unrelated business activities combine together. Firms
opting for conglomerate merger control a range of activities in various industries that require different
skills in the specific managerial functions of research, applied engineering, production, marketing and so
on.

This type of diversification can be achieved mainly by external acquisition and mergers and is not
generally possible through internal development. The basic purposes of such merger is to effective
utilization of unutilized financial resources and enlarge debt capacity through reorganizing their financial
structure so as to maximize shareholders earnings per share (EPS), lowering the cost of capital and
thereby raising maximizing value of the firm and the share price. Mergers enhance the overall stability
of the acquirer company and create balance in the company’s total portfolio of diverse products and
production processes. These types of mergers are also called concentric mergers.

Firms operating in different geographic locations also proceed with these types of mergers.
Conglomerate mergers have been further sub-divided into

(a) Financial Conglomerates,

(b) Managerial Conglomerates

(c) Concentric Companies

a. Financial Conglomerates: These conglomerates provide a flow of funds to every segment of their
operations, exercise control and are the ultimate financial risk takers. They not only assume financial
responsibility and control but also play a chief role in operating decisions. They also improve risk-return
ratio; reduce risk; improve the quality of general and functional managerial performance; provide
effective competitive process; provide distinction between performance based on underlying potentials
in the product market area and results related to managerial performance.

b. Managerial Conglomerates: Managerial conglomerates provide managerial counsel and interaction

on decisions thereby, increasing potential for improving performance. When two firms of unequal
managerial competence combine, the performance of the combined firm will be greater than the sum of
equal parts that provide large economic benefits.

c. Concentric Conglomerates: The primary difference between managerial conglomerate and concentric
company is its distinction between respective general and specific management functions. The merger is
termed as concentric when there is a carry-over of specific management functions or any
complementarities in relative strengths between management functions.