THIRD MODULE

CORPORATE

RESTRUCTURING

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 CONTENTS

 Corporate restructuring
 -different methods of restructuring
 -joint ventures
 -sell off and spin off
 -divestitures
 -equity carve out
 -leveraged buy outs (LBO)
 – management buy outs
 -master limited partnerships
 -employee stock ownership plans (ESOP)

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 WHAT IS CORPORATE RESTRUCTURING

corporate restructure means actions taken to expand or

contract a firm's basic operations or fundamentally change its
asset or financial structure.

Corporate restructuring refers 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.

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It includes activities such as

 Mergers,
 Purchases of business units,
 Takeovers,
 Slump sales,
 Demergers,
 Leveraged buyouts,
 Organizational restructuring, and
 Performance improvement initiatives.

We will refer to these activities collectively as mergers,

acquisitions, and restructuring (a widely used, though not a very
accurate, term) or just corporate restructuring.

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 Categories of Corporate Restructuring

Corporate restructuring activities can be divided into 2 broad categories:

1. Operational Restructuring refers to:-

 outright or
 partial purchase or
 sale of companies or product lines or
 downsizing by closing unprofitable, non-strategic facilities.

2. Financial Restructuring:
refers to the actions taken by the firm to change its total debt & equity
structuring.
 Ownership restructuring
 Business restructuring
 Asset restructuring

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CHARACTERISTICS
1. To improve the co., Balance sheet, (by selling unprofitable division from its core
business).

2. To accomplish staff reduction ( by selling/closing of unprofitable portion)

3. Changes in corporate mgt

4. Sale of underutilized assets, such as patents/brands.

5. Outsourcing of operations such as payroll and technical support to a more

efficient 3rd party.

6. Moving of operations such as manufacturing to lower-cost locations.

7. Reorganization of functions such as sales, mktg, & distribution

8. Renegotiation of labor contracts to reduce overhead

9. Refinancing of corporate debt to reduce interest payments.

10. A major public relations campaign to reposition the co., with consumers.
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 Need for restructuring

1. To respond to particular business needs.

2. To create friendly & comfortable working system

3. To make organization more competent

4. To make it as counter strategies

5. Growth & globalization

6. To have financial strength & synergy to compete.

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 PURPOSE OF CORPORATE RESTRUCTURING

 To enhance the share holder value.

 The co., should continuously evaluate its:
1. portfolio of businesses,
[Link] mix,
3. ownership &
4. assets arrangements to find opportunities to increase the share holders’
value.

 To focus on asset utilization and profitable investment opportunities

 To reorganize or divest less profitable or loss making

businesses/products

 The co., can also enhance value through capital Restructuring, it

can innovate securities that help to reduce cost of capital.

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FORMS OF CORPORATE RESTRUCTURING
Expansion

 Mergers & acquisition

 Tender offers
 Joint venture

Sell-offs
 Spin- offs
 Split-offs
Corporate  Split-ups
Restructuring  Equity carve outs
Corporate Control
 Premium Buy-backs
 Standstill Agreements
 Anti-takeover Amendments
 Proxy contests

Changes in Ownership Structure

Exchange offers
 Share Repurchase
 Going Private
 Leveraged Buy-outs
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 A. Tender offer

 A tender offer is a public offer made to the

shareholders of a company by a potential acquirer to
purchase their stock at a price much higher than the
current market value of the stock. If all goes as
planned, the shareholders who accept the tender offer
make a significant profit on their holdings, and the
acquirer gains control of the company.

 In other words An offer to purchase some or all of

shareholders' shares in a corporation. The price
offered is usually at a premium to the market price.

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 B. JOINT VENTURE
 Joint ventures are new enterprises owned by two
or more participants. They are typically formed for
special purposes for a limited duration.

 It is a contract to work together for a period of time

each participant expects to gain from the activity
but also must make a contribution.

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 Examples for JV

PARTNERS Product Strategic Objective

GM & TOYOTA Autos Cut-cost

Ford / Measurex Factory Cut-cost

automation
Boeing/ Small air-craft Cut-cost, share
Mitsubishi/ technology
Fuji/ Kawasaki

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 CHARACTERISTICS OF JOINT VENTURE
1. Contribution by partners of:
a) Money
b) Knowledge
c) Property
d) Skill
e) Effort or other assets to a common undertaking.

2. Limited scope and duration

3. Generally it involves two firms

4. Joint property interest in the subject matter of the venture

5. Right of mutual control or mgt of the enterprise.

6. Right to share in the profit.

[Link] production of single product

[Link] sharing of assets/ information beyond venture

9. Limited risk 13
Reasons for forming a joint venture

 Build on company's strengths

 Spreading costs and risks
 Improving access to financial resources
 Economies of scale and advantages of size
 Access to new technologies and customers
 Access to innovative managerial practices

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 MOTIVES TO JOINT VENTURE

1. To share investment expenses or combine a large co.

2. Learning-experience

3. Sharing of risk

4. Antitrust authorities permit Joint-venture than merger because it

increases the no., of firms.

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 RATIONAL FOR JOINT VENTURES
1. To augment insufficient financial or technical ability to enter a particular line
or business.

2. To share technology & generic mgt skills in orgn, planning & control.

3. To diversify risk

4. To obtain distribution channels or raw materials supply

5. To achieve economies of scale

6. To extend activities with smaller invt than if done independently

7. To take advantage of favorable tax treatment or political incentives

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 International joint venture:

 To reduce the risk of expanding into a foreign environment

 The contribution of the local conditions, which may be essential to the

success of the venture.

Example:
US steel/ Pohang iron & Steel – steel (Product) – raise capital & expand
market

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 Reasons for the failure of JV
 The hoped – for technology never developed

 Preplanning for the joint venture was inadequate

 Agreement could not be reached on alternative

approaches to solving the basic objectives of the JV

 Managers with expertise in one company refused to

share knowledge with their counter parts in the JV

 Mgt difficulties may be compounded because of

inability of parent companies to share control or
compromise on difficult issues
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 C. SELL OFF

 Selling a part or all of the firm by any one of means:

sale, liquidation, spin-off & so on .

Or

 General term for divestiture of part/all of a firm by any

one of a no. of means: sale, liquidation, spin-off and so
on.

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 PARTIAL SELL-OFF

 A partial sell-off/slump sale, involves the sale of a

business unit or plant of one firm to another.
 It is the mirror image of a purchase of a business unit
or plant.
 From the seller’s perspective, it is a form of contraction;
 from the buyer’s point of view it is a form of expansion.

For example:
 when Coromandal Fertilizers Limited sold its cement
division to India Cement Limited, the size of
Coromandal Fertilizers contracted whereas the size of
India Cements Limited expanded.

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 Motives for Sell off

• Raising capital
• Curtailment of losses
• Strategic realignment
• Efficiency gain

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 DEMERGERS

A demerger results in the transfer by a company of one or more of

its undertakings to another company. The company whose
undertaking is transferred is called the demerged company and the
company (or the companies) to which the undertaking is
transferred is referred to as the resulting company.
A demerger may take the form of
• A spinoff or
• A split-up.
• A split off

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 DEMERGERS STRUCTURE

 Demergers are one type of spin-offs: (under/section 391)

 A = Demerging Company
 B = Resulting Company: may or may not have existed earlier
 A transfers undertaking to B
 B issues shares to shareholders of A

Transfers undertaking Y
X Y Y

Company A Shareholders of Company B

Issues shares
A
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SPIN OFF’S

 Spin-off is a transaction in which a co., distributes on

a pro-rata basis all the shares it owns in a subsidiary
to its own shareholders.

 In a spinoff an undertaking or division of a company

is spun off into an independent company.

 After the spinoff, the parent company and the spun

off company are separate corporate entities.

Ex: AT &T

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 Spin-Offs Structure

Transfer of undertaking Y
X Y Y
Consideration issue
Company A of shares Company B

 Consideration is usually shares of Company B but

maybe cash.
 Process may or may not be Court sanctioned.
 Salora spinning off Panasonic to Matsushita under
sec. 391 Scheme. Consideration in cash.
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 Feature
 No cash exchange (money is not received by the original parent).
 subsidiaries assets are not revalued.

 The transactions is treated - stock dividend and a tax-free exchange.

 Proportion of ownership:
The existing stockholders have the same proportion of ownership in
the new entity as in the original firm.

 Separation of control
 The new entity exists as a separate decision-making unit.
 It may develop policies & strategies different from those of the
original parent.

so, spin-off represents a form of a dividend to existing shareholders.

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 SPLIT – OFF


A transaction in which some, but not all, parent co.,
shareholders receive shares in a subsidiary in return for
relinquishing their parent co., share.

In other words……………….

some parent company shareholders receive the subsidiary’s

shares in return for which they must give up their parent
company shares

Features
 A portion of existing shareholders receives stock in a
subsidiary in exchange for parent co., stock.

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 SPLIT - UP
In a split-up, a company is split up into two or more independent
companies.

As a sequel, the parent company disappears as a corporate entity

and in its place two or more separate companies emerge.

In other words a transaction in which a co., spins off all of it

subsidiaries to its shareholders & ceases to exist.

Features
 The entire firm is broken up in a series of spin-offs.
 The parent no longer exists and
 Only the new offspring survive.

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 DIVESTITURES
 Represent the sale of a segment of a company
(assets, a product line, a subsidiary) to a 3rd party for
cash and or securities
Ex: VSNL
Features:
 It is used as a means of eliminating or separating:
a) Product line
b) Division
c) Subsidiary.
 It represents the sale of a segment of a co., to a 3rd
party.
 The assets are revalued, by the sale, for purpose of
future depreciation by the buyer.

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 MOTIVES FOR DIVESTITURES

 Change of focus or corporate strategy

 Unit unprofitable can mistake

 Sale to pay off leveraged finance

 Antitrust

 Need cash

 Defend against takeover

 Good price.

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 Equity carve-out

 A transaction in which a parent firm offers some of a

subsidiaries common stock to the general public, to bring
in a cash infusion to the parent without loss of control.

 In other words……………………..

 Equity carve outs are those in which some of a

subsidiaries shares are offered for a sale to the general
public, bringing an infusion of cash to the parent firm with
out loss of control

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 Features of ECO
It is the sale of a minority or majority voting control in a
subsidiary by its parents to outsider investors. These are
also referred to as “split-off IPO’s”

 A new legal entity is created.

 The equity holders in the new entity need not be the same as the
equity holders in the original seller.
 A new control group is immediately created.’

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 Difference between Spin-off and Equity carve outs:

1. In a spin off , distribution is made pro rata to shareholders of the

parent co as a dividend, a form of non cash payment to
shareholders

In equity carve out , stock of subsidiary is sold to the public

for cash which is received by parent co

2. In a spin off , parent firm no longer has control over subsidiary

assets

In equity carve out, parent sells only a minority interest in

subsidiary and retains control

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