 Restructuring ◦ To give a new structure ◦ To rebuild or rearrange  Corporate restructuring ◦ Consolidate business operations ◦ Strengthen its position in the market ◦ To achieve corporate objectives

 India – highly regulated economy  Government participation and intervention  Closed economy ◦ Demand supply not allowed to rule the market  Restrictive government policies  Rigid regulatory framework  Not much scope for corporate restructuring

 To achieve faster economic growth  Industrial policy, 1991  Opening up of the economy  Industrial licensing relaxed  Foreign investment encouraged  Transfer of foreign technology  Indian corporate sector started restructuring to meet the opportunities and challenges of competition

 Market oriented globalized economy  Easy and free flow of technology, capital and expertise  Restructuring ◦ Tata Steel – Corus group ◦ Hindalco – Novelis ◦ Mittal Steel – Arcelor ◦ Vodafone – Hutch-Essar

 Redirection of firm’s activities  Deploy surplus cash from one business to finance growth in another  Exploit interdependence among businesses within the corporate structure  Risk reduction  Develop core competencies  Cost cutting and Value addition – key to succeed in a competitive environment

 Organic growth ◦ The growth rate that a company can achieve by increasing output and enhancing sales.  Inorganic growth ◦ Arises from mergers or takeovers, rather than an increase in the companies own business activity.  gain access to new markets  fresh ideas available through successful mergers and acquisitions

 Developing new business areas ◦ May or may not be connected with its traditional business areas  Exploiting some competitive advantage it has

 Three alternatives: 1. Formation of a new company 2. Acquisition of an existing company 3. Merger with an existing company  Decision would depend on: ◦ Cost ◦ Likelihood of success ◦ Degree of managerial control

 Growth of mergers, acquisitions and corporate restructuring ◦ $ 4.5 Billion ◦ $ 62 Billion (971 deals) ◦ 2012 (first 4 months) $ 23 Billion (396 deals)  2005 – year of mergers and acquisitions ◦ India - $ 13 billion

 Merger – unification of 2 entities into one  Amalgamation – by merger of companies under Companies Act  Acquisition ◦ One entity buying out another and absorbing the same. ◦ Acquisition through take over - regulated by SEBI

 Acquisition ◦ Both acquiring and acquired companies are still left standing as separate entities  Merger ◦ Legal dissolution of one of the companies  Consolidation ◦ Dissolves both parties and creates a new one

 Started by Lord Swaraj Paul ◦ Takeover of Escorts  Some major takeovers ◦ Ashok Leyland by Hindujas ◦ Ceat Tyre by Goenkas ◦ Consolidated Coffee by Tata Tea

 Interest of general public  Promotion of industry and trade  Government - Safeguard interest of citizens, consumers, investors and shareholders, creditors, workers.

 Reconstruction / Compromise / Arrangement ◦ Sec. 391 – 394 of the Companies Act  Acquisition ◦ Sec. 395  Amalgamation ◦ Sec. 396  Reconstruction of sick industrial company ◦ Sec. 17, 18 of the Sick Industries (Special Provisions) Act.  Revival of financially unviable companies ◦ Sec. 72A of Income Tax Act, 1961

 Relevant provisions of:  FEMA, 2000  Income Tax Act, 1961  Industries (Development and Regulation) Act, 1973  The Competition Act, 2002  SEBI Act, 1992  Restrictions imposed by any other relevant Act

 One company involved – rights of shareholder and creditors are varied ◦ Reconstruction ◦ Reorganization ◦ Scheme of arrangement  Two or more existing companies – fused into one by merger or one company taking over another ◦ Amalgamation ◦ Shareholders of each blending company become substantially the shareholders of the company which is to carry on the blended undertaking

 Fusion of two companies  Dissolution of one or more companies / firms / proprietorships ◦ Form or get absorbed into another company  Merger increases the size of the undertaking

 Two companies in the same industry  Market share of new consolidated company would be larger  Closer to being a monopoly / near monopoly - to avoid competition  Economies of scale / economies of scope  Eg.

 Two companies – different stages of industrial or production process  A (potential) ‘buyer – seller’ relationship  Lower transaction costs  Demand – supply synchronization  Independence and self sufficiency  Eg.

 Firms engaged in unrelated type of business operations ◦ Business activities not related either horizontally, or vertically  No important common factors ◦ Production / marketing / research and development  Unification of different kinds of businesses ◦ One flagship company  Foray into varied businesses ◦ Without having to incur large start-up costs

 Purpose ◦ Utilization of financial resources ◦ Enlarged debt capacity ◦ Synergy of managerial functions  Leads to increase in the value of outstanding shares by ◦ increased leverage and earnings per share, and ◦ lowering the average cost of capital  Eg.

 Acquirer and target companies are related through ◦ Basic technologies ◦ Productions processes ◦ Markets  Acquired company represents an extension of ◦ Product line ◦ Market participants ◦ Technologies

 Outward movement by acquirer ◦ from its current business scenario ◦ to other related business activities  Eg.

 Also known as a ‘cash-out merger’  The shareholders of one entity receive cash in place of shares in the merged entity.  Common practice in cases where the shareholders of one of the merging entities do not want to be a part of the merged entity.

 For regulatory and tax reasons.  A tripartite arrangement ◦ the target merges with a subsidiary of the acquirer.  Based on which entity is the survivor after such merger, a triangular merger may be ◦ forward (when the target merges into the subsidiary and the subsidiary survives), or ◦ reverse (when the subsidiary merges into the target and the target survives).

 Involves acquisition of a public (shell) company by a private company ◦ Public company may have little or no assets ◦ Only the internal structure and shareholders exist  Also called ‘back door listing’ ◦ Helps the private company to by pass lengthy and complex process in order to go pubic ◦ Without incurring huge expenses

 Easy access to capital market  Increase in visibility of company  Tax benefits on carry forward losses (of the acquired public company)  Cheaper and easier route to become a public company

 Downstream merger ◦ Merger of parent company into its subsidiary  Upstream merger ◦ Merger of subsidiary company into its parent company

 Synergistic operating economics  Growth  Diversification  Taxation  Consolidation of production capacities  Increasing market power

 Synergy defined as ◦ V (AB) > V(A) + V(B)  Combined value of 2 entities > addition of their individual values  Increase in performance of the combined firm ◦ Result of complimentary services  And / Or ◦ Economies of scale

 Complimentary activities ◦ One company with an efficient production system ◦ Other with a good networking of branches  Economies of scale ◦ Lower average cost of production – reduction in overhead costs  Real economies ◦ Reduction in factor input per unit of output  Pecuniary economies ◦ Lower prices for factor inputs due to bulk transactions

 Enables firm to grow at a faster rate than organic growth  Shortening of ‘Time to Market’ - Avoid delays associated with ◦ Purchasing of building ◦ Site preparation ◦ Setting up of plant ◦ Hiring personnel ◦ Supply chain

 Merger between 2 unrelated companies ◦ Reduction in business risk ◦ Increase market value  Combination of independent or negatively correlated income streams of merged companies ◦ Higher reduction in business risk

 Set off and carry forward of business losses as per Income Tax Act, 1961  Tax saving or tax reduction of merged entity

 Increase in production capacity ◦ By combining 2 or more plants  Reduced competition ◦ Leads to increase in marketing power

 Increase in financial strength  Advantage of brand equity  Competitive advantage  Eliminate / weaken competition  Revival of sick company  Survival

 Enhance value for shareholders for both companies ◦ Greater access to market resources  Increased market share ◦ Higher control on price ◦ Increase in profitability  Increased bargaining power ◦ Labour, suppliers,

 Increase in volume of production ◦ Ratio of output – input improves ◦ Lower cost of production per unit ◦ No increase in fixed costs  Optimum utilization of management resources  Competitive advantage ◦ Reduce price – increase market share ◦ Maintain price – higher profits

 Avoid overlapping functions  Eliminate duplicate channels ◦ Integrated planning and control system  Common R&D facilities

 Deployment of surplus cash  Enhanced debt capacity  Low cost of financing  Stability of cash flows  Borrow at lower interest rates

 Exploit existing brand name ◦ Buy existing manufacturing unit ◦ Higher market share  Takeover company with a strong brand name ◦ Increase market share for own products

 Diversify into various segments  Growth through combination of unrelated companies / products  Widen growth opportunities  Smoothen ups and downs of product life cycles

 Complementary nature of companies ◦ Commercial strength ◦ Geographical profiles  Increase cost effectiveness and efficiency  Optimal utilization ◦ Infrastructural and manufacturing assets ◦ Utilities and other resources

 Substantial cost saving  Standardization and simplification of business processes  Elimination of duplication  Eliminate disadvantage of each company

 Loss making company – carry forward losses ◦ Merged with another company ◦ Absorbs tax liability of the latter  Company – modernizing or investing in P&M – investment incentives ◦ Not much taxable profits ◦ Merge with profit making company to utilise the investment incentives

 Mergers limit or restrict competition  Company becomes a monopoly / near monopoly ◦ Price benefits ◦ Market share