UNIT I

CORPORATE RESTRUCTURE
Chapter 1
Corporate Restructuring
Corporate Restructuring
Restructuring is a means whereby the organisational structure is changed
so that the organisation accomplishes its objectives.Corporate Restructuring is
a term of wide importance and covers in its ambit restructuring or reorganizing
or financial restructuring of any organisation done in order to operate more
effectively and efficiently.
Corporate Restructuring is defined as the procedure that is involved in
changing the organization of a business. Corporate Restructuríng includes
making dramatic changes to business by cutting out or integration of
departments. It suggests rearranging the business for increased proficiency and
profitability. In other words, it is a comprehensive process, by which a company
can consolidate its business operations and strengthen its position for achieving
corporate objectives-synergies and continuing as a competitive and successful
entity.
Corporate restructuring is an action taken by the corporate entity to
modify its capitalstructure or its operations significantly. Generally, corporate
restructuring happens when a corporate entity is experiencing significant
problems and is in financial jeopardy.
Restructuring is the corporate management term for the act of reorganizing
the legal, ownership, operational, or other structures of a company for the
purpose of making it more profitable, or better organized for its present needs.
Other reasons for restructuring include a change of ownership or ownership
structure, demerger, or a response to a crisis or major change in the business
such as banikruptcy, repositioning, or buyout. Restructuring may also be
described as corporate restructuring, debt restructuring and financial
restructuring.
Executives involved in restructuring often hire financial and legal advisors
to assist in the transaction detail and negotiation. It may also be done bya new
CEO hired specifically to make the difficult and controversial decisions required
to save or reposition the company. It generally involves financing debt, selling
portions of the company to investors, and reorganizing or reducing operations.
The basic nature of restructuring is a zero-sum game. Strategic
restructuring reduces financial losses, simultaneously reducing tensions between
debt and equity holders to facilitate a prompt resolution of a distressed
(1)
2 LAW OF MERGER AND ACQUISITION

situation.

Coporate debt restructuring is the reorganization

outstanding liabilities. It is generally a mnechanism used by of
tacing difficulties in repaving their debts. In the process companies Companies
which ate
credit obligations are spread out over longer duration withof restructuring,
This allows company's ability to meet debt smaller the
some creditors may agree to exchange debtobligations. Also, as part ofpayments,
for some portion of
based on the principle that restructring facilities available to edquityproceSs,
.
timely and transparent matter goes a long way in
is sometimes threatened by internal
companies
ensuring their viability whiin
and external factors. This process tries
resolve the difficulties faced by the corporate
viable again. sector and enables them to beco
Corporate Restructuring is
corporates as the whole in orderconcerned about placing business
to accomplish certain prearrangedactivities of
The objective encompass the following: objectives
Orderly redirection of the firm's activities
Positioning extra cash flow from one business to
growth in another finance profitable
Misusing inter-dependence amongst current or
the corporate portfolio;-risk reduction and potential business within
" Development of core
competencies
The Scope of Corporate Restructuring
The scope of Corporate
Restructuring encompasses :
1. Enhancing economy (cost
the same to its reduction) : The status allows it to leverage
own advantage by being able to raise
lower costs. large funds at
2. Improving efficiency (profitability) :
translate into profits. Reducing the cost of capital
Note :Corporate
for different companiesRestructuring aims at different things at different
and the single common objective times
exercise is to eliminate the disadvantage in every restructuring
and combine the advantages.
Need for Corporate Restructuring
The needs for undertaking
(i) To focus on basic
Corporate Restructuring are as follows :
effective allocation of managerial strengths, operational synergy and other
(ii) Consolidation and capabilities and infrastructure;
economies of scale by expansion and
diversion to exploit extended domestic
(iüi) Revival and rehabilitation of and global markets;
the sick unit with profit of a a sick unit by adjusting
healthy company; losses of
(iv) Acquiring the constant supply of
scientific research and technological raw materials and access to
(v) Capital restructuring by adevelopments;
equity funds to decrease the cost of suitable combination of loan and
capital employed; servicing and improve retum On
 cORPORATE RESTRUCTURE 3

(vi) Improve corporate performance to bring it on par with

competitors by adopting the readical changes brought out by infornation
technology.
Characteristics of Corporate Restructuring8
(I) To inmprove the balance sheet of the company (by disposing of the
unprofitable division from its core business);
(2) Staff reduction (by closing down or selling off the unprofitable
portion),
(3) Changes in corporate management;
(4) Disposing of the underutilised assets, such as brands/patent rights;
(5) Outsourcing its operations such as technical support and payrol!
management to a more efficient third party:
(6) Shifting of operations such as moving of manufacturing operations to
lower-cost locations;
(7) Reorganising functions such as marketing, sales, and distribution;
(8) Renegotiating labour contracts to reduce overhead;
(9) Rescheduling or refinancing of debt to minimise the interest payments:
(10) Conducting a public relations campaign at large to reposition the
company with its consumers.

Important Aspects to be Considered in Corporate Restructuring

Strategies
(1) Legal and procedural issues
(2) Accounting aspects
(3) Human and Cultural synergies
(4) Valuation and funding
(5) Taxation and Stamp duty aspects
(6) Competition aspects etc.
Types of Corporate Restructuring
1. Financial Restructuring.This type of restructuring may take place
due to a severe fall in the overall sales because of the adverse economic
conditions. Here, the corporate entity may alter its equity pattern, debt-servicing
schedule, the equity holdings, and cross-holding pattern. Al this is done to
sustain the market and the profitability of the company.
2. Organisational Restructuring,-The Organisational Restructuring
implies a change in the organisational structure of a company, such as reducing
its level of the hierarchy, redesingning the job positions, downsizing the
employees, and changing the reporting relationship. This type of restructuring
is done to cut down the cost and to pay off the outstanding debt to continue
with the business operations in some manner.
Reasons for Corporate Restructuring
Corporate restructuring is implemented in the following situations :
(1) Change in the Strategy.-The management of the distressed entity
 IAW OF
A4FRGER ANID AC (QUISTON

pertormance hy
attenys to
divistos and
npove
subsiaries
its whichh do
not align with
he
eliminating Ite
company he subsidiaries
division or
may not core
strategicall
of the with the company's long--term vision. slrate
entity decides
to fous on its core strategy
oporale
otential buyers. and
Such assets to the
undertaking may not
Profits.-lhe beenough
dipOne
(2) Lack of of capilal of the company and may profit
to cover the cost performance of the cause making
kosses. The poot undertaking
taken by the management to start
may be he econeri
a wong
the
decisions
decline in the profitability of the undertaking due the
to the
resuk
division of
increasing costs. ox
in custonmer necds or chatigg
Synergy.-This concept is in contrast to
(3) Revese the
synergy, where
the value of a merged unit is more than
individual units collectively. According
to reverse principle o
the value
individual unit may be more than the merged unit. the synergy, of
of an
of the common reasons for
This is vae
divesting the assets of the company. Theone
concemed entity may decide that by divesting a division to
it
party can fetch more value rather than owning a third
(4) Cash Flow Requirement.-Disposing of an
undertaking can provide a considerable cash inflow to the unprodutive
If the concerned corporate entity is facing some company.
complexity
cbtaining finance, disposing of an asset is an approach i n nin
raise money and to reduce debt.

Objectives of Corporate Restructuring

(1) Nature of Business/Strategy
During economical structure changes, the nature of business reauirod..
little change in their product and services, to explore the market and keen
company existence of the brand, to reach new customers.
For instance, if the company is expanding to the international market. they
have to change the staff and required skilled people to handle the consequences
during routing work.
(2) Improving Bottom Line
Companies usually run different divisions to cover the market
capitalization and earn more profits, sometimes the division due to some reason
is unable to generate sufficient profit as expected, may be due to wrong decision
of the management, in that cases they are required to close the division or need
major change or restructuring.to improve the Bottom Line.
(3) Improving Cash Flow
The sales of division which is not performing as
requirement need to be sold out, this decision will improve thepercompany
the mark
cas
flow and help the books and other running
division.
This will also help the management to expand the
assets is a good approach for the nanagement to division, Se's
reduce debt also.
 CORPORATE RESTRUURE

The techniques or methods adopted in corpaorate restructuring

(Types of corporate restrueturing)
Corporate Restructurtng Technique

Expansion Techniques Divestment Techniques Other Techniques

Mergers Sell-of(Hive-off) Going Private
Takeovers Demerger (Spin-of) Share Repurchase
loint Venture Slump Sale Management Buy-in
Strategic Alliances Management Buy-out Reverse Merger
Franchising Leveraged Buy-out Equity Carveout
PRs Liquidation
Holding Companies
Takeover by Reverse Bid
Types of Corporate Restructuring Strategies
Various types of corporate restructuring strategies include 1. Merger 2.
Demerger 3. Reverse Mergers 4. Disinvestment 5. Takeovers 6. Joint venture 7.
Strategic alliance 8. Franchising 9. Slump Sale
1. Merger
The merger is the combination of two or more companies which can be
merged together either by way of amalgamation or absorption or by the
formation of a new company. The combining of two or more companies is
generally by offering the stockholders of one company securities to the
acquiring company in exchange for the surrender of their stock.
Kinds of Merger
Mergers may be
"Horizontal Merger.It is amerger of two or more companies that
compete in the same industry. It is a merger with a direct competitor
and hence expands the firm's operations in the same industry.
Vertical Merger.,It is kind of merger that takes place on the
combination of two companies that are operating in the same industry
but at diverse stages of production or distribution system. If any
company takes over its supplier/producers of raw materials, then it
may result in backward integration. On other hand, forward integration
also results if a company agrees to take over the retailer or Customer
Company.
Congeneric Merger.--It is the type of merger, where two companies are
in the same or related industries but do not offer the same products, but
related products and may share similar distribution channels, providing
synergies for the merger.
" Conglomerate Merger.-These mergers involve firms engaged in an
unrelated type of activities ie. the business of two comparies are not
related to each other horizontally or vertically. In a pure conglomerate,
 IAW O MERGER AND ACOUISITION

thee aent any important common factors between

pduction, marketing, research and
development, comparnies in
Conglomerate mergers are the merger of various and
Lunder one flagshi company.
2. Demerger
types of
(ebuschnolinengesogy.
The demerger is a type of corporaBe restructuring
business actions are separated into one or more mechanism wherein an
Demerger is adopted as a business strategy to
separate entityn
dontcomfortably merge with cach other.
Two businesses may have different strategies,
business which
operational
needs which are difficult to fulfill while they are still linked or
They may even be competing with each other for businese regulatory
A demerger is a form of reorganization where
one company or group are separated out into several
business activities
Each business will usually have the same ultimatecompanies or groups. by
Owned
A demerger may also be a step towards sale to thirdownership as before.
The demerger refers to a situation, where an party.
transferred to a separate company and decided to undertaking
run into as
is separated
and
unit from the earlier enterprise. an
The demerger is also called as 'spin-off or "hiving
independent
By demerging the business activities, off.
more corporate bodies with separation of a corporate body splits into two or
The strategic reasons resulting for management and accountability.
(i) Restructuring the existing
demerger may be as follows :
business, by segregating different
uncommon activities into differernt corporate
bodies;
(ü) Separation of management of
(iü) Introduction of the concept different
of
undertakings;
accountability: responsibility accounting and
(vi) Protection of business
which are continuously incurringfrom high risk activities and undertakings
cash losses;
(v) Bringing clear lines of
management;
(vi) Protection of crown jewel
takeover; from the predator through hostle
(viü) Avoidance of frequent
agencies in business; interference of government and 15
(vii) Division of family
(xi) TapPping more
managed business;
opportunities and counter against threas,
() Separation of unwanted
activities; activities and to concentrate On co
(xi) Enable
The potential management buy-out.
(i) Loss ofdisadvantages of demergers are as follows :
economies of scale;
(ii) Lower turnover
and profitability;
 CORPORATE RESTRUCTURE 7

(ii) Increase in overhead;

(iv) Loss of benefits from synergy; and
(v) Loss of ability to raise extra finances.
3. Revese Merger
The reverse merger is the opportunity for the unlisted cornpanies to
Ieone a public listed company, without opting for Initial Public Offer (IPO).
In this process, the private company acquires majority shares of the public
Company wilh its own name.
In normal practice, it is the larger company which acquire a srmaller ne.
But in case of reverse merger it is a smaller company which acquires
the
larger company.
The reverse merger may be motivated by tax benefits available whenever
at least one of the companies in deal has accumulated Joss or unabsorbed
expenses/allowance that can be carried forward and set off against future profit
of the amalgamated company.
The takeover by the smaller firm would also be more appropriate if it had
the better record and more promising future. In some cases the smaller
company is listed but the larger company is not and, therefore, in order to keep
the listing, without having to pay costs in obtaining a new one, the smaller
listed company makes the acquisition.
The restructuring through reverse merger process is carried on following
three steps :
() Capital reduction of the losing company to writ-off the share
capital not represented by assets;
(ii) Consolidation of shares after capital reduction to make face
value of shares of the acquirer at par with that of the target;
(ii) Change of name after merger to publicize the name of the
target.
4. Acquisition
"An acquisition", according to Krishnamurti and Vishwanath (2008) "is the
purchase of by one company (the acquirer) or a substantial part of the assets or
the securities of another (target company). The purchase may be a division of
the target company or a large part (or all) of the target company's voting
shares." Acquisitions are often made as part of a company's growth strategy
whereby it is more beneficial to take over an existing firm's operations and
niche compared to expanding on its own. Acquisitions are often paid in cash,
the acquiring company's shares or a combination of both. Further, an acquisition
may be friendly or hostile. In the former case, the companies cooperate in
negotiations; in the latter case, the takeover target is unwilling to be bought or
the target's board has no prior knowledge of the offer. Acquisition usually refers
to a purchase of a smaller firm by alarger one. Sometimes, however, a smaller
fim will acquire managementcontrol of a larger or longer established company
and keep its name for the combined entity. This is known as a reverse takeover.
 LAW OF
MERGER AND ACQUISITION

over
$ T a k e o e r

when an
Nqurer takes the
Takote (NYIN
kown as an
acquisition, control of
It is alen the
(nyant

The Tvpe of
lakever

hostile takeover.
larm
friendl or
Bma be a this type, one company takes over he
takeover. In
with the permission of the board.
Priendty

the target compan

Hostile
takeover.-n this tvpe, one company takes over ihe
knowledge and
managener
without its against the
( the target
company
wimaNagt
sh of he
managemnt
hee
Venture (V)
A Joint
an entity formed by two or
A joint enture istogether. more
undertake financial act
The parties agree to contribute
and share the revenues, expernses, and control of
Cornpanito es to
equity
amaynewheentitv the form
a project-based joint venture or functional-based joint venture. company. n
Project-based joint venture : The joint venture entered
companies in order to achieve a
specific task in known as into by he
project-based
Functional-based joint venture : The joint venture entered
jV.
mutual benefit is known as into he
companies in order to achieve
functiona]1-based
All joint ventures are typically characterized by two or more ventures
jV.
being bound by a contractual arrangement which establishes joint control.
The contractual arrangements establish joints control over the
venturers.
joint
Such an arrangement ensures that no single venturer is in a position i
unilaterally control the activity.
Joint venture may give protective or participating rights to the parties to
the venture.
Protective rights merely allow a coventurer to protect its interests in the
venture in situation where its interests are likely to be adversely affected.
Joint venture is a form of business combination in which two unaffiliated
business fims contribute financial and/or physical assets, as well as personnel,
to a new comparny formed to engage in some economic activity, such as the
production or marketing of a product.
Joint venture can be formned between a domestic company and
enterprise in order to flow the skills and knowledge both the toegt
7. Divestitures
ways.
Divestitures are considered as one of the important techniques in conpoe
restructuring.
Divestiturs do not deal with acquisition or combination but they
frequentBy examine the various recently acquired assets and divisions to
determine whether the assets or divisions fit into overall corporate strategyin
value maximization and its
If it does not serve
future plans.
the purpose, such are hived of.
assets or divisions
 cORPORATE RESTRUCTURE 9

BIFR had also encouraged this method of take over for rehabilitation and
revival of sick industrial compounds
8. Sell-Offs
A sell-off, also known as a divestiture, is the outright sale of
a conpany
subsidiary. Normally, sell-offs are done because the subsidiary doesn't fifinto
the parent company's core strategy. The market may be undervaluing the
combined businesses due to a lack of synergy between the parent and
subsidiary. As a result, management and the board decide that the subsidiary is
better off under diferent ownership.
Beside getting rid of an unwanted subsidiary, sell-offs also raise cash,
which can be used to pay off debt. In the late 980s and early 1990s, corporate
raiders would use debt to finance acquisitions. Then, after making a purchase
they would sell-off its subsidiaries to raise cash to service the debt. The raiders'
method certainly makes sense if the sum of the parts is greater than the whole.
When it isn't, deals are unsuccessful.
In a strategic planing process, a company can take decision to concentrate
on core business activities by selling off the non-crore business divisions.
A sell-off is a sale of part of the organization to a third party in the
following circumstances :
(1) To come out of shortage of cash and severe liquidity problems;
(i) Toconcentrate on core business activities;
(ii) To protect the firm from takeover activities by selling-off the
desirable division to the bidder;
(iv) To improve the profitability of the firm by selling-off
loss-making divisions;
(v) To increase the efficiency of men, machines and money:
(vi) To facilitate the promising activities with enough funds by
sell-off non-performing assets;
(vii)To reduce the business risk by selling-off the high risk activities.
9. Strategic Alliance
Any agreement between two or more parties to collaborate with each
other, in order to achieve certain objectives while continuing to remain
independent organizations is called a strategic alliance.
Strategic alliance is a relationship between two or more parties to pursue
a set of agreed upon goals or to meet a critical business need while remairing
independernt organisations.
Some of the feature of strategic alliance are as follows :
(i) It aimns for a synergy where each partner hopes that the benefits
from the alliance will be greater than those from individual efforts.
(iü) Alliance often involves technology transfer, economic
specialisation, shared expenses, reduction in cost, etc.
(ii) It is gaining importance in infrastructure sectors.
(iv) Strategic alliance aims to pool the resources and facilitate
innovative ideas and techniques while implementing large projects.
 ANDACQUISITION
10 LAW OF MERGER

(v) I coud help ompany to develop a more effective process

develop an advantage over a
new market or
epand into a
among other possib1lities. competito
10. Slum Sale undertaking ae
Slumpor sale meanssum transter of one or more
the consideration
the sale a hump without value being assigned to he

indvidual assets and

liabilities in such sales.
Both demerger and slump sale results in hiving of a division Or
differences which are as followe
undertaking but there are various
1. In casc of slump sale values are not assigned to individual assets and
iabilities and the sale of undertaking is for a
consideration. In demerger, valuation of individual lump sum
assets and
iabilities are mandatory.
2. In case of demerger, the resulting company has to continue the
business of transferred undertaking of demerged company, whereas
in slump sale it is not so.
3. Demerger results into reorganization of capital, whereas slump sale
does not result in reorganization of capital.
4. In case of demerger, the shareholders of demerged company has to ha
issued shares of resulting company and in case of slump sale fhe
issue of shares does not take place.
When acompany sells or disposes the whole or substantially the whole of
the undertaking for a predetermined lumpsum amount as sale consideration is
called 'slump sale'.
The acquirer may be interested in purchase of an urndertaking or part of it
as a going concern and the acquirer is not interested in taking the whole
Company as part of the transaction.
While fixing the selling price, the value of assets are not individually
counted and the liabilities are not separately considered while fixing the slump
price.
A business transfer agreement will be entered into between the
and seller and the hive-off deal passes the title for both movable and acquirer
and the related liabilities as a 'going concern'. properties
11. Compromise and Arrangement
The word arrangement means reorganization of share
company by consolidation of shares of different classes or divisioncapital of the
classes of shares or both. into different
On the other hand, compromise presupposes the
which it seeks to settle. existence of a dispue
The word arrangement has a wider
compromise. meaning when compared
12. Absorption
Absorption, the other type of merger, is nothing but
company's identity into other company's identility. dissolution o
As the name suggest,
 CORPORATE RESTRUCUE 11

absorption, a company absorbs other company to fron anew

13. Consolidation
larger entity.
Consolidation creates anew company. Stockholders of
must approve the consolidation. Subsequent both companies
common equity shares to the approval, they receive
in the new firm. For example, in
Traveler's Insurance Group announced 1998, Citicorp
a consolidation,, which resulted andin
itigroup.
14. Buy-back
Buy-back is used as restructuring strategy so as
share of the company. Strategy used to increase to increase earning per
as sub-division of shares, which is also market price of share is called
or type of corporate restructuring
15. Dis-investment
It is the act of the organisation or
liquidating an asset or subsidiary, this ascompany or government for selling or
known as dis-investrment.
16. Alliances agreement
Alliance agreement is one of the regular
restructuring. arrangement of corporate
The purpose is to reduce cost by sharing technology, product marketing
strategy, capital etc.
Aliance agreement is executed between two or more corporate
acertain task. Some of the oil sector and to achieve
infrastructure company are a good
example of a strategicalliance.
An 'alliance'is defined as associations to
further the common interests of
the members.
Strategic alliance is an arrangement or agreement under which two or
more firms cooperate in order to achieve certain commercial objectives.
The motives behind strategic alliances is to reduce cost,
technology
sharing, product development, market access, availability of capital, risk sharing
etc.
The concept of 'alliance' is gaining importance in infrastructure
sectors,
more particularly in the areas of power,, oil and gas.
The basic objective is to facilitate transfer of technology while
implementing large objectives.
The resultant benefits are shared in proportion to the contribution made by
each party in achieving the targets.
In strategic alliance, two or more firms that unite to pursue a set of agreed
upon goals, remain independent subsequent to the formation of an alliance.
The strategic alliances are generally in the forms like joint venture,
franchising, supply agreement, purchase agreement, distribution agreement,
marketing agreement, management contract, technical service agreement,
licensing of technology/patent/trade mark/design etc.
17. Equity Carve-out
It is a situation where a parent comnpany sells portion of its equity in a
12 LAW OF MERGER AND ACQUISITION

wholly owned subsidiary to the general publit or to a strategic investor.

An eqity carveout enables the parent company to generate cash inflow
which can be used for further investments.
In a spin-off, the slhare received from the acqirer of undertaking is
distributed among the existing shareholders of the parernt company.
But in equity carve-out the shares of the parent company are sold out to
outside investors.
Morr and more companies are using equity carve-outs to boost
shareholder value. Aparent firm makes a subsidiary public through an initial
public offering (PO) of shares, amounting to a partial sell-off. A new
publicly-listed company is created, but the parent company keeps a controlling
stake in the newly traded subsidiary.
one of its
A carve-out is a strategic avenue a parent firm may take when
subsidiaries is growing faster and carrying higher valuations than other
businesses owned by the parent firm. A carve-out generates cash because shares
of
in the subsidiary are sold to the public, but the issue also unlocks the value
the subsidiary unit and enhances the parent firm's shareholder value.
The new legal entity of a carve-out has a separate board, but in most
carve-outs, the parent firm retains some control. In these cases, some portion of
the parent firm's board of directors may be shared. Since the parent firm has a
controlling stake, meaning both firms have common shareholders, the
connection between the two will likely be strong.
That said, sometimes companies carve-out a subsidiary not because it's
doing well, but because it is a burden. Such an intention won't lead to a
successful result, especially if a carved-out subsidiary is too loaded with debt,
or had trouble even when it was a part of the parent company and is lacking
an established track record for growing revenues and profits.
Carve-out can also create unexpected friction between the parent and
subsidiary. Problems can arise as managers of the carved-out company must be
accountable to their public shareholders as well as the owners of the parent
company. This can create divided loyalties.
18. Corporate turnaround
This is the transaction in which the group of people or an expert team or
organization control the company shares over a period of time of for daily basis.
In the projects line company engages similar kind of company to execute
the work for them on back to back basis. The engaged company uses the
trademark and assets of the principal company.
Corporate restructuring allows the company to stand in the difficult
situation and run the company as well as keep the faith of the shareholder.
Restructuring helps the debtors topayout the loans and help improve the
confidence of the banks and financial institutes.

19. Franchising
Franchising is to be defined as an arrangement wherein one party
((ranchiser) allows another party (franchisee) the right to use its trade name
 (ORPORATE RESTRUICTURE
along with definile business system and procedure, to produce
goods or services along with certain speciflcations. The and market the
aone-tine franchise fee plus a % of sales revenue in franchise generally pays
terms of royalty and gains
Franchising provides an immediate access to business operation and
trchnology in profitable fields of operations.
It is an important means of doing business in
several countries and
represents an elfective combination of the advantages of large business with the
motivation and adaptation capabilities of small or medium scale
It also enables linkages of large and small businesses enterprises.
of vertical division of labour. within a frarnework
The concept of frarnchising is quite comprehensive and covers
range of marketing and distribution arrangements for goods and an extensive
services.
Franchises are becoming a key mechanism for technological, narketing
and service linkages between enterprises within a country as
well as globally.
20. Intellectual Property Rights
The worth of a company lies more in its intangible assets
(patents,
trademarks, brands, copyrights etc.) than tangible assets (land, building,
and machinery). plant
The intellectual property rights give real value to a company.
Patents, trademarks and strong brands lead to higher sales, economies of
scale and profits.
Some business gains, however, instead of investing efforts, time and
money in research and development for new patents, trademarks and brands,
prefer to buy these from companies or go to the extent of acquiring the
companies themselves.
21. Holding Companies
A holding company enjoys controlling interest in the subsidiary by
acquiring substantial voting power in the form of equity shares carrying voting
rights.
When the holding company acquires 100ovoting power in subsidiary, it is
called 'wholly owned subsidiary'.
Acquisition of controlling interest in subsidiary by holding company is
form of combination and can also be used as a technique of restructuring.
The holding company is also called as 'parent' enterprise.
22. Going Private
In a restructure program, the management of the widely held company
may decide to go private by purchase of stocks from the outside public and
delisting the shares in the stock excharnges where the shares are traded.
By going private, a company can avoid the predators from bidding the
company.
It can avoid the listing fees of the stock exchanges and when the company
is in finarncial difficulties this will avoid the fall in share prices.
It facilitates to avoid the declaration of periodical results for general public.
14
LAW OF MERGER AND ACQUISIION

By keeping-otf fronm the public, trade secrecy can be

maintalned.
23. Liquidation
Abusiness may go into decine when
l0sses are made over
The losses are setoff against past several
profits retained in the business years.
but clearly the situation cannot eontinue for very long
In such case liquidation of conpany may be imminent.
(reserves),
In case of technological obsolescence, lack of market for
products, financial losses, cash shortages, lack of the company's
may decide to liquidate the business to stop furthermanagerial skills, the owner
aggravation
With a strategic motive also, a business unit may be of losses,
liquidated.
24. Takeover by Reverse Bid
Normally, a large company takeover a small company.
But when asmall company acquires a big company, in a
such situation is called 'takeover by reverse bid. takeover mode,
This would be possible when the substantial
small company or its directors. shares are in the control of
It would also be possible when the small
and big company is a sick company. company is a cash rich company
The takeover by reverse bid enables the
of scale. acquirer to exploit the economies
25. Spino-ffs
A spin-off occurs when a subsidiary becomes
parent firm distributes shares of the subsidiary an independent entity. The
stock dividend. Since this transaction is a to its shareholders through a
dividend
generated. Thus, spin-offs are unlikely to be used whendistribution, no cash is
growth or deals. Like the care-out, the a firm needs to finance
entity with a distinct management and board.subsidiary becomes a separate legal
Like carve-outs, spin-offs are
In most cases, spin-offs unlock usually about separating a healthy operation.
hidden shareholder value. For the parent
company, it sharpens management focus.
management doesn't have to compete for the For the spin-off company,
parent's
Once they are set free, managers can explore attention and capital.
new opportunities.
Investors, however, should beware of
firm created to separate legal liability or to throw-away
off-load
subsidiaries the parent
are issued to parent company shareholders, some debt. Once spin-off shares
to quickly dump these shares on the market, depressingshareholders may be tempted
the share valuation.
26. Tracking Stock
A tracking stock is a special type of stock
issued by a publicly held
company to track the value of one segment of that company.
the different segments of the company to be valued The stock allows
Let's say a slow-growth company trading at a lowdifferently by investors.
(P/E ratio) happens to have a fast growing business unit. Theprice-earnings ratio
issue atracking stock so the market can value the new business company might
separately from
 CORPORATE RESTRUCTURE 15

the old one and at a significantly higher P/E rating.

Why would a firnm issue a tracking stock rather than spinning-off or
carving-out its fast growth busincss for shareholders? The company retains
control over the subsidiary; the two businesses can continue to enjoy synergies
and share marketing, administrative support functions a headquarters and so
(on. Finally, and most importantly, if the tracking stock climbs in value the
parent company can use the tracking stock it owns to make acquisitions.
Still, shareholders need to remember that tracking stocks are class
meaning they don't grant shareholders the same voting right as those of theB,
main stock. Each share of tracking stock may have only a half or a quarter of
vote. In rare cases holders of tracking stock have no vote at all. a
27. Management Buy-In (MBI)
The management team who have got special skills will search out and
purchase business, to their interested area, which has considerable potential but
that has not been run to its full advantage due to lack of managerial and
technical skills, fails to establish the market for the company's products.
After the identification of suitable unit for purchase, the management team
will make arrangements with the venture capitalist for finance.
The management team will generally have lesser funds for investment
and,
unit.
therefore, debt component will be more in their purchase of the business
The MBI is just reverse to MBO. In MBI, the management of other concern,
not the management of the same company, acquires the majority shareholding
and thus the existing management of the concern has to leave the concern.
28. Management Buy-Out (MBO)
MBO is the purchase of the business by its management when the existing
owners are trying to sell business to the third parties due to its slow growth or
lack of managerial skills in running the business.
The existing managers will come forward to purchase and run the
business by taking it over from the owners.
In a MBO, the managers purchase all or part of the business from its owners.
The management team will take substantial controlling interest from the
existing owners whoare having control over the affairs of the company.
The management team may consist of one or more directors and
employees, either with or without inviting for external associates.
It is a method of setting up of business by the management team itself.
The cases of MBO occurs when the existing owners are unable to run the
company successfully and when the very existence of the company is at stake.
The MBOs are used in restructuring the business and to tide over the
recessionary tenderncy in business.
29: Leveraged Buy-Out (LBO)
An LBO is defined as the acquisition of an operating company with the
funds derived primarily from debt financing, by a small group o investors'.
In LBO, debt financing typically represents 50% or more of purchase price.
16 IAW OF NIRGER AN) A QUISITION

The consideration for BO is a miv of debt and equitycomponents wwith

high graring
The detbt is seud by the aseets of the acquired firm and
amortis over a e d of less than ten years.
is usualy
In atypical BOrogram, he acquiring group consists of a small numhe
of persons or organizations sponsoted by buy-out specialists or
hankers. investrnent
lhis groups, with the help of certain financial instruments like
hugh-rnsk debt instruments ((unk bonds), deferred payment instrurments, high-yield,
private
rdacement instruments, bridge financing, loans from venture capitalists
menhant bankers etc., acquire all or nearly all the outstanding shares of the
tanget fim and takes the target firm private.
The buy-out group may or may not include current management of the
tanget firnm.
The typical targets for an LBO include any of the folldwing :
(i)) If the company does not have share-holding more than 51%;
(i) If the company is over leveraging with the debt components
nearing to maturity:
(ii) If the company has diversified into unrelated areas and thus
facing problems;
(iv) If the company is earning low operating profits due to poor
management and there is a possibility of turnaround,;
(v) If the company is having an asset structure which is grossly
under-utilized;
(vi) If the company's present management is facing managerial
incompetence.