Module -1

Corporate Restructuring

Corporate restructuring is the process of reorganizing a company's management, finances,

and operations to improve the efficiency and effectiveness of the company. Changes in this
area can help a company increase productivity, improve the quality of products and services,
and reduce costs. They can also help a company better serve the needs of its customers and
shareholders. Restructuring businesses may also result in the closure of underperforming or
unprofitable business units.

Types of Corporate Restructuring

Financial Restructuring: This type of restructuring may take place due to a severe fall in the
overall sales because of adverse economic conditions. Here, the corporate entity may alter its
equity pattern, debt-servicing schedule, equity holdings, and cross-holding pattern. All this is
done to sustain the market and the profitability of the company.

Organisational Restructuring: Organisational Restructuring implies a change in the

organisational structure of a company, such as reducing its level of the hierarchy, redesigning
the job positions, downsizing the employees, and changing the reporting relationships. 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:

Change in the Strategy: The management of the distressed entity attempts to improve its
performance by eliminating certain divisions and subsidiaries which do not align with the
core strategy of the company. The division or subsidiaries may not appear to fit strategically
with the company’s long-term vision. Thus, the corporate entity decides to focus on its core
strategy and dispose of such assets to the potential buyers.

Lack of Profits: The undertaking may not be enough profit-making to cover the cost of
capital of the company and may cause economic losses. The poor performance of the
undertaking may be the result of a wrong decision taken by the management to start the
division or the decline in the profitability of the undertaking due to the change in customer
needs or increasing costs.

Reverse Synergy: This concept is in contrast to the principles of synergy, where the value of
a merged unit is more than the value of individual units collectively. According to reverse
synergy, the value of an individual unit may be more than the merged unit. This is one of the
common reasons for divesting the assets of the company. The concerned entity may decide
that by divesting a division to a third party can fetch more value rather than owning it.

Cash Flow Requirement: Disposing of an unproductive undertaking can provide a

considerable cash inflow to the company. If the concerned corporate entity is facing some
complexity in obtaining finance, disposing of an asset is an approach in order to raise money
and to reduce debt.

Types of Corporate Restructuring Strategies

Merger: This is the concept where two or more business entities are merged together either
by way of absorption or amalgamation or by forming a new company. The merger of two or
more business entities is generally done by the exchange of securities between the acquiring
and the target company.

Demerger: Under this corporate restructuring strategy, two or more companies are combined
into a single company to get the benefit of synergy arising out of such a merger.

Reverse Merger: In this strategy, the unlisted public companies have the opportunity to
convert into a listed public company, without opting for IPO (Initial Public offer). In this
strategy, the private company acquires a majority shareholding in the public company with its
own name.

Disinvestment: When a corporate entity sells out or liquidates an asset or subsidiary, it is

known as “divestiture”.

Takeover/Acquisition: Under this strategy, the acquiring company takes overall control of
the target company. It is also known as the Acquisition.

Joint Venture (JV): Under this strategy, an entity is formed by two or more companies to
undertake financial act together. The entity created is called the Joint Venture. Both the
parties agree to contribute in proportion as agreed to form a new entity and also share the
expenses, revenues and control of the company.

Strategic Alliance: Under this strategy, two or more entities enter into an agreement to
collaborate with each other, in order to achieve certain objectives while still acting as
independent organisations.

For example

Flipkart (2018): Flipkart restructured its ownership when Walmart acquired a 77% stake,
helping it fight Amazon in India.

Corporate Rescue

Corporate rescue refers to measures taken to help a financially distressed or failing company
recover and return to viability avoiding closure or liquidation.

The goal is to save the company, protect jobs, pay creditors, and restore business operations.

Common rescue strategies:

 Restructuring debt (renegotiating loan terms

  Bringing in new investors or equity
 Selling non-core assets
 Merging with a stronger company
 Appointing a turnaround specialist
 Government bailout or financial aid

Real-life example (India):

Jet Airways (2019–present):
Jet Airways was grounded due to unpaid debt and losses. Under India’s Insolvency and
Bankruptcy Code (IBC), a resolution plan was approved where new owners (Jalan-Kalrock
consortium) are trying to revive the airline, pay creditors, and restart operations.

Insolvency

Insolvency means a company is unable to pay its debts when they become due or its liabilities
exceed its assets.

There are two types:

 Cash-flow insolvency → not enough cash to pay bills, though assets may exist.
 Balance-sheet insolvency → liabilities are more than assets.

If insolvency is not resolved, it often leads to:

 Bankruptcy (for individuals)

 Liquidation (for companies)

Real-life insolvency example (India)

Essar Steel (2017-2019):

Essar Steel defaulted on loans of ~₹54,000 crore. Under IBC, the company was taken to
NCLT. After two years, Arcelor Mittal acquired it for ~₹42,000 crore, paying creditors and
saving operations.

Sick Industrial Companies Act, 1985

The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), was a landmark piece
of legislation in India aimed at addressing the issue of industrial sickness. It provided a
framework for the timely detection, rehabilitation, and liquidation of sick industrial
companies.
Sick Industrial Companies Act of 1985 (SICA) was an Indian law enacted to detect unviable
("sick") companies that could pose systematic financial risk.
SICA was repealed and replaced in 2003 by the Sick Industrial Companies (Special
Provisions) Repeal Act of 2003,
SICA was then fully repealed in 2016, in part because some of its provisions overlapped with
the provisions of a separate Act, the Companies Act of 2013.

Objectives of SICA

• Detect sickness & provide opportunity for survival

• Rehabilitate if feasible else help them with winding up scheme
• Expedite the process of winding up
• Safeguard the workers of the sick units as far as possible

Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code, 2016 (IBC) is India's primary bankruptcy law,
providing a consolidated framework for insolvency and bankruptcy proceedings for
companies, partnership firms, and individuals. The IBC aims to streamline insolvency
resolution, maximize the value of assets, and balance the interests of all stakeholders

 Bankruptcy → applies mainly to individuals or partnerships who cannot pay their

debts.
 Insolvency → applies to both companies and individuals; refers to the financial state
of being unable to meet obligations.

In India, the term bankruptcy is used more in the context of individuals, while insolvency is
used for companies.

It replaced earlier fragmented laws like SICA, SARFAESI, Companies Act (winding up
provisions). Provide a single, comprehensive law for insolvency resolution of corporates,
individuals, and partnerships.

The Code outlines separate insolvency resolution processes for individuals, companies and
partnership firms. The process may be initiated by either the debtor or the creditors.

Maximum time limit, For companies-180 days, which may be extended by 90 days

For start ups (other than partnership firms), small companies and other companies (with asset
less than Rs. 1 crore) - 90 days of initiation of request which may be extended by 45 days.

The Insolvency and Bankruptcy Code (Amendment) Act, 2019 has increased the mandatory
upper Time limit of 330 days

Objectives of IBC

 Consolidate and simplify insolvency and bankruptcy law.

 Ensure time-bound resolution (180–270 days).
 Maximize value of assets.
 Balance interests of all stakeholders: creditors, employees, shareholders, debtors.
 Promote entrepreneurship and availability of credit.
 Improve ease of doing business in India.
 • Insolvency regulator: The Code establishes the Insolvency and Bankruptcy Board of
India, to oversee the insolvency proceedings in the country and regulate the entities
registered under it. The Board will have 10 members, including representatives from
the Ministries of Finance and Law, and the Reserve Bank of India.

• Insolvency professionals: The insolvency process will be managed by licensed

professionals. These professionals will also control the assets of the debtor during the
insolvency process.

• Bankruptcy and Insolvency Adjudicator: The Code proposes two separate tribunals
to oversee the process of insolvency resolution, for individuals and companies:

(i) National Company Law Tribunal for Companies and Limited Liability Partnership
firms and

(ii) Debt Recovery Tribunal for individuals and partnerships

Corporate Insolvency Resolution Process (CIRP)

The Corporate Insolvency Resolution Process (CIRP) is a structured procedure under the
Insolvency and Bankruptcy Code, 2016 (IBC) in India, designed to resolve financial distress
in companies.

It aims to safeguard the interests of stakeholders while facilitating either recovery or

liquidation of the company.

The process is initiated by a financial creditor, operational creditor, or the corporate debtor
itself when a company defaults on its financial obligations.

Steps

1. Initiation: A creditor (financial or operational) or the corporate debtor itself can

initiate the CIRP by filing an application with the NCLT.
2. Appointment of Interim Resolution Professional (IRP): The NCLT appoints an
IRP within 14 days of the insolvency commencement date to manage the corporate
debtor's affairs.
3. Moratorium: A moratorium is declared, preventing further legal proceedings against
the corporate debtor.
4. Verification of Claims: The IRP collects and verifies claims from various creditors.
5. Formation of the Committee of Creditors (CoC): The IRP forms a CoC, which is
responsible for making decisions regarding the resolution plan.
6. Appointment of Resolution Professional (RP): The CoC appoints an independent
RP to handle the remaining aspects of the CIRP.
7. Preparation of Information Memorandum: The RP prepares an Information
Memorandum, which provides details about the corporate debtor's financial situation
and assets to potential investors.
 8. Resolution Plan: The RP, along with the CoC, prepares a resolution plan outlining
how the corporate debtor's debts will be resolved, whether through repayment,
restructuring, or other means.
9. Approval of Resolution Plan: The resolution plan is then voted upon by the CoC
and, if approved, is submitted to the NCLT for approval.
10. Implementation or Liquidation: If the resolution plan is approved, it is
implemented. If the resolution plan fails to gain approval, the corporate debtor may be
liquidated.

SARFAESI Act

The SARFAESI Act (Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act) was passed by the Indian Parliament in 2002 to help
banks and financial institutions recover non-performing assets (NPAs) without going
through lengthy court procedures.

It allows lenders to seize and sell the secured assets of borrowers when they default on
loans.

Objectives of the SARFAESI Act

 Enable banks/FIs to recover NPAs efficiently.

 Allow securitisation and asset reconstruction.
 Improve financial discipline among borrowers.
 Reduce pressure on the judicial system by avoiding court intervention.
 Strengthen the financial sector and reduce bad loans.

Formation of SARFAESI Act, 2002

SARFAESI Act, 2002 was circulated:

 To regulate securitization and reconstruction of financial assets.

 Enforcement of the security interest for.
 Matters connected therewith or incidental thereto(something that is not essential or
directly related to the main point, but is still connected or related to it. )

Special Purpose Vehicles (SPVs)

A Special Purpose Vehicle (SPV) is a legal entity created by a parent company for a specific,
often temporary, purpose, such as isolating financial risk or facilitating a particular
investment. It's essentially a subsidiary with a defined scope and often used for securitization,
risk management, and project financing.

Types of SPV
Limited Liability Company SPV (LLC SPV)

formed for a specific purpose. It's a distinct legal entity that acts as a container for a particular
asset or project, allowing it to be managed and financed separately from the parent company's
other operations.

Limited partnership SPV (LP SPV)

LP SPV is a legal entity, structured as a limited partnership, created by a company or group
of investors for a specific purpose, such as investing in a single company or isolating
financial risk.

Asset Reconstruction Companies (ARCs)

Asset Reconstruction Companies (ARCs) are specialized financial institutions that buy non-
performing assets (NPAs) or bad loans from banks and other financial institutions.

They help banks improve their balance sheets by offloading these distressed assets, allowing
them to focus on core lending activities. ARCs specialize in recovering or restructuring these
bad assets, with the goal of maximizing value.

Banks are financial institutions that are engaged principally in the business of money lending
and money borrowing. The customer base of the banking sector is very large and there is also
a substantial risk involved in lending money.

While the bank always has the option of taking legal action on the defaulting borrowers, it is
not always economically feasible to do so. The bank sometimes decides to just cut its losses,
clean up its balance sheet and keep the business moving towards better avenues. This is
where an Asset Reconstruction Company (ARC) comes in.

The asset reconstruction companies or ARCs are registered under the RBI and regulated
under the Securitisation and Reconstruction of Financial Assets and Enforcement of
Securities Interest Act, 2002 (SARFAESI Act, 2002).

All the rights that were held by the lender (the bank) in respect of the debt would be
transferred to the ARC. The required funds to purchase such such debts can be raised from
Qualified Buyers.

Example

Phoenix ARC - Backed by Kotak Mahindra Bank.

QIB

QIB stands for Qualified Institutional Buyer. These are institutional investors, like mutual
funds, insurance companies, or pension funds, that possess the financial expertise and
resources to make significant investments in capital markets. They are recognized by market
regulators as having the capacity to assess and invest in large opportunities.
 Characteristics of QIBs:

 Institutional Nature: They are typically entities like mutual funds, insurance companies,
pension funds, and banks.
 Regulatory Recognition: QIBs are recognized by market regulators like SEBI in India.
 Expertise: They possess advanced knowledge of financial markets and investment strategies.
 Large-scale Investments: They are capable of making significant investments in capital
markets.

Examples of QIBs:

 Mutual funds
 Insurance companies
 Pension funds
 Venture capital funds
 Alternative investment funds
 Foreign portfolio investors

Revival, rehabilitation, and restructuring of sick units

Revival, rehabilitation, and restructuring of sick units refer to the processes used to save
struggling companies from closure, often through financial restructuring, operational
improvements, or even mergers and acquisitions. The primary goal is to make these
companies financially viable again and prevent unnecessary job losses and economic impact.

Key aspects of the process:

 Identifying Sickness:
Determining when a company is considered "sick" based on factors like losses, inability to
meet financial obligations, and other indicators.
 Application for Revival and Rehabilitation:
Filing an application with the appropriate authority, such as a tribunal, to initiate the revival
process.
 Appointment of an Interim Administrator:
A person appointed to oversee the revival process, managing the company's affairs during
this period.
 Formation of a Committee of Creditors:
 Representatives from various stakeholders, including creditors, are brought together to
discuss the company's situation and potential solutions.

 Tribunal's Order:
The tribunal reviews the application, potential revival plans, and the committee's
recommendations, issuing an order regarding the company's future.
 Scheme of Revival and Rehabilitation:
A detailed plan is developed outlining the steps needed to revive the company, such as
financial restructuring, operational improvements, or even a merger with a healthier
company.
 Implementation of the Scheme:
The tribunal oversees the implementation of the approved scheme, ensuring it is followed
correctly.
 Winding-up (if necessary):
In cases where revival is deemed impossible, the tribunal may order the company's
winding-up or liquidation

Module 2

Corporate Valuation

A business valuation is the process of determining the economic value of a business. It's also
known as a company valuation. All business areas are analyzed during the valuation process
to determine its worth and the value of its departments or units.

A business valuation is often used during the process of negotiating the merger or
acquisition of one company by another, but it might be used in other situations as well.
Owners will often turn to professional business evaluators for an objective estimate of their
business's value.

Business valuation can be used to determine the fair value of a business for a variety of
reasons, including sale value, establishing partner ownership, taxation.

Several methods of valuing a business exist, such as looking at its market cap, earnings
multipliers, or book value etc

Methods of Valuation

A company can be valued in numerous ways. Each provides a different view of a company's
value, and no method is inherently more correct than another.
1. Market Capitalization
Market capitalization is the simplest method of business valuation. It's calculated by
multiplying the company's share price by its total number of shares outstanding.

Microsoft Inc. traded at $438.24 on May 2, 2025. The company could then be valued at:

 $438.24 (Market Value) x 7.43 billion (Total shares Outstanding) = $3.26 trillion12

2. Times Revenue Method

The Times Revenue Method is a simplified approach to valuing a company by multiplying its
annual revenue by a predetermined value, typically ranging from 1 to 2. This method
provides a quick estimate of a company's value, especially useful in situations like mergers
and acquisitions where a quick assessment is needed

3. Earnings Multiplier
The earnings multiplier may be used instead of the times revenue method to get a more
accurate picture of the real value of a company because a company’s profits are a more
reliable indicator of its financial success than sales revenue. The earnings multiplier adjusts
future profits against cash flow that could be invested at the current interest rate over the
same period. It adjusts the current P/E ratio to account for current interest rates.

4. Discounted Cash Flow (DCF) Method

The DCF method of business valuation is similar to the earnings multiplier. This method is
based on projections of future cash flows, which are adjusted to get the current market value
of the company.

5. Book Value
This is the value of shareholders’ equity in a business as shown on the balance sheet
statement. The book value is derived by subtracting the total liabilities of a company from its
total assets.

6. Liquidation Value
Liquidation value is the net cash that a business will receive if its assets are liquidated and
its liabilities are paid off today.

Shareholder Vs Shareholder Theory

Shareholder Vs Shareholder Theory

Shareholder

A shareholder (or stockholder) is an individual or institution that legally owns at least one
share of a company’s stock.

They are the owners of the company and have certain rights, such as:
  Voting at shareholder meetings
 Receiving dividends
 Selling their shares
 Getting residual claims in case of company liquidation

In short, a shareholder is a person or entity that invests capital in a company in exchange

for ownership.

The Friedman Doctrine (also called Shareholder Theory) is an idea proposed by Nobel
Prize-winning economist Milton Friedman in 1970.

Friedman argued that:

 The primary responsibility of a business is to maximize profits for its shareholders.

 As long as the company follows the law and basic ethical rules, it has no obligation
to pursue social goals like environmental protection, employee welfare, or community
development.
 Spending company money on social causes is a misuse of shareholders’ funds
unless it improves long-term profitability.

Key Points of the Friedman Doctrine

1. Profit maximization is the goal:

The only “social responsibility” of business is to generate profit for its owners.
2. Managers as agents:
Managers and executives are agents hired by shareholders. Their job is to act in the
shareholders’ best financial interest.
3. Legal and ethical boundaries:
Businesses must operate within the laws and ethical customs of society but beyond
that, they should focus on profits.
4. Voluntary spending on social issues is wrong:
If a business spends money on social causes (like poverty, education, environment)
without shareholder approval, it is essentially taxing shareholders, customers, or
employees without consent.

Example

If a company donates part of its profits to a local charity without clear shareholder benefit:

 Friedman would argue this is wrong.

 However, if the donation improves the company’s reputation, attracts customers,
and increases profits, then it can be justified under the doctrine.

Criticism of the Friedman Doctrine

 Ignores wider stakeholder interests like employees, customers, communities.

  Promotes short-termism (chasing immediate profits over long-term sustainability).
 Contributed to unethical corporate practices and environmental damage.
 Fails to address rising global issues like climate change, inequality, and social justice.

Key Difference

Aspect Shareholder Shareholder Theory

An individual or entity that owns A theory stating that the firm’s main duty is
Meaning
shares in a company to serve its shareholders

Role in Owner, investor, receiver of Philosophical or economic idea guiding

business dividends & voting rights how firms should operate

Corporate goal: profit maximization for

Focus Ownership, financial interest
shareholders

Agency Theory

Agency theory is a framework that explains the relationship between principals (owners,
shareholders) and agents (managers, executives) in a business. Agency theory studies how to
design contracts and incentives so that agents (who manage the company) act in the best
interests of the principals (who own the company).

 Principal-agent relationship:
Shareholders (principals) hire managers (agents) to run the company.
 Separation of ownership and control:
Shareholders own the company, but managers control day-to-day decisions.
 Problem:
Agents may pursue their own goals (such as higher salaries, perks, empire-building)
instead of maximizing shareholder wealth this is called agency problem or conflict.
 Examples of agency problems:
o Managers taking excessive risks or avoiding risks to protect their job.
o Managers overinvesting in low-return projects for personal prestige.
o Misuse of company resources (luxury offices, private jets).
 Solutions to reduce agency problems:
o Performance-based incentives (stock options, bonuses)
o Monitoring (board oversight, audits)
o Aligning interests (shareholder activism, corporate governance rules)

Problem of Free Cash Flow

Free cash flow (FCF) = cash generated by the company after paying for operations and
investments in fixed assets (like machinery, buildings)
The problem of free cash flow arises when a company has excess cash and managers misuse
it instead of returning it to shareholders. This idea was famously developed by Michael
Jensen in 1986.

 Companies with large free cash flow but low-growth opportunities are at risk.
 Instead of paying dividends or repurchasing shares, managers may:
o Invest in unnecessary acquisitions.
o Expand the business empire (empire-building).
o Increase their own compensation.
o Fund low-return or wasteful projects.
 This reduces shareholder value and creates inefficiency.

Example:

 A mature company with stable cash flows but limited growth opportunities.
 Instead of distributing cash to shareholders, management decides to buy unrelated
businesses or build a fancy new head office.
 This destroys value and reflects the free cash flow problem.

Link between Agency Theory and Free Cash Flow

 The free cash flow problem is a specific type of agency problem.

 Managers have control over cash but may not use it in shareholders’ best interests.
 Solutions:
o Stronger corporate governance
o Higher dividend payouts
o Debt financing (reduces free cash available to managers)
o Incentive-based pay for managers

Excess Capacity

Excess capacity refers to a situation where a firm or industry has more production resources
(like machines, equipment, labor) than it currently uses to produce goods or services.

In simple terms, it means the firm can produce more, but demand is not high enough to use
full capacity.

 Occurs when actual production is less than maximum possible production.

 It indicates unused or underutilized resources in the business.
 Often happens when:
o Demand falls.
o Competition increases.
o New technology makes existing capacity redundant.
o Firms over-invest in capacity due to wrong demand forecasts.
o Regulatory or economic shocks (like COVID-19 lockdowns)

Consequences of Excess Capacity

 Higher fixed cost per unit → increases average cost.

  Lower profitability → as resources are underutilized.
 Price competition → firms may lower prices to sell more and use capacity.
 Barrier to entry → new firms hesitate to enter when existing firms have surplus
capacity.
 Waste of resources → idle labor, machines, or capital.

Examples

 A hotel with 100 rooms but only 60 occupied has excess capacity of 40 rooms.
 A car manufacturer set up to produce 10,000 cars per month but sells only 6,000 has
excess capacity of 4,000 units.

Balance Sheet Restructuring

Balance sheet restructuring refers to the process of reorganizing the assets, liabilities, and
equity on a company’s balance sheet to improve its financial health, reduce risk, improve
liquidity, and enhance performance.

It’s about changing the structure of what the company owns (assets) and owes (liabilities) to
make the balance sheet stronger and more efficient.

Key Objectives of Balance Sheet Restructuring

1. Improve financial stability.

2. Reduce debt burden.
3. Improve liquidity position (cash flows).
4. Improve credit rating and investor confidence.
5. Prepare the company for growth, investment, or mergers.
6. Avoid bankruptcy or insolvency.

Common Methods of Balance Sheet Restructuring

1. Debt restructuring:

Debt restructuring is a process that allows a private or public company or a sovereign

entity facing cash flow problems and financial distress to reduce and renegotiate its
debts to improve or restore liquidity so that it can continue its operations.

2. Asset sales / divestitures:

o Selling non-core assets (like land, buildings, subsidiaries) to raise cash.
3. Equity infusion / capital raising:
o Issuing new shares to strengthen capital base.
4. Cost reduction and working capital improvement:

Cost reduction and working capital improvement involve optimizing a business's

financial performance by enhancing liquidity and managing current assets and
liabilities effectively. This can be achieved through various strategies, including
optimizing inventory, accelerating receivables, and extending payables.
 5. Debt-equity swap:
o Lenders convert part of the debt into ownership stakes in the company.

When is balance sheet restructuring needed?

 Company is highly leveraged (too much debt).

 Cash flows are not enough to service debt.
 Company is at risk of breaching loan covenants.
 To prepare for a merger, acquisition, or turnaround.
 To improve valuation and shareholder value.

Example

 A distressed airline sells part of its aircraft fleet, negotiates longer repayment terms
with banks, and raises new equity from investors to avoid bankruptcy.
 A company swaps part of its debt into shares to reduce interest costs and improve its
balance sheet.

Asset restructuring

Asset restructuring refers to the process where a company reorganizes, sells, acquires, or
revalues its assets to improve financial health.

focus on core operations, raise funds, or improve profitability.

The company changes the mix or value of the assets it owns to strengthen its balance sheet,
improve cash flows, or align better with its business strategy.

When is Asset Restructuring Needed?

 Company is facing financial stress or bankruptcy risk.

 Business wants to refocus on core areas.
 To improve profitability and asset turnover.
 After mergers or acquisitions, to streamline operations.
 To unlock value from undervalued assets.

Benefits of Asset Restructuring (Objectives)

 Raises cash for debt repayment or new investment.

 Improves profitability and operational focus.
 Reduces maintenance and operating costs.
 Strengthens balance sheet.
 Enhances shareholder value.

Challenges

 One-time loss or accounting hit (if assets are sold below book value).
 Loss of future revenue from sold assets.
 Negative employee or market reaction if major businesses are sold.
Examples

 A telecom company sells towers and leases them back to raise funds.
 A real estate developer sells unused land parcels to pay down debt.

Mode of Asset Disposition

Asset disposition refers to the process by which a company disposes of or transfers ownership
of its assets typically to raise cash, exit non-core businesses, improve efficiency, or reduce
liabilities.

It’s how a company sells, transfers, or removes assets from its balance sheet.

1. Outright Sale

 Direct sale of an asset (like land, machinery, patents, or subsidiaries) to a third party.
 Generates immediate cash.
 Common when a company wants to focus on core business or needs funds quickly.

Example:
A manufacturing company sells old machinery to another factory.

2. Divestiture

 Selling or disposing of an entire business unit, division, or subsidiary.

 Allows the company to exit non-core or unprofitable operations and focus on its main
strengths.
 Often used to raise funds, reduce debt, or improve profitability.

Example:
Tata Motors selling its passenger car business to focus on commercial vehicles.

3. Spin-off

 A company creates a new independent company by separating a division or subsidiary

and distributing its shares to existing shareholders.
 No cash inflow, but shareholders own shares in both companies.
 Helps unlock value, increase focus, and improve performance.

Example:
ITC Limited spinning off its hotel business into a separate company.

4. Split-off

 Shareholders exchange their shares in the parent company for shares in a subsidiary or
division being split off.
 Reduces the parent’s outstanding shares and separates the subsidiary as an
independent company.
Example:
A telecom company splitting off its tower business, offering shareholders the option to
exchange shares.

5. Equity Carve-out (Partial IPO)

 Selling a minority stake (partial ownership) of a subsidiary to the public through an

Initial Public Offering (IPO).
 Company raises cash but retains control over the subsidiary.
 Used to test market value or prepare the subsidiary for a full spin-off later.

Example:
Reliance Industries did an equity carve-out for Jio Platforms.

6. Sale and Leaseback

 The company sells an asset (usually real estate, aircraft, or equipment) and leases it
back from the buyer.
 Frees up capital while retaining use of the asset.
 Reduces ownership risks and improves liquidity.

Example:
An airline sells its aircraft to a leasing company and leases it back for continued operations.

7. Liquidation / Scrap Sale

 Selling assets (often at discounted or scrap value), usually when winding down or
closing a business.
 Used to recover some value from obsolete, surplus, or non-functioning assets.

Example:
A textile mill shutting down operations sells old looms and machinery for scrap.

8. Asset Swap / Exchange

 Exchanging one asset for another between companies.

 Helps align assets with business strategy without direct cash involvement.

Example:
Two oil companies swap oil fields in different countries to improve geographic focus.

9. Abandonment / Write-off

 Abandoning or writing off assets that are no longer useful or have zero market value.
 Reduces asset value on the balance sheet and reflects true economic value.

Example:
Writing off old software licenses or obsolete inventory
Value Creation

Value creation is the process by which a company, individual, or organization produces

benefits or outcomes that are meaningful and useful to its stakeholders such as customers,
shareholders, employees, and society.

It’s about making something more valuable than the resources or costs used to produce it.

Value Creation In Business?

Value creation in business involves a multifaceted strategy for attaining enduring success.

It goes beyond mere financial aspects, weaving together stakeholder relationships,

innovation, efficiency, and distinctiveness.

To thrive in the value creation process, businesses should embrace a comprehensive

approach that emphasizes crucial strategies and practices, ensuring their continued
competitiveness and relevance in a swiftly changing environment.

components of business value creation:

o Enhancing Stakeholder Relations for Sustainable Success
o Efficiency and cost management
o Innovation and differentiation
o Sustainability and social responsibility
o Measurement and evaluation

1) Enhancing Stakeholder Relations for Sustainable Success

In the complex world of modern business, achieving sustainable success goes beyond profit
margins and bottom lines. It centres on the art of enhancing stakeholder relations, a concept
that extends far beyond financial stakeholders. It encompasses a web of interconnected
relationships with customers, employees, suppliers, and the broader community.

 Innovation and Differentiation

 Customer-Centric Approach and Experience
 Employee Engagement and Development

Innovation and Differentiation

Innovation is the driving force behind differentiation and a competitive edge in the market. It
involves the creation of unique products, services, or processes that distinguish your business
from competitors.
 Product Innovation
 Service Innovation.
 Process Innovation:
Customer-Centric Approach and Experience

Putting customers at the centre of your business strategy is paramount for long-term success.
It involves understanding their needs and delivering exceptional experiences.
 1. Needs Analysis
2. Personalization:
3. Feedback and Improvement:
Employee Engagement and Development

Engaging and developing employees is not just a moral imperative; it’s also a strategic
advantage. Engaged employees are more productive, innovative, and committed to achieving
organizational goals, thus contributing to creating value for customers.
1. Training and Development
2. Recognition and Rewards
3. Open Communication
4. Wellness Programs
2) Efficiency and Cost Management
Efficiency and cost management are fundamental pillars of value creation in business. They
involve the meticulous optimization of operations and resources to enhance overall
profitability. Let’s delve deeper into this critical aspect:

 Resource Allocation: Efficient cost management ensures that resources, including

finances, manpower, and time, are allocated judiciously to achieve maximum
productivity and minimize waste.
 Improved Profit Margins: By identifying and eliminating inefficiencies,
businesses can significantly enhance their profit margins, making every dollar
count.
 Competitive Advantage: A company that excels in cost management can often
offer more competitive prices in the market, attracting a larger customer base and
gaining a strategic advantage.
 Sustainability: Streamlining operations and reducing waste not only bolsters
profits but also aligns with sustainability goals, which can enhance a company’s
reputation and appeal to environmentally conscious consumers.
 Innovation: Effective cost management encourages innovation as businesses seek
creative ways to reduce expenses and enhance processes.
3) Innovation and Differentiation
. They set successful organizations apart by enabling them to not only keep up with changing
market dynamics and evolving customer preferences but also lead the way in their respective
industries. Let’s explore this concept in greater detail:

 Continuous Innovation: For businesses, innovation should be an ongoing

process. It involves identifying opportunities for improvement, both in products
and processes, and implementing changes to stay competitive. This may include
technological advancements, new product features, or even entirely novel solutions
to existing problems.
 Adaptation to Market Dynamics: Markets are dynamic, and what works today
may not work tomorrow. Staying attuned to market shifts and emerging trends is
essential. Businesses need to adapt quickly to seize new opportunities and mitigate
potential risks.
  Customer-Centric Approach: Successful innovation is often customer-centric.
Understanding customer needs and preferences is vital in creating products or
services that resonate with the target audience. Regular feedback and engagement
with customers can guide the innovation process.
 Creating Unique Value: Differentiation is about standing out from the
competition. Through innovation, businesses can create unique value propositions
that make their offerings more appealing to customers. This could involve superior
quality, distinct features, or a one-of-a-kind customer experience.
 Sustainability: Innovation doesn’t just mean short-term improvements; it can also
lead to long-term sustainability. Businesses that innovate with sustainability in
mind can reduce costs, attract eco-conscious customers, and contribute positively
to the environment, thereby enhancing their value creation efforts.
 Market Leadership: Continuous innovation and differentiation can position a
business as a leader in its industry. Being at the forefront of change can open up
new revenue streams and solidify a company’s reputation as an industry
innovator.
4) Sustainability and Social Responsibility
Sustainability and social responsibility are integral facets of value creation in business. These
practices not only benefit society and the planet but also bolster a company’s reputation and
appeal to a growing base of socially conscious customers. Let’s explore this critical aspect in
more detail:

 Environmental Sustainability: Businesses that incorporate environmentally

friendly practices contribute positively to the planet. This includes minimizing
waste, reducing energy consumption, and adopting eco-friendly technologies.
Sustainability efforts can lead to cost savings, regulatory compliance, and
alignment with global sustainability goals, such as the United Nations Sustainable
Development Goals (SDGs).
 Social Responsibility: Beyond environmental concerns, social responsibility
involves ethical behaviour and philanthropic initiatives. It includes fair treatment
of employees, responsible supply chain management, and community engagement.
Companies that prioritize social responsibility often build stronger relationships
with employees, suppliers, and local communities.
 Enhanced Reputation: Demonstrating a commitment to sustainability and social
responsibility can significantly enhance a company’s reputation. Customers and
stakeholders increasingly prefer to support businesses that align with their values.
A positive reputation can lead to customer loyalty, increased market share, and
improved brand recognition.
 Long-Term Viability: Sustainability practices aren’t just about short-term gains.
They contribute to the long-term viability of a business. By reducing waste,
conserving resources, and fostering responsible practices, companies can ensure
their operations remain resilient and adaptable in a changing world.
 Regulatory Compliance: Many regions have implemented environmental and
social regulations that businesses must adhere to. By proactively embracing
sustainability and social responsibility, companies can avoid legal issues, fines,
and negative publicity associated with non-compliance.
5) Measurement and Evaluation
Regularly assess and measure the impact of your value creation efforts to ensure they align
with strategic objectives. They serve as a compass that guides organizations toward their
strategic objectives. By regularly assessing and quantifying the impact of value creation
efforts, businesses can ensure alignment with their overarching goals. Let’s take a closer look
at this essential aspect:

 Key Performance Indicators (KPIs): Defining clear KPIs is essential for

measuring value creation. These indicators should be directly tied to the strategic
objectives of the organization. They could include financial metrics like revenue
growth and profitability, as well as non-financial metrics such as customer
satisfaction, employee engagement, or sustainability targets.
 Data Collection and Analysis: Businesses should establish robust data collection
mechanisms to gather relevant information related to their value creation efforts.
This data can come from various sources, including customer surveys, financial
reports, and operational data. Advanced data analytics tools can help in deriving
meaningful insights from this data.
 Regular Reporting: To maintain a proactive approach to value creation, regular
reporting is essential. Organizations should have processes in place to compile and
analyze data at regular intervals, whether it’s on a monthly, quarterly, or annual
basis. Reporting ensures that value creation efforts remain on track and are
adjusted as needed.
 Benchmarking: Comparing your performance and value creation efforts against
industry benchmarks and competitors can provide valuable insights. Benchmarking
helps identify areas where improvements can be made and sets the standard for
excellence in your industry.
 Feedback Loops: Soliciting feedback from customers, employees, and
stakeholders is a valuable part of measurement and evaluation. Feedback can
reveal areas of strength and areas in need of improvement. It also fosters a culture
of continuous improvement within the organization.
 Strategic Alignment: Perhaps most importantly, measurement and evaluation
should always be aligned with the organization’s strategic objectives. It ensures
that value creation efforts are not just isolated activities but contribute directly to
the fulfillment of the organization’s mission and vision.

Methods of valuing the firm

1. Value Creation Dimensions

2. Comprehensive Value Metrics Framework:

1.Value Creation Dimensions

Value creation dimensions refer to the different ways a company can add value to its
products, services, or overall business. These dimensions can be broadly categorized
as societal, shareholder, and user/consumer value creation.

The value creation model is adaptable, and contingent on factors such as industry, market
dynamics, and the specific objectives of a company.

1) Value Creation for a Customer

Maximizing customer value begins with a thorough understanding of the unique needs and
preferences of high-value customers.

This entails a multifaceted approach that delves deep into customer data and behavior.

By segmenting the customer base, analyzing historical behavior, and conducting in-depth
surveys and feedback sessions, businesses can uncover valuable insights.

2)Value Creation for Employees

Value creation for employees is essential for building a satisfied and engaged workforce,
which, in turn, significantly contributes to the overall success and sustainability of a
business.

3) Value Creation for Investors

Value creation for investors is a fundamental objective for any business, as it directly affects
the attractiveness of the company’s investment proposition. Investors, whether they are
shareholders, bondholders, or other stakeholders, seek opportunities that offer the potential
for sustained value growth

Comprehensive Value Metrics Framework:

A comprehensive value metrics framework goes beyond traditional financial measures to
consider the value an organization delivers to all stakeholders, including customers,
employees, shareholders, and society. This framework might encompass metrics related to
customer satisfaction, operational efficiency, innovation, sustainability, and social impact.
Balanced Scorecard (tool to measure value)
The balanced scorecard is a popular framework that measures performance across four key
perspectives: financial, customer, internal processes, and learning and growth.
This approach ensures that organizations consider not only financial results but also their
ability to deliver value to customers, optimize internal processes, and continuously improve
their capabilities.

Corporate expansion and Diversification

Corporate Expansion
Corporate expansion, also known as business expansion, refers to a strategy a company uses
to grow its reach, resources, and revenue. It involves increasing the company's market
presence, launching new products or services, and often tapping into new markets.

Diversification

Diversification refers to the strategic expansion of a company into new areas to reduce risk
and increase opportunities. It involves branching out into new product offerings, entering new
markets, or developing new services. The goal is to generate new sources of revenue,
improve profitability, and enhance the company's resilience to market changes.

Types of diversification strategies

The four types of diversification strategies that a company may use based on its goals and
resources:

Horizontal diversification

Horizontal diversification refers to the diversification practice a company uses when

expanding existing products or services. A company may add new products that resemble or
relate to current products while also expanding the customer's options. This can often mean
simply adding more options and variety to an established product.

Examples

Apple:
Moving from computers (MacBooks) to smartphones (iPhone) and wearables (Apple
Watch).

Coca-Cola:
Launching new beverages like Minute Maid juices, Dasani water, and energy drinks.

Vertical diversification

or vertical integration, refers to the diversification process that allows a company to expand
into other areas of its manufacturing process. For example, a manufacturing company may
expand to create one of the key parts or materials for its finished products. Like horizontal
diversification, this practice allows a business to stay in the same market in which it has
already established itself.

Examples:

 Amazon:
o Backward integration: Launching AmazonBasics (own branded products)
instead of relying on suppliers.
o Forward integration: Acquiring its own delivery network (Amazon
Logistics) instead of depending on FedEx/UPS.
  Tesla:
o Owns battery production (Gigafactories) and sells cars directly to customers
(no dealerships).
Conglomerate diversification

Conglomerate diversification allows a company to launch a service or product that's

completely new to the company and has no relation to its current market. A company may
often do this by acquiring a company in an unrelated market. This strategy can allow
companies to expand across industries and appeal to a new consumer demographic.

Examples:

 Tata Group (India):

o Operates in cars (Tata Motors), tea (Tata Tea), software (TCS), steel (Tata
Steel), hotels (Taj Hotels).
 Samsung:
o Electronics, shipbuilding, construction, insurance — all unrelated fields.

Concentric diversification

Concentric diversification strategies utilize a company's existing resources to create a new,

improved or updated product related to current products. This is often a cost-effective way to
expand a business and can help a company reach new customers while appealing to pre-
established ones.

Examples:

 Sony:
o Started with electronics (radios), then expanded into related areas like music,
gaming (PlayStation), and movies.
 Nike:
o From athletic shoes to sports apparel, fitness equipment, and wearable tech
(Nike+iPod collaboration with Apple).
Sell-Offs and Changes in Ownership: Business Downsizing

Business Downsizing

It refers to a strategic process where a company reduces its scale of operations, asset base, or
workforce, often accompanied by the sale of business units, divestitures, or changes in
ownership structure.

It is undertaken to improve profitability, enhance efficiency, focus on core activities, or

survive financial distress.
Business downsizing through sell-offs and ownership changes is a strategic method to restore
profitability, concentrate on competitive strengths, and improve organizational agility.
However, successful execution requires careful stakeholder communication, timing, and
alignment with long-term goals.

Objectives of Business Downsizing

 Improve operational and financial performance

 Eliminate unprofitable or non-core divisions
 Generate cash for debt repayment or restructuring
 Streamline management and reduce overheads
 Enhance shareholder value through focused operations
Business Downsizing Strategies

1. Workforce Reduction

 Laying off employees or offering voluntary retirement schemes (VRS).

 Aims to reduce salary costs and improve productivity.
2. Facility Closure

 Shutting down non-performing plants, offices, or branches.

 Frees up resources and cuts fixed costs.
3. Operational Shrinking

 Reducing scale of operations in certain markets or product lines.

 Focuses resources on profitable segments.
4. Product Line Rationalization

 Discontinuing products that are obsolete or unprofitable.

 Helps concentrate efforts on high-margin items.

Sell-Offs:

Sell-offs involve a company selling off tangible or intangible assets to generate cash. This
can be a part of a larger downsizing strategy or restructuring effort.
Sell-offs are often used to free up assets for sale, raise capital, or streamline operations.
For example : A company might sell off a division or branch that is underperforming or no
longer aligns with its overall strategy.

Changes in Ownership:
Changes in ownership can occur as a result of downsizing, as the company may be
acquired, restructured, or split off.

Changes in ownership can be driven by various factors, including the need to streamline
operations, reduce debt, or improve profitability.
For Example : A company might be acquired by another company, or its ownership
structure might be altered through a spin-off or split-off.

This can happen through:

 Management Buyouts (MBOs) – Internal managers acquire the company.

 Employee Stock Ownership Plans (ESOPs) – Employees acquire ownership over
time.
 Leveraged Buyouts (LBOs) – Buyouts financed largely through debt. Example: A
private equity firm wants to buy Company A for ₹100 crore. It contributes ₹20 crore
of its own funds and borrows ₹80 crore.
 Private Equity Takeovers – External investors acquire the business for value
unlocking or turnaround.
Benefits of Sell-Offs and Downsizing

 Improved Financial Health – Reduces debt and operating expenses.

 Increased Focus – Management can concentrate on core competencies.
 Enhanced Shareholder Value – Strategic clarity and better performance.
 Liquidity Generation – Proceeds from sell-offs strengthen cash reserves.
Risks and Challenges

 Reputation Damage – Downsizing may signal weakness to the market.

 Employee Morale – Layoffs can affect workforce motivation and loyalty.
 Customer Impact – Service disruptions or loss of trust in the brand.
 One-time Costs – Severance packages, facility closure costs, etc.
Divestitures

A divestiture is the process by which a company sells, liquidates, or otherwise disposes of a

business unit, asset, or subsidiary. It is often part of a strategic decision to refocus on core
operations, streamline operations, or improve financial performance. Divestitures can occur
through the sale of assets, spin-offs, or carve-outs.

Types of Divestitures:
 1. Sale of Assets: The company sells a division, plant, or other business assets to
another company. This is the most common form of divestiture.
2. Spin-offs: A company creates a new independent company by distributing shares of
the new company to its existing shareholders. The parent company typically retains
no control over the spun-off entity.
3. Carve-outs: A company creates a new business entity by separating a portion of its
business, usually by offering shares in the new entity to the public while retaining
partial ownership.
4. Equity Carve-outs: A company sells a portion of its subsidiary or business unit via a
public offering, where a portion of the subsidiary's shares is sold to the public, and the
parent company retains a controlling stake.
5. Management Buyouts (MBOs): The business unit is sold to the company's
management team, often with the help of external financing.
6. Leveraged Buyouts (LBOs): A company is acquired using a significant amount of
borrowed money to meet the cost of acquisition.
Reasons for Divestitures:

 Strategic Focus: A company may divest a business unit that no longer aligns with its
core objectives or long-term strategy.
 Financial Health: To raise cash, reduce debt, or improve financial ratios.
 Regulatory Requirements: To comply with regulatory mandates or avoid antitrust
concerns after a merger or acquisition.
 Operational Efficiency: To streamline operations and eliminate underperforming
units.
 Market Conditions: To exit an unprofitable or saturated market.
Benefits of Divestitures:

 Improved Focus: The company can concentrate its resources and management on its
most profitable and strategically important areas.
 Increased Liquidity: The company receives cash or other assets that can be
reinvested in more profitable or growth-focused areas.
 Debt Reduction: Cash raised from divestitures can be used to reduce debt, improving
the company’s balance sheet and credit rating.
Spin-off:

A spin-off is a type of corporate restructuring where a company creates a new, independent

company by separating a portion of its business.

 The parent company distributes shares of the new entity to its existing shareholders
on a pro-rata basis.
  The parent company continues to exist.

Example : eBay and PayPal (2015):

 Parent Company: eBay

 Spin-off Company: PayPal
 Reason for Spin-off: To allow each company to focus on its respective core competencies
(e-commerce vs. payment processing) and to unlock potential value for shareholders
Split-up:

A split-up occurs when a company breaks itself into two or more independent companies
and ceases to exist.

 Shareholders receive shares in the new entities.

 The original company is dissolved completely.

Example : Reliance Industries Ltd (RIL)

 Original Company: Reliance Industries Limited

 Split Entities:
o Reliance Industries (RIL) – continued core petrochemicals, refining, and oil
business
o Reliance Jio Infocomm – telecom business
o Reliance Retail Ventures Ltd (RRVL) – retail business
o Jio Financial Services (JFS) – recently demerged to focus on the financial
services segment (2023)

Reason: To unlock shareholder value and enable focused growth in each segment

Key Differences
Feature Spin-off Split-up
Parent Company Continues to exist Ceases to exist
Ownership Shareholders receive shares in Shareholders receive shares in new
both entities companies only
Number of 1 parent + 1 (or more) spin- 2 or more new independent
Companies off(s) companies
Purpose Unlock value, focus on core Completely divide the business into
business new parts

How a Spin-off Works (Step-by-Step)

 1. Company decides to separate a division (e.g., underperforming, non-core, or to
unlock value).
2. Forms a new legal entity for that business unit.
3. Allocates assets, liabilities, and staff to the new entity.
4. Issues shares of the new company to existing shareholders.

The new company becomes independently traded on stock exchanges (if public)

How a Split-up Works (Step-by-Step)

1. Board of directors approves the decision to completely break up the company.

2. Assets and liabilities are divided among two or more newly formed companies.
3. The original company is dissolved.
4. Shareholders receive proportionate shares in the new companies.
5. All new companies begin to operate as fully independent businesses.
Going public

Going public refers to the process by which a private company offers its shares to the public
for the first time by listing them on a stock exchange through an Initial Public Offering (IPO).
This transition allows the company to raise capital from public investors and gives the
company a market-driven valuation. Once the company goes public, it becomes a publicly
traded company and is subject to regulatory oversight and financial reporting requirements.

Key Steps in Going Public:

 Decision to Go Public
 Hiring Advisors
 Due Diligence and Documentation
 Regulatory Approval
 Pricing the IPO
 Marketing the IPO
 Launching the IPO
 Post-IPO Requirements
1. Decision to Go Public:
o The company evaluates its readiness to go public, considering factors like
market conditions, business growth potential, and the need for capital.
o The decision is usually made by the company’s board of directors and
executive leadership.
2. Hiring Advisors:
o The company typically hires investment banks (underwriters), lawyers, and
accountants to guide the IPO process.
o Underwriters play a critical role in helping the company determine the price
range for its shares and find buyers for the shares.
3. Due Diligence and Documentation:
o A detailed review of the company’s financials, operations, and legal standing
is conducted.
o The company prepares a prospectus, a detailed document that provides
information about the business, its financial health, risks, and the IPO offering.
o The prospectus is filed with the relevant regulatory bodies, such as the
Securities and Exchange Board of India (SEBI)
4. Regulatory Approval:
o The company submits the prospectus to the relevant regulatory authority,
which reviews the document to ensure compliance with financial reporting and
disclosure standards.
o The IPO can only proceed after the regulatory authority gives approval.
5. Pricing the IPO:
o After approval, the company and its underwriters determine the price at which
the shares will be sold to the public. This price is often set through a
combination of market research, demand forecasting, and investor interest.
6. Marketing the IPO:
o The company and its underwriters launch a roadshow to market the IPO to
institutional investors, such as mutual funds, hedge funds, and pension funds.
o During this period, company executives meet with potential investors to
explain the company’s business, growth prospects, and the benefits of
investing in the IPO.
7. Launching the IPO:
o The shares are offered to the public on the designated stock exchange.
o On the day the company goes public, the shares are traded, and their market
price is determined by supply and demand in the stock market.
8. Post-IPO Requirements:
o After going public, the company is required to disclose its financial statements
on a quarterly and annual basis.
 o It must also comply with various corporate governance and regulatory
requirements.
Benefits of Going Public:

1. Capital Raising:
o The primary reason for going public is to raise capital, which can be used for
expansion, reducing debt, funding research and development, or other strategic
objectives.
2. Liquidity:
o Going public provides liquidity to the company’s shares, making it easier for
shareholders to buy and sell stock.
3. Public Profile and Credibility:
o Being publicly listed enhances the company’s profile and can attract more
attention from customers, potential partners, and talented employees.
4. Mergers and Acquisitions:
o A public company has shares that can be used as a form of currency for
acquisitions. It makes it easier to enter into strategic alliances and expand.
5. Attraction of Talent:
o Public companies often offer stock options and other equity-based incentives,
making it easier to attract top talent.
6. Improved Access to Future Capital:
o Once public, the company has better access to capital markets for future
fundraising, whether through secondary offerings or debt issuance.
Risks and Challenges of Going Public:

1. Costs:
o The IPO process is expensive, with costs related to legal, underwriting,
accounting, and regulatory compliance fees.
o Ongoing costs include investor relations, regulatory filings, and audit
requirements.
2. Loss of Control:
o By going public, the company’s founders and executives may lose some
control over the company, as shareholders gain voting rights.
o Management must consider shareholders’ interests and performance
expectations.
3. Regulatory Scrutiny:
 o Public companies are subject to more stringent regulations and oversight from
government bodies (e.g., the SEBI), which require detailed disclosures about
their operations, financial performance, and management practices.
4. Market Pressure:
o Public companies face the pressure of quarterly earnings reports, which may
force management to prioritize short-term results over long-term goals.
o Stock price volatility can also impact the company’s reputation and market
perception.
5. Vulnerability to Market Conditions:
o The success of the IPO depends on the broader market conditions. In times of
market volatility or economic downturns, the IPO may fail to meet its
expectations.
Example of a Company Going Public:

 Alibaba IPO (2014): One of the most significant IPOs in history, Alibaba raised $25
billion in its IPO, which was listed on the New York Stock Exchange (NYSE). The
IPO attracted massive global investor interest and propelled Alibaba into the spotlight
as one of the largest e-commerce platforms in the world.
Privatization

Privatization is the process through which a government or public entity sells or transfers
ownership of a state-owned enterprise (SOE) or public service to private individuals or
companies. The goal of privatization is often to improve efficiency, reduce government
involvement in business, raise capital for public use, and stimulate economic growth.

Key Types of Privatization:

1. Privatization through Sale of Shares:

o Initial Public Offering (IPO): The government sells a portion of its
ownership in the company by offering shares to the public through an IPO.
This is a common method used to privatize state-owned companies.
o Direct Sale to Private Investors: The government may sell the entire
company or a portion of it directly to a private investor or a consortium of
investors.
2. Management Buyouts (MBOs):
o In this case, the management team of a state-owned enterprise purchases the
company from the government, often with the help of private financing. This
can help ensure that the company’s management remains committed to its
success.
3. Voucher Privatization:
 o In some countries, the government distributes vouchers or shares to the public,
allowing citizens to purchase shares in state-owned enterprises. This method
was used in Eastern Europe and Russia during the 1990s.
4. Asset Sales (Divestiture):
o The government sells individual assets of a state-owned enterprise (such as
property, infrastructure, or subsidiary units) to private investors, rather than
selling the entire company.
5. Public-Private Partnerships (PPPs):
o Governments enter into long-term partnerships with private companies to
manage or provide public services, with the private sector responsible for
financing, building, and maintaining infrastructure, while the government may
retain some regulatory control.
Reasons for Privatization:

1. Improving Efficiency:
o Private ownership often leads to more efficient management, cost-cutting,
and innovation since private owners have a vested interest in the company’s
success and profitability.
o State-owned enterprises may be less efficient due to political interference, lack
of competition, or the absence of market-driven incentives.
2. Reducing Government Debt:
o Selling state-owned companies or assets can generate immediate cash for
governments, helping to reduce national debt or fund other public projects.
3. Encouraging Competition:
o Privatization can introduce competition into previously monopolistic or state-
controlled sectors, which can lead to better quality services and lower prices
for consumers.
4. Fostering Economic Growth:
o Privatized companies may have more access to private capital and markets,
allowing them to expand and grow more rapidly.
o Private sector management can lead to better business practices, improved
products or services, and the creation of jobs.
5. Attracting Foreign Investment:
o Privatization can attract foreign direct investment (FDI), especially in sectors
that were previously closed to private investors, such as energy,
telecommunications, and transportation.
6. Political or Ideological Reasons:
 o In some cases, governments privatize businesses due to ideological beliefs in
free-market capitalism or to align with international pressure from
organizations like the International Monetary Fund (IMF) or the World
Bank.
Benefits of Privatization:

1. Increased Efficiency and Profitability:

o Private companies, driven by profit motives, tend to be more efficient, cost-
effective, and responsive to market demands compared to government-run
entities.
2. Enhanced Service Delivery:
o Privatization can lead to improvements in the quality and availability of
services since private companies often introduce new technologies and
processes to enhance service delivery.
3. Better Management and Innovation:
o With private ownership comes more specialized management, which can lead
to innovative solutions and better management practices that may not exist in
state-run enterprises.
4. Economic Growth and Job Creation:
o Privatization may stimulate job growth by introducing new technologies,
markets, and investment, potentially increasing tax revenues and contributing
to overall economic growth.
5. Reduced Government Burden:
o Privatizing state-owned enterprises allows the government to step back from
managing businesses and focus on regulatory oversight, saving public
resources.
Risks and Challenges of Privatization:

1. Job Losses:
o Privatization can lead to layoffs or reductions in the workforce as private
companies streamline operations and cut costs. This can lead to
unemployment and social unrest, especially if the privatized company was a
significant employer in the region.
2. Monopoly or Reduced Competition:
o In cases where privatization results in the creation of a private monopoly
(especially in industries with natural monopolies, like utilities), there may be a
lack of competition, leading to high prices or reduced quality.
3. Public Opposition:
 o Privatization can be politically unpopular, especially if the public feels that
essential services should remain under government control. Critics argue that
privatization may lead to the exploitation of public goods for profit, at the
expense of citizens.
4. Short-Term Focus:
o Private companies might prioritize short-term profits over long-term
investments in infrastructure or public welfare, potentially leading to a
reduction in the quality or availability of services.
5. Loss of Control:
o In some cases, privatization may result in foreign ownership or control over
strategic sectors (e.g., energy, transportation), raising concerns about national
security or the loss of domestic control over critical industries.
6. Unequal Access:
o In sectors such as healthcare or education, privatization may lead to unequal
access to services, where the wealthier segments of society can afford better
services, while the poorer population might be left behind.

For Example: Four years since the privatisation policy was announced, the Modi government
has had only three successes, out of which Air India's sale to the Tata Group was the largest.
The other two were indirect holdings in steel-maker Neelachal Ispat Nigam Ltd to Tata Steel
and Ferro Scrap Nigam to Konoike Transport Co.

Leveraged Buyouts (LBOs)

A Leveraged Buyout (LBO) is a financial transaction in which a company is acquired

using a significant amount of borrowed money (leverage) usually through loans or bonds
to meet the cost of acquisition.

In most cases, the assets of the company being acquired are used as collateral for the loans,
and the acquiring party typically invests a relatively small amount of their own capital.

Types of LBO

 Management Buyouts (MBOs):

In an MBO, the existing management team of a company purchases a majority stake or
outright ownership of the company, often with the help of private equity firms. The goal is
often to take the company private, potentially restructuring it and/or improving operational
performance.
 Management Buy-Ins (MBIs):
An MBI involves a new management team (often from outside the company) acquiring a
company. This is similar to an MBO, but with a different group of buyers seeking to bring
in new leadership and strategic changes.
 Public-to-Private Buyouts:
This type of LBO involves a private equity firm or group of investors purchasing a publicly
traded company and then taking it private. The goal is often to improve the company's
performance, potentially through restructuring or operational improvements, and then either
take it public again or sell it at a higher price.
 Secondary Buyouts:
In a secondary buyout, a private equity firm that previously owned a company through an
LBO sells that company to another private equity firm or a financial sponsor. This is
different from a public-to-private transaction where the company is returned to the public
market.
 Divisional Buyouts:
These involve the purchase of a specific division or business unit of a larger company.
 Employee Buyouts (EBOs):
In an EBO, employees of a company buy out the company or a significant stake in it.
Why a business owner would consider a leveraged buyout?

 To make a public company private

 To break up a large company

 To improve a company that is underperforming

 To acquire a competitor

Advantages of LBOs:

 High Return on Equity (ROE): Due to small equity and high leverage.
 Operational Efficiency: Drives cost-cutting and restructuring.
 Ownership Incentive: Management has “skin in the game” in MBOs.(Mgt.
personally invest their own money (or take on debt) to buy a significant ownership
stake in the company they manage.)
 Tax Shield: Interest payments on debt are tax-deductible.

Risks and Challenges:

 High Debt Burden: If cash flows falter, bankruptcy risk increases.

 Operational Pressure: Aggressive cost-cutting may hurt long-term value.
 Employee Impact: Layoffs and downsizing often follow LBOs.
 Economic Sensitivity: LBOs are vulnerable during economic downturns.
 Exit options for LBOs
 Trade sale to a strategic buyer, e.g. a corporate in the same line of business that can
reap scale or scope economies or leverage marketing capabilities;
 taking the company public through an IPO to public equity investors;
 Sale to another financial buyer through a secondary LBO.
A case of involuntary exit occurs when the buyout firms becomes insolvent and ends
up in receivership or bankruptcy.

For Example:

The acquisition of Tetley by Tata Tea in 2000 stands as a landmark event in Indian corporate
history, marking the country's emergence on the global business stage. This deal was
particularly notable as it was the first leveraged buyout (LBO) executed by an Indian
company, and it involved Tata Tea, then a relatively modest player, acquiring a company
three times its size.

Background of the Companies

 Tata Tea: Originating as Tata Finlay Limited in a joint venture with UK-based James
Finlay, Tata Tea became an independent entity after buying out Finlay's stake. By the
late 1990s, Tata Tea had established itself as a leading tea producer in India but
lacked a significant international footprint.
 Tetley: Founded in 1837 in Yorkshire, England, Tetley had grown into the world's
second-largest tea company, renowned for innovations like introducing tea bags to the
UK market. Prior to the acquisition, Tetley was owned by a group of investors who
had purchased it from Allied Domecq in 1995.

The Acquisition Deal

 Date: March 10, 2000

 Purchase Price: £271 million (approximately $450 million)
 Financing Structure: Tata Tea employed a leveraged buyout strategy, a first for an
Indian company. This involved creating a special purpose vehicle (SPV) named Tata
Tea (Great Britain) Ltd., capitalized with £10 million, of which Tata Tea contributed
 £6 million through a rights issue. The remaining funds were raised through debt, with
Tetley's assets serving as collateral.
 Strategic Rationale: The acquisition aimed to transform Tata Tea from a domestic
producer into a global brand, leveraging Tetley's established presence in markets like
the UK, Canada, and the US. This move was part of Tata Group's broader strategy to
expand its international footprint.

Impact and Significance

 Global Expansion: Post-acquisition, Tata Tea became the second-largest tea

company globally, significantly enhancing its international market presence.
 Pioneering Move: The successful execution of an LBO by an Indian company set a
precedent and demonstrated the growing financial sophistication of Indian corporates.
 Brand Synergy: The merger allowed Tata Tea to combine its production capabilities
with Tetley's branding and distribution strengths, leading to improved efficiencies and
market reach.

Buyback of Shares (Share Repurchase)

A Buyback of shares refers to a corporate action where a company repurchases its own
outstanding shares from the open market or directly from its shareholders. This reduces the
number of shares in circulation, potentially increasing the value of the remaining shares and
improving key financial ratios like earnings per share (EPS).

In India, share buybacks are regulated under the Companies Act, 2013 and SEBI (Buy-Back
of Securities) Regulations, 2018. These regulations outline limits, procedures, and conditions
for companies to repurchase their own shares. The maximum limit for buyback is 25% of the
company's paid-up capital and free reserves, and post-buyback debt cannot exceed twice the
paid-up capital and free reserves.

Reasons for Buyback:

1. Undervalued Stock: Management believes the company’s stock is undervalued and

seeks to support or increase its market price.
2. Improved Financial Ratios: Reduces the number of shares outstanding, thereby
improving:
o EPS (Earnings Per Share)
o Return on Equity (ROE)
o Book value per share
 3. Excess Cash Utilization: Provides a way to return surplus cash to shareholders
without declaring dividends.
4. Increase Promoter Holding: Buybacks can indirectly increase promoter holding
percentage by reducing total shares.
5. Prevent Hostile Takeovers: Fewer shares in circulation make it harder for outside
parties to gain control.
6. Signal of Confidence: Signals management's confidence in the company’s future
performance.

Importance of Buyback of Shares for Companies and Investors

For Companies

1. Enhanced Financial Ratios:

A buyback increases EPS by reducing the number of shares in circulation, which can
improve the perception of the company’s profitability.
2. Efficient Use of Surplus Cash:
Companies with excess reserves often prefer buybacks over dividends, as it avoids tax
on dividends and optimizes shareholder returns.
3. Signaling Confidence:
By repurchasing its shares, a company conveys that its stock is undervalued, boosting
market confidence and stabilizing share prices during volatility.
4. Capital Structure Optimization:
Companies use it to optimize their capital structure under the regulatory framework of
the Companies Act, 2013, and SEBI guidelines.

For Investors

1. Opportunity for Higher Returns:

Shareholders participating in a buyback often receive a premium over the prevailing
market price, providing an attractive exit option.
2. Ownership Consolidation:
Fewer shares outstanding mean that each share represents a larger ownership stake in
the company, benefiting long-term investors.
3. Tax Benefits:
Shareholders may find buybacks more tax-efficient compared to receiving dividends,
especially in jurisdictions with high dividend taxes.
4. Market Perception:
A buyback of equity shares is often perceived as a positive move, signaling that the
company is confident about its future prospects.
 Examples:

 Infosys Ltd has conducted multiple buybacks to return excess cash to shareholders.
 TCS (Tata Consultancy Services) also regularly engages in buybacks to increase
shareholder returns and boost EPS.

Joint Ventures and Strategic Alliances

Joint Ventures (JV)

A Joint Venture is a formal, legal partnership between two or more companies to undertake
a specific project or business activity, often by creating a new legal entity.

Features:

 Separate legal entity is formed (e.g., Company X + Company Y = JV Company Z).

 Shared ownership, risk, profit, and control.
 Usually project-specific or limited in duration.
 Can be equity-based (shareholding involved) or contractual (agreement without
equity sharing).

Type of Joint Ventures:

 Project-based Joint Venture:

This type is focused on completing a specific project. The partnership typically ends once
the project is finished.
 Functional-based Joint Venture:
 In this type, companies come together to share resources and expertise to improve their
operations.
 Vertical Joint Venture:
These ventures involve companies at different stages of the supply chain, such as a supplier
and a manufacturer.
 Horizontal Joint Venture:
These ventures involve companies that compete with each other, often to enter a new
market or share resources.

Example:

 Tata Sons + Starbucks = Tata Starbucks Ltd. (JV to operate Starbucks in India)

Strategic Alliance

A Strategic Alliance is a collaborative agreement between two or more companies to

pursue agreed-upon objectives while remaining independent.

A strategic alliance is an arrangement between two companies to undertake a mutually

beneficial project while each retains its independence.
A strategic alliance is a partnership between firms whereby resources, capabilities and core
competences are combined to pursue mutual interests
Even though the strategic alliance is an informal alliance between the companies involved,
but the responsibilities and work are clearly defined for each party involved.
Example:
Smartphone taxi app company Uber and music streaming service Spotify have announced a
partnership that will enable Uber passengers to listen to their own Spotify playlists during car
journeys, Uber users who link their Spotify account to their Uber account can basically push
a button and get a ride, and get into the car, and in the car their Spotify music, their Spotify
station, is playing,”.
In 2012, technology giant Microsoft and world energy leader General Electric (GE) created a
joint venture aimed at using data to improve healthcare quality and patient experience.
What is Takeover?
Acquisition of Substantial Shares and Control over a Target Company to expand the
business in an inorganic manner.
Type of Takeovers
 Hostile
 Friendly

Types of Hostile Takeover

1. Tender Offer
 2. Proxy Contest
3. Bear Hug
Tender offer
Tender offer is a public bid by an acquirer to purchase a target company's shares directly
from its shareholders, offering a premium price. It's a common method for acquiring a
company, often used in both friendly and hostile takeovers.

Disney vs. Roy E. Disney and Stanley Gold (2004)

 Target Company: The Walt Disney Company

 Activists: Roy E. Disney (nephew of Walt Disney) and Stanley Gold
 Reason: Poor performance and management concerns under CEO Michael Eisner
 Action: Roy and Gold started a proxy campaign to oust Eisner.
 Outcome: Michael Eisner received a 43% no-confidence vote from shareholders. He
was removed as chairman (though he stayed as CEO briefly).

Bear Hug

A bear hug is a takeover strategy where a company (the acquirer) makes an unsolicited offer
to buy another company (the target) at a very attractive premium price so high that the
target’s board and shareholders find it difficult to refuse, even if the approach is hostile.

It's called a “bear hug” because it’s an offer that’s so generous, it’s hard to escape like a
tight hug from a bear. It is also known as lip lock or body lock.

Microsoft’s Bear Hug to Yahoo (2008)

 Acquirer: Microsoft
 Target: Yahoo
  Offer: ~$44.6 billion (a 62% premium over Yahoo's share price)
 Outcome: Yahoo rejected the offer, saying it undervalued the company. Microsoft
eventually withdrew

Defence Tactics Against Takeovers (Anti-Takeover Measures)

Companies under threat of a hostile takeover where an acquiring firm attempts to take
control without the target company's consent often use various defense tactics to prevent or
deter the acquisition. These tactics aim to make the takeover more expensive, less attractive,
or legally difficult.

4. Poison Pill
5. Crown Jewel Defence
6. White Knight
7. Pac-Man Defence
8. Golden Parachute
9. Green Mail
10. Shark Repellent
11. Shares Buyback

Poison Pill

A poison pill is a defensive strategy employed by a public company to deter hostile

takeovers by making it more difficult for an acquirer to gain a controlling interest without
board approval.

The poison pill is one of the most powerful defenses against hostile takeovers.

The pills can be flip-in, flip-over, dead hand, and slow/no hand.

 Flip-in poison Pill

Allows existing shareholders (except the hostile bidder) to purchase additional shares at a
deep discount when a specific ownership threshold is breached (e.g., 20%).

 “Dead hand” pill

When a company knows that an unwanted acquirer has acquired enough of its shares from
the secondary market, it issues new shares in a high volume, which dilutes the shares
acquired by the unwanted acquirer

 No handpill
 It's designed to prevent any newly elected board of directors from redeeming the pill,
ensuring the current board's ability to block a takeover.

Pros

 Prevents majority control takeovers that don't consider minority shareholder interests
 Discourages vulture bids that want to benefit from temporary share price declines
 Come with higher takeover premiums than those without them

Cons

 Leaves share price lower

 Shields underperforming board members from efforts to replace them
 Requires justification
 Comes with sunset provisions

CROWN JEWEL

• Employing a crown jewel defense means selling the company’s most profitable assets,
reducing its attractiveness to unwanted buyers.
• This is a risky strategy, as it destroys the company’s value. many companies will seek
a friendly third-party company, often referred to as a white knight, to buy their assets.
• Once the hostile buyer drops the bid, the target company can buy its assets back from
the strategically chosen third party.
• Crown jewels are options under which a favored party can buy a key part of the target
at a price that may be less than its market value. As such, crown jewels benefit
friendly investors over unfriendly acquirers.
  An Acquirer Company (blue box) initiates a hostile takeover against a Target
Company (green box).
 The Target Company tries to protect itself by executing the Crown Jewel Defense.
 It sells off its most valuable assets (called "core assets" or "crown jewels") to a
Third Party (White Knight) (grey box) to make itself less attractive to the hostile
acquirer.
 The image shows the core assets being transferred downward (with crown icons
symbolizing value) to the Third Party.
 Once the hostile takeover threat is neutralized or withdrawn, the Target Company
buys back the core assets from the Third Party—usually at a premium.

White Knight
 • A white knight is a company that acquires another company that is trying to avoid
acquisition by a third party
• a strategy that involves the acquisition of a target company by its strategic partner,
called a white knight
• White knights make acquisitions on friendly terms. White knights are white because
they are associated with goodness and virtue.
• The white knight is the "savior" of a company in the midst of a hostile takeover.
• preserving the current management team, offering better acquisition terms, and
maintaining the core business operations.

PAC-MAN Defence

• Popular 1980s video game called Pac-Man.

• In the game, after eating a power pellet, Pac-Man receives the power to eat the ghosts
chasing him.
• In 1982, Martin Marietta Corp. was the first to use this strategy.
• Target companies may choose to avoid a hostile takeover by buying stock in the
prospective buyer’s company,
• Pac-Man defense works best when the companies are of similar size.
• Expensive strategy
• Just as the acquirer is attempting to buy up a controlling amount of shares in the target
company, the target likewise begins buying up shares of the acquirer in an attempt to
obtain a controlling interest in the acquirer.
• possible only if the target company has enough financial resources to purchase the
required number of shares in the acquirer.
• The acquirer, seeing control of its own firm threatened, will often cease attempting to
take over the target.
• Debt financing, selling own assets, issuing shares, reserves are the common ways of
funding Pac-man defense.

Golden Parachute

• involves including a provision in an executive’s contract that gives them a fairly large
compensation in the form of cash or stock if the takeover attempt succeeds.

• The provision makes it more expensive and less attractive to acquire the company
since the acquirer will incur a large debt in the sum of money to pay the senior
executives.
 • The clause mainly protects the senior management who are likely to get terminated if
the takeover process becomes successful.

• some executives may intentionally insert the clause to make it unattractive for the
acquirer to pursue the forced acquisition.

• Not popular in India as compensation for loss of office of top executives are restricted
by Companies Act

• industries where Golden parachute was popular were IT, telecommunications, media,
insurance and financial services.

For Example

Green mail

refers to the target company buying back shares of its own stock from a takeover bidder who
has already acquired a substantial number of shares in pursuit of a hostile takeover.

The term “greenmail” is derived from “greenbacks” (dollars) and “blackmail”. It’s a costly
defense, as the target company is forced to pay a substantial premium over the current market
price in order to repurchase the shares.

The potential acquirer accepts the greenmail profit it makes from selling the target company’s
shares back to the target at a premium, in lieu of pursuing the takeover any further.

Although this strategy is legal, the acquirer is, effectively, sort of blackmailing the target
company, in that the target must pay the acquirer a premium – through the share buybacks –
in order to persuade it to cease its takeover attempt.

Shark Repellent
Shark repellent refers to preventive measures or corporate governance strategies that a
company adopts to protect itself from hostile takeovers. The term "shark" symbolizes a
hostile acquirer, and "repellent" means making the company harder or unattractive to acquire.

These tactics are often written into the company's charter, bylaws, or policies and are
triggered when a hostile takeover attempt is made.

Shark repellent defens strategies refer to various anti-takeover provisions implemented by the
target company to deter hostile takeovers.

These measures are designed to make it more difficult or costly for the acquiring company to
succeed in its takeover attempt.

Examples of shark repellents include staggered board elections, poison pills (shareholder
rights plans), supermajority voting requirements, and dual-class share structures.

These provisions aim to provide the target company's management with more time and
leverage to negotiate with the acquiring company or find alternative strategies to protect the
company's interests.

Share Buyback

• Type of financial Restructuring

• Rearrangement of the financial structure to make the company’s finances more

balanced

• Over capitalization or undercapitalization has problems

• If it is overcapitalized the corrective measures are:

(a) Buyback of own shares

(b) redeeming its bonds,debentures

(c) Repaying fixed deposits to public

(d) Repaying loans to financial institutions, banks etc

Module – 3

Mergers

A merger involves two or more companies combining to form a new entity, while
corporate restructuring encompasses a wider range of actions to improve a company's
efficiency and profitability.

Types of mergers

Horizontal Mergers
This kind of merger takes place between companies engaged in competing businesses which
are at the same stage of industrial process. Illustration – Two companies involved in the
manufacture of two similar kinds of cars, one company may decide to merge with the other
company so that both types of cars can be sold in the market without any competition.

Examples – Vodafone – Idea Cellular Merger (2018)

Tata Motors – Jaguar Land Rover Acquisition (2008)

Vertical Mergers

This kind of merger takes place between companies engaged at different stages of the
industrial process or production process.

Illustration – To manufacture a car, tires are required. A big automobile company may merge
with a company involved in manufacturing of tyres. One of the examples is the merger
between eBay and PayPal.

Congeneric Mergers

A congeneric merger, also known as a product extension merger, involves companies in

related industries combining to broaden their product offerings or market reach. While they
might operate in the same general industry, the merging companies typically don't sell
directly competing products and may not have a direct customer or supplier relationship. The
goal is often to leverage synergies, such as shared distribution channels or technology, to
create a larger, more diversified entity.

Example

merger between Citicorp (a commercial bank) and Travelers Group (a financial services
company), which resulted in the formation of Citigroup.

Conglomerate Mergers

A merger between companies that are engaged in totally unrelated business activities. The
principal reason for a conglomerate merger is utilization of financial resources, enlargement
of debt capacity, and increase in the value of outstanding shares by increased leverage and
earnings per share, and by lowering the average cost of capital.

Example – Reliance Industries and Hamleys

Cash Mergers

Also known as Cash-out Merger or Freeze-out Merger.

The shareholders of one company receives cash instead of shares in the merged company.
This is essentially an exit for the cashed out shareholders.

Triangular Mergers
It is a tripartite arrangement in which the target merges with a subsidiary of the acquirer
company. It is often resorted to, for regulatory and tax reasons. There are two types of
triangular mergers –

Forward triangular merger – when the subsidiary survives, even after the merging of the
target into the subsidiary.

Reverse triangular merger – when the target survives after the merging of subsidiary into the
target.

Acquisitions

Acquisition refers to purchase of the shares or assets and/or liabilities of a company (target)
using the stock, cash or other securities of purchaser’s company (acquirer). Acquisition is
also known as takeover. It may be hostile or friendly.

What is the difference between Mergers and Acquisitions?

MERGER ACQUISITION

When two companies combine together to When one company is taken over by
form one company. another company.

Acquired company ceases to exist and Acquiring company takes over the majority
becomes a part of the acquiring company or stake (shares or undertakings) in the
forms a new company. acquired company. Both the companies
continue to be in existence.

When the companies mutually decide to Acquisition maybe hostile or friendly

merge their companies in the best interest of
their firms.

Usually between companies of relatively Usually a larger company purchases a

equal size. smaller company.

Example – Disney and Pixar Example – Google acquired Android

Rationale / Reasons:

1. Strategic Rationale

a. Market Expansion

 Access to new geographical markets (domestic or international).

 E.g., Walmart acquiring Flipkart gave Walmart a foothold in the Indian e-commerce
market.
b. Product Diversification
  Broaden the product/service portfolio to reduce business risk.
 E.g., Facebook acquiring Instagram and WhatsApp to diversify its social media
presence.
c. Synergy Creation

 Revenue Synergy: Cross-selling products, expanding customer base.

 Cost Synergy: Eliminate duplicate functions, reduce overheads.
 Example: Kraft and Heinz merger aimed at operational synergies in the food industry.
2. Financial Rationale

a. Tax Benefits

 Carry forward of accumulated losses and depreciation of the acquired firm (if allowed
by law).
 Reduced tax liabilities through financial restructuring.
b. Better Financial Leverage

 Combined entity may have better access to capital markets.

 Improved credit ratings due to increased scale and financial health.
c. Utilization of Surplus Cash

 Companies with surplus funds can acquire smaller or underperforming firms to create
value.
 More productive use than holding idle cash or giving large dividends.

3. Defensive Rationale

a. Preventing Takeover

 Sometimes, firms merge with another to prevent being taken over by a hostile bidder.
b. Survival Strategy

 For struggling firms, a merger may be a route to survival.

 E.g., Bank mergers in India aimed to consolidate weaker banks.
c. Regulatory Compliance

 To meet regulatory or industry-specific requirements (like capital adequacy norms in

banking).
4. Human Resource and Talent Acquisition
  Acquire skilled workforce, managerial expertise, or technical know-how.
 E.g., Tech companies acquiring startups to absorb innovative teams (also known as
“acqui-hiring”).

5. Competitive Rationale

a. Reducing Competition

 Absorbing competitors strengthens market position.

 May help achieve monopolistic or oligopolistic dominance.
b. Increasing Market Share

 Immediate boost in customer base, sales volume, and market presence.

6. Globalization and International Presence

 Helps firms expand globally without starting from scratch.

 E.g., Tata Motors’ acquisition of Jaguar Land Rover gave it global branding and
technology access.

7. Innovation and R&D Access

 Acquire firms with advanced research, technology, or patents.

 Saves time and cost of developing in-house capabilities.

8. Shareholder Value Creation

 Ideally, M&As lead to a stronger entity with better performance, benefiting

shareholders via higher returns.

Process of Mergers & Acquisitions in India

1. Strategy Development:

Define the strategic objectives and goals of the M&A transaction.

Identify the reasons for undertaking the deal, such as market expansion, cost reduction, or
new product development.
2. Target Identification and Evaluation:
Identify potential target companies that align with the acquiring company's strategic goals.
Conduct a preliminary assessment of the target company's financial performance, industry
position, and potential synergies.
3. Valuation:

Determine the value of the target company, considering its financial performance, assets,
liabilities, and future growth potential.
Assess potential synergies and cost savings that could result from the merger or acquisition.
4. Due Diligence:

Conduct a thorough investigation of the target company's financial records, legal documents,
and operational performance.
Identify any potential risks or liabilities associated with the transaction.
5. Negotiation and Agreement:

Negotiate the terms and conditions of the transaction, including the purchase price, structure
of the deal, and closing date.
Finalize the purchase agreement, which outlines the obligations and liabilities of both
parties.
6. Closing:

Finalize the transaction by transferring ownership of the target company or its assets to the
acquiring company.
Obtain any necessary regulatory approvals or consents.
7. Post-Merger Integration:
Integrate the acquired company's operations, systems, and personnel into the acquiring
company.
Realize the synergies and cost savings that were identified during the valuation and due
diligence stages.
Evaluation of M&A Targets

Evaluating a target company is one of the most critical steps in the M&A process. The goal is
to assess whether the target aligns with the strategic objectives of the acquirer and whether
the transaction can create value.

1. Strategic Fit

a. Alignment with Strategic Objectives

 Market Expansion: Does the target allow entry into new markets, regions, or
customer segments?
  Product Diversification: Does it complement or expand the acquirer’s existing
product portfolio?
 Synergies: Can operational, financial, or revenue synergies be achieved (e.g., cost-
cutting opportunities, cross-selling potential)?
 Technological Integration: Does the target offer proprietary technology or
intellectual property that adds strategic value?
b. Cultural Compatibility

 Cultural fit is crucial to a smooth integration process. A target with a similar

organizational culture is more likely to integrate successfully.

2. Financial Evaluation

a. Valuation of the Target

 Discounted Cash Flow (DCF): Estimation of the target’s future cash flows and
discounting them to present value using an appropriate discount rate.
 Comparable Company Analysis: Evaluating the target based on the valuation
multiples (e.g., P/E ratio, EV/EBITDA) of similar publicly traded companies.
 Precedent Transaction Analysis: Comparing the target to similar companies
involved in past M&A transactions to determine a reasonable price range.
 Asset-based Valuation: Assessing the target based on its net assets (assets minus
liabilities).
b. Earnings and Profitability Analysis

 Revenue Growth: Historical revenue growth rates and future growth projections.
 Profit Margins: Analysis of operating margin, gross margin, and net profit margin to
assess profitability.
 EBITDA: Focus on Earnings Before Interest, Taxes, Depreciation, and Amortization
to evaluate operational performance.
 Free Cash Flow (FCF): The target’s ability to generate cash after operational costs
and capital expenditures, a key indicator of financial health.
c. Debt and Capital Structure

 Debt Levels: Review the target’s current debt levels and how they impact its financial
flexibility.
 Leverage Ratios: Analyze leverage ratios (e.g., debt-to-equity, interest coverage) to
evaluate the risk posed by the target’s financial obligations.
  Cost of Capital: Compare the cost of capital (WACC) to the target’s profitability to
gauge whether the transaction will yield a sufficient return.

3. Operational Evaluation

a. Business Model and Operations

 Revenue Streams: What are the sources of the target’s revenue (e.g., product sales,
service contracts)?
 Supply Chain: Is the target’s supply chain efficient? Are there opportunities to
reduce costs or improve delivery times?
 Customer Base: Is the customer base diverse or concentrated? Are there
opportunities for cross-selling to the acquirer’s customers?
b. Management Team and Leadership

 Competence and Stability: Evaluate the target’s leadership, their track record, and
stability.
 Employee Retention: Assess the quality of the target’s workforce and the likelihood
of retaining key employees post-acquisition.

4. Legal and Regulatory Evaluation

a. Legal Structure and Contracts

 Ownership Structure: Understand the target’s ownership structure, including any

minority shareholders, and assess potential challenges in gaining control.
 Contracts and Obligations: Review existing contracts, licenses, patents, and other
agreements that may be transferred or require renegotiation.
 Litigation Risks: Investigate any pending or potential legal issues, lawsuits, or
regulatory fines that could affect the target's value or the acquiring company’s
reputation.
b. Compliance and Regulatory Approvals

 Antitrust Issues: Examine if the merger will face any antitrust or competition
concerns, especially if the combined entity will have a dominant market position.
 Sector-Specific Regulations: Some industries, such as healthcare, banking, and
telecommunications, are highly regulated, and the target must comply with all
industry-specific regulations.

5. Risk Assessment
a. Market and Industry Risks

 Industry Trends: Evaluate the health of the industry in which the target operates. Is
the industry growing, shrinking, or stable? What are the key risks facing the industry?
 Competitive Landscape: Assess the target’s competitive position within its industry.
How will the merger impact its market share and competitive advantage?
b. Economic and Geopolitical Risks

 Economic Cycles: Consider how macroeconomic factors such as economic

downturns or interest rate fluctuations might affect the target’s performance.
 Geopolitical Factors: For international targets, geopolitical risks such as political
instability, currency fluctuations, and trade barriers must be evaluated.
c. Integration Risks

 Cultural Differences: As mentioned earlier, cultural incompatibility can lead to a

failed integration. Understanding the differences between the acquirer and target’s
cultures is crucial.
 Operational Integration Complexity: Some targets may have complex systems or
operational structures that make integration difficult and costly.
6. Synergy Estimation

a. Cost Synergies

 Headcount Reductions: Merging operations may lead to layoffs and consolidation of

redundant roles.
 Operational Efficiencies: Streamlining operations, eliminating duplicate functions,
and leveraging economies of scale.
 Supply Chain Optimization: Negotiating better rates with suppliers or eliminating
redundant suppliers.
b. Revenue Synergies

 Cross-Selling: Offering complementary products or services to existing customers of

both the acquiring and target companies.
 Geographical Expansion: Expanding into new markets that the acquirer may not
have access to.
 Brand Strengthening: Combining strong brands to increase customer loyalty or
improve brand equity.
c. Tax Synergies

 Loss Carryforwards: If the target has accumulated losses, they may be used to offset
future taxable income of the combined entity.
  Financing Synergies: Utilizing the acquirer's stronger credit rating to reduce
financing costs.
Negotiations

• Negotiation is the most critical step when it comes to mergers and acquisitions

• It is the stage where the deal either comes together with the way the negotiators want
it to or falls apart because their efforts have exhausted them.

• The ultimate goal of negotiating a merger or acquisition is to negotiate a deal in which

two companies conclude a transaction that generates shareholder value for both the
buyer and the seller.

• Negotiating the letter of intent reveals that there are numerous issues to resolve
beyond the price before granting a buyer access to the business’s inner workings and
confidential information.

• A well-written letter of intent will speed up the negotiation and documentation

process involved in a deal, increasing the likelihood of success. Therefore, negotiating
terms and conditions in a letter of intent are important in order to make further
negotiations easier and to ensure the process is streamlined, with the parties sailing on
the same boat.

Negotiation process

1. Preparation and Planning:

Both companies assess their strategies, identify potential targets, and analyze the deal's
potential benefits and risks.
2. Initial Offer and Negotiation:
The acquiring company typically makes an initial offer, which is then negotiated with the
target company, focusing on valuation, deal structure, and key terms.
3. Valuation and Due Diligence:
Thorough valuation analysis is conducted to determine the fair value of the target company,
and due diligence is performed to assess its financial health and legal status.
4. Negotiation and Agreement:
The parties negotiate the final terms of the merger, including the purchase price, payment
terms, and integration plans, with the goal of reaching a mutually agreeable deal.
5. Regulatory Approvals and Closing:
The deal is subject to regulatory approvals from bodies like the Competition Commission
of India (CCI) in India. Once approvals are obtained and all terms are finalized, the merger
is officially closed, and the two companies merge into one.
Legal and Other Formalities in Mergers and Acquisitions
Mergers and acquisitions involve various legal processes and formalities to ensure that the
transaction is legitimate, fair, and compliant with applicable laws and regulations. These legal
steps are critical for protecting the interests of both parties and achieving a smooth
integration.

1. Due Diligence

Due diligence is a comprehensive review process where the acquiring company evaluates the
target company’s financial health, legal standing, and operational status. This step is essential
for identifying any potential risks or liabilities associated with the deal. Both parties must
provide accurate and complete information to facilitate this process.

2. Regulatory Approvals

M&A transactions often require approvals from regulatory bodies to ensure they do not harm
market competition or violate antitrust laws. In many jurisdictions, including India,
the Competition Commission of India (CCI) must review significant mergers and
acquisitions. For example, the CCI assesses whether a proposed transaction might lead to a
substantial reduction in competition or create a monopoly.

3. Disclosure Requirements

Companies involved in M&A must adhere to disclosure requirements, which mandate

transparency about the terms of the deal, financial implications, and potential conflicts of
interest. This is crucial for maintaining investor trust and ensuring all stakeholders are well-
informed.

4. Shareholder Approval

In many cases, M&A deals require approval from shareholders. Shareholders review detailed
information about the transaction and then vote to approve it. This process ensures that their
interests are considered and protected.

5. Compliance with Company Law

M&A transactions must comply with company laws applicable in the relevant jurisdictions.
In India, for instance, the Companies Act, 2013, outlines various provisions related to
mergers and acquisitions. These provisions include procedures for conducting meetings,
filing necessary documents, and adhering to legal formalities.

6. Antitrust and Competition Laws

 Antitrust laws prevent anti-competitive practices and promote fair market competition. When
assessing M&A deals, you must evaluate their potential impact on market competition.
Recent updates in antitrust regulations emphasize stricter scrutiny of mergers and acquisitions
to prevent monopolistic practices.

Tax benefits on mergers and acquisitions in India

1. Carry forward and set-off of losses: In a merger or acquisition, the acquiring company
can carry forward and set off the losses of the merged or acquired company against its
profits. This can reduce the overall tax liability of the acquiring company.
2. Depreciation benefits: In a merger or acquisition, the acquiring company can claim
depreciation benefits on the assets acquired from the merged or acquired company. This
can help reduce the tax liability of the acquiring company.
3. No capital gains tax: Under certain conditions, a merger or demerger of companies can be
tax-neutral, meaning that there is no capital gains tax payable. This can be a significant tax
benefit for companies involved in a merger or demerger.
4. Tax exemptions: The Indian government provides certain tax exemptions for mergers and
acquisitions, such as exemption from stamp duty and transfer pricing regulations. These
exemptions can help reduce the overall tax liability of the companies involved.
5. Lower tax rate for small companies: In India, small companies with a turnover of up to
Rs. 400 crores can avail of a lower tax rate of 25%. This can be a significant tax benefit for
small companies involved in a merger or acquisition.

Tax Tips on Mergers & Acquisition:

1. Understand the tax implications: It’s important to understand the tax implications of the
merger or acquisition before the deal is finalized. This includes understanding the tax
liabilities, deductions, and exemptions that may apply.
2. Plan ahead: Plan the merger or acquisition in a tax-efficient manner. For example,
consider structuring the deal in a way that minimizes tax liabilities.
3. Consult with tax experts: Consult with tax experts and lawyers who have experience
in mergers and acquisitions. They can provide valuable insights into tax laws and
regulations that may impact the deal.
4. Stay up to date with changes in tax laws: Keep up-to-date with changes in tax laws and
regulations that may impact the deal. This includes changes in tax rates, deductions, and
exemptions.
5. Maintain proper documentation: Maintain proper documentation of all financial
transactions related to the merger or acquisition. This includes records of all assets and
liabilities, as well as any tax deductions or exemptions claimed.
6. Consider the impact on employees: Consider the impact of the merger or acquisition on
employees and their taxes. For example, if there are redundancies, there may be tax
implications for severance pay and other benefits.
7. Consider the impact on shareholders: Consider the impact of the merger or acquisition
on shareholders and their taxes. This includes understanding any capital gains taxes that
may be applicable.

Regulation of Mergers and Takeovers in India

The regulation of mergers and takeovers in India is governed by a complex framework that
ensures transparency, fairness, and protection of the interests of stakeholders, particularly
shareholders. The regulatory landscape primarily involves the Securities and Exchange
Board of India (SEBI), Competition Commission of India (CCI), and other laws,
including those related to company law and tax. Below is a detailed overview of the key
regulations governing mergers and takeovers in India:

1. Key Regulatory Authorities

a. Securities and Exchange Board of India (SEBI)

SEBI plays a key role in regulating takeovers and mergers in India, with a primary focus on
protecting the interests of shareholders. SEBI issues guidelines, rules, and regulations for the
smooth functioning of M&A transactions in the Indian securities market.

 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

(Takeover Code): This code regulates the process of acquiring substantial control
over a listed company. It is designed to ensure that shareholders have adequate
information and that their interests are protected.
 SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
(LODR): These regulations govern the disclosure requirements for listed companies
involved in mergers or takeovers.
b. Competition Commission of India (CCI)

The CCI ensures that mergers and acquisitions do not lead to anti-competitive practices that
could harm market competition and consumer welfare. Under the Competition Act, 2002,
the CCI is empowered to review mergers and acquisitions that meet specific thresholds of
turnover and asset value.

 Section 5 and 6 of the Competition Act: These sections outline the criteria for
mergers and acquisitions that would require prior approval from the CCI. M&A
transactions are scrutinized based on their potential impact on competition in India.
c. Ministry of Corporate Affairs (MCA)

The MCA, under the Companies Act, 2013, regulates the process of mergers and demergers
of companies in India. The Ministry ensures compliance with corporate governance
principles and laws related to mergers and amalgamations.
  Sections 230-232 of the Companies Act, 2013: These provisions deal with the
merger and amalgamation process, including the approval process, creditors’
meetings, and schemes of arrangement.
The Takeover Code
The Takeover Code, also known as the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011, is a set of rules in India designed to regulate the acquisition of
shares and takeovers of listed companies. It aims to ensure that material changes in
shareholding or control are undertaken in an equitable and transparent manner, providing
shareholders with an opportunity to sell their shares if the company's control changes.

Objectives and Principles:

 Protection of Shareholders:
The Takeover Code prioritizes protecting the interests of public shareholders, including
retail investors, who have invested in the company.
 Transparency and Fairness:
It mandates that any change in shareholding or control is undertaken in a transparent and
fair manner, ensuring that all relevant information is disclosed to shareholders.
 Exit Opportunity:
The Code provides shareholders with an opportunity to sell their shares if they don't want to
continue with the new management, ensuring that they can exit the company if they
disagree with the change in control.
 Mandatory Open Offer:
In certain circumstances, the Code requires acquirers to make a mandatory open offer to all
shareholders, allowing them to decide whether to continue holding their shares in the
company.
 Regulation of Acquisitions:
The Takeover Code defines what constitutes an acquisition and who is considered an
acquirer, providing a framework for regulating such transactions.

Competition Act, 2002

The Competition Act, 2002 is a landmark legislation enacted by the Government of India to
regulate business practices and promote fair competition in the marketplace. The Act seeks to
prevent practices that have an adverse effect on competition, protect the interests of
consumers, and ensure freedom of trade. The key focus of the Act is to ensure a competitive
environment for businesses, prevent monopolies, and eliminate anti-competitive practices.
The Competition Commission of India (CCI) is the regulatory body empowered to enforce
the provisions of the Act.
Objectives of the Competition Act, 2002

 To prevent anti-competitive agreements: These include agreements between

enterprises or persons that could distort or restrict competition in the market.
 To prevent abuse of dominant position: The Act prohibits firms with a dominant
position from abusing it to the detriment of competition and consumers.
 To regulate combinations (mergers and acquisitions): The Act provides provisions
to regulate mergers, acquisitions, and amalgamations that may negatively affect
competition.
 To protect and promote competition: The Act ensures fair competition in markets
to enhance consumer welfare and improve economic efficiency.
 To ensure consumer welfare: The ultimate goal is to protect consumers by
promoting lower prices, better quality, and innovation.

Module – 4
MODULE 4
Business failure
• Business failure refers to a company ceasing operations following its inability to make
a profit or to bring in enough revenue to cover its expenses.
• A business failure is when a business cannot operate profitably, leading to default,
bankruptcy, or business closure.
• Businesses cannot make money because the income cannot cover the costs. It could be due to
poor operating management, insufficient capital, a poor unique selling proposition, and weak
competitiveness..
Example:

 The leaders of Kodak failed to see digital photography as a disruptive technology. The
management was so focused on the film success that they missed the digital revolution after
starting it. Kodak filed for bankruptcy in 2012
 In 2005 Yahoo was one of the main players in the online advertising market. But as Yahoo
undervalued the importance of search, the company decided to focus more on becoming a
media giant.

Causes of Business Failures

Internal & external causes

Internal
  Lack of Financial and management resources.
 Poor strategic business planning
 Lack of innovation and limited research and development efforts
 Failure to market the products/services properly
 Imbalanced finance structure
 Inadequate risk management resources and internal controls
 Informal business structure
 Complacent or compromised management
External

 Macroeconomic risks such as economic recessions political instability, and

war
 New competitors entry with distinctive technological advantages
 Legal and compliance issues resulting in a business wind-up
 Unrealistic shareholders' expectations resulting in business liquidation
 Social or community issues resulting in business insolvency
Why Established Businesses Fail

1. Financial Reasons

Poor management of cash flow

• Significant increases in stock levels
• Inadequate credit control
• Bad debts incurred
• Poor accounting practices including late invoicing
• Inaccurate forecasting by management
• Failure to plan for significant capital and/or exceptional expenditure
Inadequate or inappropriate financing
• Use of short term overdrafts for long term investment or capital spending
• Failure to use debt factoring when sales are substantially increasing
• Inadequate shareholder capital all contribute to cash flow problems
• These problems will become more pronounced when a substantial difficulty such as a
major bad debt, loss of a major customer or business interruption occurs

2.Non-Financial Reasons

Lack of management control

• Failure to develop a credible business plan
 • Failure to understand costs, markets and key customers
• Failure to administer the business properly
• Caught be surprise by significant illegality or unethical behaviour leading to
substantial business costs
• Excessive marketing expenditure
Significant external shock
• Loss of important / major customer (particularly if costs cannot be reduced)
• Sudden decline in market demand
• Change in legislation impacting demand or increasing costs
Types of business failure

Preventable

 Any failure that management could foresee and avoid

• A new product launch without proper market research, Technological advances by the
competitors
• Relates to management's inability or incompetency
• Shareholders can hold the company management responsible
Unavoidable or Complex

• Failures occur due to unavoidable factors for the operation

• Difficult to predict.
• Economic factors such as political instability, recessions, and wars
• macroeconomic business risks cannot be predicted.
• These risks cannot be avoided by businesses but mitigated.
Intellectual Business Failures

• Relate to business strategies

• A failure to strategize or research on business development.
• For example, a business may spend the bulk of resources on innovating new
technology but fail to achieve the results.
• A new product launch that results in failure due to lack of planning

Reorganization
A significant and disruptive repair of a troubled business intended to restore it to profitability.
It may include shutting down or selling divisions, replacing management, cutting budgets,
and laying off workers.
Businesses go through reorganization when they have financial troubles, new owners or staff,
or a structural change.
May change up their marketing strategies, staff, products or services, or business name.
Reorganizations might be voluntary or mandatory, depending on the circumstances

Reasons
1. Create a focus on core businesses

2. Align businesses vertically to improve accountability and reporting

3. Improve valuation and shareholder value

4. Provide a clear direction to potential investors

5. Take advantage of future growth potential

Types

Operational Reorganization

Streamlining business processes, improving efficiency, or adopting new technologies.

Financial Reorganization

Adjusting capital structure, debt restructuring, or bankruptcy-related changes.

Strategic Reorganization

Changing business models, entering new markets, or mergers and acquisitions.

Structural Reorganization

Changing organizational hierarchy, roles, or departments to improve productivity.

Reconstruction

"reconstruction" or "reorganizing" refers to a process where a company's financial

or operational structure is significantly altered, usually to improve its financial
position or address a crisis.
This can involve changes like restructuring debt, altering the company's legal
structure, or even transferring business operations to a new entity.
• When a company is suffering loss for several past years and suffering from financial
difficulties, it may go for reconstruction.
• Means that the old company is put into liquidation, and shareholders will therefore
agree to take shares of equivalent value in the new company
Objectives
1. To resolve the problem of over-capitalization/huge accumulated losses/over valuation of
assets.

2. When the capital structure of a company is complex and is required to make it simple

3. To change the face value of shares of the company

4. To generate surplus for writing off accumulated losses & writing down overstated assets.

5. Raising the fresh capital by issuing new shares.

6. Changing altogether the memorandum of association of the company.

7. To generate cash for working capital needs, replacement of assets, modernise plant &
machinery etc.

Types of reconstruction
External reconstruction

• Means the winding up of an existing company and registering itself into a new one after
a rearrangement of its financial position.
• There are two aspects
• Winding up of an existing company and,
• rearrangement of the company’s financial position
• Shall be approved by its shareholders and creditors and shall be sanctioned by the
national company law tribunal (NCLT).
• In external reconstruction, one company is liquidated and another new company is
formed. The liquidated company is called "vendor company" and the new company is
called "purchasing company". Shareholders of vendor company become the
shareholders of purchasing company.
Internal reconstruction

• It is also termed as re-organization which permits the existing company to be

continued. Generally, share capital is reduced to write off the past accumulated losses
of the company.
• A recourse undertaken to make necessary changes in the capital structure of a
company without liquidating the existing company.
• Reorganization of its share capital.
• Accounting procedure of internal reconstruction is distinct from that of amalgamation,
absorption and external reconstruction.
Provisions regarding Internal Reconstruction

• Authorization by articles of association

• Passing of special resolution
• Permission of tribunal
• Payment of borrowings
• Consent of creditors
• Public notice

Methods of internal reconstruction

1. Alteration of Share Capital:

• It may take the form of fresh issue of new shares, conversion of fully paid shares with
stock, cancellation of unissued capital, consolidation of existing shares and
subdivision of existing shares.
• Memorandum of association contains capital clause of a company. A company,
limited by shares, can alter this capital clause, if is permitted by
 i. The articles of association of the company; and

i i. If a resolution to this effect is passed by the company in the general

meeting.

2. Variation of Shareholders right:

If a company has different types (classes) of shares (like equity and preference shares), and it
wants to change the rights attached to any one type (such as voting rights or dividend rights),
then it can only do so if:

• At least 75% of the shareholders of that class agree in writing,

OR
• A special resolution is passed in a separate meeting of those shareholder
• Shareholders Who Do Not Agree With The Variation Can Appeal To The National
Company Law Tribunal (NCLT) Within 21 Days.
3.Reduction of Share Capital:

• The process where a company legally decreases its issued, subscribed, or paid-up
share capital due to restructuring, financial losses, or returning excess capital to
shareholders.
• this can help companies clean up their balance sheets, improve financial stability, or
enhance shareholder value.
• requires special resolution (75% shareholder approval) and NCLT (national company
law tribunal) approval.
4.Compromise/Arrangement:

• refers to an agreement between a company and its stakeholders (shareholders,

creditors, or debenture holders) to settle financial obligations in a mutually beneficial
way.
• it is commonly used in situations where a company is facing financial difficulties and
needs to restructure its liabilities or obligations.
• helps prevent liquidation and allows companies to restructure debts and capital.
5.Surrender of Shares:

Surrender of shares, in the context of company law, refers to the voluntary return of shares by
a shareholder to the company for cancellation.

In this method, shares are divided into shares of smaller denominations and then the
shareholders are made to surrender their shares to the Company.
Shares are then allotted to debenture holders and creditors so that their liabilities are reduced.
Unutilized surrendered shares are then cancelled by transferred to reconstruction account.
Liquidation

• Liquidation is a process in which the company is brought to an end.

• the assets and property of the company are redistributed to the creditors
and owners.
• Liquidation is also referred to as winding-up or dissolution, although
dissolution technically refers to the last stage of liquidation
• Liquidation may either be compulsory or voluntary.
• A liquidator is an individual who has been appointed to dissolve the
company and terminate its operations. This person is responsible for
selling the assets to repay the company’s internal and external liabilities.
Liquidation process

• The directors decide to voluntarily liquidate a business due to inadequate

cash flow
• Dissolution becomes the only option for paying off the creditors.
Alternatively, the court can order the compulsory dissolution of a
business.
• The company or the court appoints an Insolvency Professional (IP) as the
official liquidator to take charge of the process.
• At this stage, the owners lose their powers and rights, the liquidator takes
over.
 • The insolvency professional dissolves the assets after assessing.
• Next, the liquidator determines all the payables and debts of the
company.
• Finally, the authorized liquidator distributes the funds among claiming
parties based on the standard order of priority order.
• The company ceases to exist and is taken off the registrar of companies
(ROC).

Compulsory liquidation:
The court of law orders the business to terminate its operations and close down when the
company is unable to repay its liabilities.
Situations:
1) a company needs to pass a special resolution and also court orders for winding up
on the basis of some specific grounds
2) when company is unable to pay its debts
3) if company is carrying any illegal business
4) in case of non maintenance of accounts
5) when the statutory meeting is not conducted then the court may give orders to wind
up the company
6) in case of non submission of statutory report to the registrar
7) if company unable to start its business within a year after incorporation
8) if company is not having minimum number of members
9) if company doesn't follow the directions of the court or registrar or commission

Members Voluntary liquidation:

This type of liquidation is not forced by insolvency and is voluntarily decided by the
owner(s)/member(s) of the company. This means that the company is still solvent and can
make payments to creditors.

When a company is solvent and can pay off all its liabilities, dissolutions occur by consent.
Sometimes the purpose behind the forming of a company is fulfilled, and the owners want to
wind up.

Creditors’ voluntary liquidation:

A Creditors' Voluntary Liquidation (CVL) is a process where a company's directors choose to
wind up the company, but it is unable to pay its debts in full.

The company is considered insolvent, and the shareholders vote for a voluntary liquidation
after a general meeting.

A registered liquidator is appointed to manage the process, ensuring an orderly winding down
of the company's affairs for the benefit of creditors

Financing in M&A

Financing in M&A involves obtaining the necessary funds to facilitate the acquisition of one
company by another.

Common methods of financing M&A

a. Cash:

The acquiring company may use its own cash reserves to finance the acquisition fully or
partially,

This method provides a straightforward and immediate means of payment, but it can put a
strain on the acquirer's liquidity.

b. Debt Financing:

Acquirers often raise funds through debt financing, such as bank loans or issuing corporate
bonds. This approach allows the acquiring company to leverage its existing assets and future
cash flows to secure the necessary capital. The debt can be repaid over time using the
acquired company's cash flows or the combined entity's earnings

c. Equity Financing:
 Acquirers can raise funds by issuing equity, such as common stock or preferred shares, to
investors. This method involves selling ownership stakes in the acquiring company to raise
capital. It can dilute existing shareholders' ownership but provides a way to fund the
acquisition without incurring debt.

d. Seller Financing:

seller financing, also known as vendor financing or owner financing, is a financing

arrangement where the seller provides a portion of the purchase price as a loan to the
buyer. This often involves a down payment from the buyer, followed by installment
payments to the seller over an agreed-upon period.

e. Venture Capital or Private Equity:

Acquiring companies may secure financing from venture capital firms or private equity
investors. These investors provide capital in exchange for an ownership stake in the acquiring
company. Venture capital and private equity firms often specialize in financing high-growth
companies or specific industries.

f. Strategic Alliances or Joint Ventures:

Instead of outright acquisition companies may enter into strategic alliances or joint ventures
to pool resources and share risks. This approach allows for collaboration and cost-sharing
while maintaining separate ownership structures. Financing for such arrangements can come
from the participating companies own resources or through external funding sources.

g. Earnouts:

An earnout is a provision in the acquisition agreement that allows the seller to receive
additional payments based on the target company's future performance. This arrangement
bridges valuation gaps or uncertainties by tying a portion of the purchase price to the
achievement of specific financial or operational milestones.

Deal structuring
Deal structuring refers to determining the financial terms and conditions of the transaction.
This may include deciding the mix of cash, debt, and equity used for financing the deal,
determining the purchase price, and negotiating the payment schedule.

key considerations in deal structuring:

Purchase Price: The purchase price is a critical element of the deal structure, It can be
structured as a fixed amount, payable in cash, stock, or a combination of both
Payment Terms: The payment terms determine how and when the purchase price will be
paid to the seller. Common payment structures include upfront cash payments, installment
payments over a specified period, or deferred payments tied to the achievement of specific
milestones or earnout provisions.

Consideration Mix: The consideration mix refers to the combination of cash, stock, debt, or
other assets used to pay the purchase price. It can be tailored to meet the preferences and
objectives of both the buyer and the seller.

Tax Considerations: Deal structuring takes into account tax implications for both the buyer
and the seller. Depending on the jurisdictions involved, different tax strategies can be
employed to optimize tax efficiency, such as structuring the transaction as an asset purchase
Or a stock purchase, considering tax carryforwards, or utilizing tax-efficient jurisdictions

Risk Management in M&A

Risk management in M&A involves identifying and mitigating potential risks associated with
the transaction.

Due Diligence: Thorough due diligence is essential to identify and assess risks before
entering into an M&A deal. It involves evaluating the financial, legal. operational, and
strategic aspects of the target company. Due diligence helps uncover any undisclosed
liabilities. financial risks, legal issues, operational challenges, or potential roadblocks that
may impact the success of the transaction

Financial Risk Assessment: Financial risks in M&A deals can include overpaying for the
target company, assuming excessive debt or contingent liabilities, or encountering
unexpected financial challenges post-transaction Proper financial risk assessment involves
analyzing the target company's financial statements, cash flow projections, debt obligations,
working capital, and potential synergies to ensure a realistic valuation and understanding of
the financial risks involved.

Legal and Regulatory Risk Analysis: Legal and regulatory risks can arise from compliance
issues, pending litigation, contractual obligations, intellectual property disputes, or changes in
laws and regulations. It is crucial to assess the target compliance, review contracts and
company's legal and regulatory agreements, and identify potential legal risks that may impact
the transaction or future operations

Integration Risks: Integration risks arise from the process of combining the merged entities,
including cultural differences, organizational structure, systems integration, and human
resources challenges It is important to develop a comprehensive integration plan that
addresses these risks and establishes clear communication channels, change management
strategies, and alignment of processes and systems to ensure a smooth post-merger
integration

Operational Risk Evaluation: Operational risks relate to the target company's operational
performance, supply chain, production processes, technology potential challenges systems,
and customer relationships. Assessing operational risks helps identify in integrating
maintaining customer satisfaction. Understanding operational risk allows for better planning
and implementation of post-merger strategies to minimize disruptions and optimize
operational efficiency

Market and Competitive Risks: M&A transactions can bring market and competitive risks,
such as changes in market dynamics, competitive landscape customer preferences, or
technological advancements. Evaluating market and competitive risks involves analyzing
market trends, customer behavior, competitor analysis, and assessing the potential impact on
the merged entity's market position and growth prospects

Contingency Planning: Despite thorough risk assessment, unexpected events or risks may
still arise. Contingency planning involves developing strategies to address unforeseen risks or
adverse outcomes. This may include establishing risk mitigation measures, having backup
plans, or negotiating appropriate contractual protections and warranties

Regulatory Issues in M&A:

Regulatory issues in Mergers and Acquisitions (M&A) encompass various legal and
compliance aspects, including antitrust laws, securities laws, company laws, and sector-
specific regulations. These issues can significantly impact the success and timing of an M&A
deal.
1. Antitrust Laws:

These laws prevent monopolies and anti-competitive practices. Mergers between competitors
or those with substantial market power can face scrutiny from antitrust authorities (like the
Competition Commission of India).

2. Securities Laws:

These laws govern the issuance and trading of securities. M&A transactions involving
publicly traded companies are subject to disclosure requirements and takeover rules set by
regulators like the Securities and Exchange Board of India (SEBI).

3. Company Laws:

These laws outline the process for mergers and acquisitions, including schemes of
arrangement, mergers under the Companies Act, and recent amendments introducing stricter
compliance requirements.

4. Sector-Specific Regulations:

Certain industries (e.g., banking, insurance) have specialized regulatory frameworks. M&A
transactions in these sectors may require approvals from specific regulators (e.g., RBI for
banking).

5. Foreign Exchange and Investment Laws:

Cross-border M&A deals may be subject to regulations related to foreign direct investment
(FDI) and foreign exchange management.

MODULE 5
Economic Value Added (EVA)
Economic Value Added (EVA) is a financial performance metric that calculates the true
economic profit of a company.

It is based on the premise(Assumption) that a company only creates value for its
shareholders if it generates returns that exceed the cost of capital invested in the
business.

EVA is used to measure how effectively a company is utilizing its resources to generate
profit and create shareholder value.

Formula for EVA:

EVA=NOPAT− (Capital Employed × WACC)

Where:

 NOPAT (Net Operating Profit After Taxes): This is the company's operating profit
after taxes, excluding any financing costs (such as interest).
NOPAT=Operating Income×(1−Tax Rate)

 Capital Employed: The total capital invested in the company, which can be
calculated as the sum of equity and debt.
Capital Employed=Total Assets−Current Liabilities

 WACC (Weighted Average Cost of Capital): This is the average rate of return a
company is expected to pay to its shareholders (equity holders) and debt holders for
using their capital.
WACC= (EV×Re) + (DV×Rd×(1−T))

Where:

o E = Market value of equity

o D = Market value of debt

o V = Total market value of the company’s capital (equity + debt)

o Re = Cost of equity

o Rd = Cost of debt

o T = Corporate tax rate

Interpretation of EVA:

 Positive EVA:
o If EVA is positive, it means the company is generating a return above its cost
of capital and is creating value for shareholders.
 Negative EVA:
o If EVA is negative, it indicates that the company’s returns are not enough to
cover its cost of capital, and it is destroying value. This situation requires
immediate attention, as it suggests the company is not efficiently using its
capital.
Advantages of EVA:

1. Focus on True Profitability:

o Unlike accounting profit, EVA considers the cost of capital and provides a
more accurate measure of value creation.
2. Aligns with Shareholder Wealth:
o EVA is directly linked to shareholder value. A positive EVA suggests that the
company is adding value to its shareholders, aligning management’s interests
with those of investors.
3. Performance Measurement:
o EVA can be used as a performance metric to evaluate business units or
managers, encouraging decisions that maximize shareholder wealth.
4. Decision Making:
o It helps management in making more informed decisions regarding
investments, capital allocation, and cost control.
5. Discourages Excessive Risk-Taking:
o By factoring in the cost of capital, EVA discourages decisions that may
generate high returns at the cost of excessive risk.
Disadvantages of EVA:

1. Complexity in Calculation:
o Calculating EVA requires accurate data and involves adjustments to financial
statements (such as adjustments for operating leases or non-recurring items),
which may be time-consuming.
2. Focus on Short-Term Results:
 o While EVA is a valuable measure of profitability, it may focus more on short-
term performance rather than long-term strategic goals.
3. Not Always Reflective of Cash Flow:
o Although EVA adjusts for taxes and capital costs, it is not a direct reflection of
the company’s cash flow, which is another important measure of financial
health.
Applications of EVA:

1. Corporate Valuation:
o EVA is frequently used in corporate valuation models to estimate the value of
a company based on its future economic profit. The EVA-based valuation
model is often used by analysts and investors.
2. Strategic Planning and Investment Decisions:
o Companies use EVA to evaluate whether their investments or projects are
creating value. If a project does not generate a positive EVA, it might be
reconsidered or abandoned.
3. Executive Compensation:
o EVA is increasingly being used as a basis for performance-based executive
compensation plans, aligning the incentives of management with the creation
of shareholder wealth.
4. Mergers and Acquisitions (M&A):
o During M&A transactions, EVA can be used to assess the target company’s
value and the potential for value creation post-acquisition.

Shareholder Wealth and EVA Measurement

Shareholder wealth is the ultimate goal of corporate financial management. It refers to the
value delivered to shareholders in the form of increased stock prices, dividends, or both.
Economic Value Added (EVA) plays a significant role in measuring and creating
shareholder wealth. By assessing whether a company is generating returns above its cost of
capital, EVA directly ties into the concept of shareholder wealth.

EVA Measurement:

EVA measures the difference between a company's actual operating profit (after taxes) and
the cost of capital. If a company generates returns greater than its cost of capital, it creates
value for shareholders; if not, it destroys value.
 1. Positive EVA: A positive EVA indicates that the company is generating returns
that exceed the cost of capital, which leads to an increase in shareholder wealth.
This means the company is efficiently utilizing its resources and is expected to
increase its stock value over time.
2. Negative EVA: A negative EVA suggests that the company is not generating
sufficient returns to cover its cost of capital. This leads to a reduction in
shareholder wealth and can result in a decline in stock prices, signaling inefficiency in
capital utilization.
Relationship Between EVA and Shareholder Wealth

EVA is directly linked to shareholder wealth creation. Here's how:

1. Value Creation:
o Positive EVA indicates that a company is creating value by generating returns
above its cost of capital, which contributes to an increase in stock prices,
dividends, and overall shareholder wealth.
2. Value Destruction:
o Negative EVA signals that the company is destroying shareholder value
because it is not generating sufficient returns to cover its cost of capital. This
will likely result in a decline in the market value of the company, leading to a
decrease in shareholder wealth.
3. Long-Term Wealth:
o EVA measures the true profitability of a company, considering the cost of
capital. Long-term shareholder wealth is created when a company consistently
generates positive EVA. It shows that the company is not just earning profits,
but doing so efficiently and in excess of its capital costs.
4. Link with Stock Prices:
o Companies that generate positive EVA tend to be rewarded by the market with
higher stock prices. Investors recognize that such companies are more likely to
provide superior returns in the future. Over time, this drives up the value of the
company's stock, benefiting shareholders.
5. Performance-Based Executive Compensation:
o EVA is increasingly being used to structure executive compensation. This
ensures that management is aligned with the goal of creating shareholder
wealth. If executives improve EVA, they contribute to increasing the
company’s market value and, consequently, shareholder wealth.
Drivers of EVA:
The key drivers of EVA are factors that directly influence a company's operating profit
and its cost of capital. These can be broken down into two main categories:

 operating performance drivers and

 capital structure drivers.

1. Operating Performance Drivers:

These are the factors that impact a company's Net Operating Profit After Taxes (NOPAT),
which reflects the company's ability to generate profit from its core operations.

 Revenue Growth: An increase in revenues generally leads to higher operating profits,

assuming costs are managed effectively.
 Operating Efficiency: This refers to the company’s ability to generate profit from its
resources (assets). Efficiency improvements in areas like cost management,
production processes, or supply chain optimization can drive EVA positively.
 Profit Margins: Higher operating margins result in higher profits after tax (NOPAT).
Efficient management of operational costs and increasing pricing power can
contribute to better margins.
 Asset Utilization: The ability to generate higher sales per unit of capital employed
(assets) enhances EVA. Efficient use of assets to generate income drives profitability.
2. Capital Structure Drivers:

These are the factors that influence a company's Capital Employed and Weighted Average
Cost of Capital (WACC).

 Cost of Capital (WACC): The lower the WACC, the less capital the company needs
to generate a unit of profit, which increases EVA. Reducing the cost of debt and
equity can help improve EVA. For instance, refinancing high-cost debt or increasing
equity capital at favorable terms can lower the WACC.
 Capital Employed: The amount of capital invested in the business (equity and debt)
affects EVA. A higher capital base with a low return on investment will lower EVA.
Optimizing the use of capital (e.g., reducing underutilized assets) can drive higher
EVA.
 Debt Financing: Using debt financing (leverage) to finance operations can help
increase EVA, as long as the return on capital exceeds the cost of debt. However,
excessive leverage can increase risk and raise the cost of debt, which might negatively
affect EVA.
Market Value Added (MVA)

Market Value Added (MVA) is a performance metric that represents the difference
between the current market value of a company and the total capital invested by
shareholders (equity and debt).

It reflects the value created (or destroyed) by a company since its inception, from the
perspective of its investors. MVA measures the cumulative value a company has added to its
shareholders through its business activities, investment decisions, and overall management
performance.

Formula for MVA:

MVA=Market Value of the Company−Capital Invested

Where:

 Market Value of the Company

The market value of a company is the current value of its equity and debt in the market.
Market price of equity × Number of shares outstanding + Market value of debt.
 Capital Invested
Capital invested refers to the total amount of capital provided by the company’s shareholders
and debtholders, which is the money raised by issuing stock and debt. This includes both
equity (owner’s capital) and debt (borrowed capital).
Interpretation of MVA:

 Positive MVA:
o A positive MVA indicates that the company has created value for its
shareholders by generating returns higher than the cost of capital. This means
that the market perceives the company’s value to be higher than the total
capital invested in it.
 Negative MVA:
o A negative MVA suggests that the company has destroyed shareholder value,
as its market value is less than the capital invested. The company has failed to
generate returns in excess of its cost of capital.
Factors Influencing MVA:

1. Company Performance:
o Strong operating performance, reflected by consistent profitability, growth,
and value generation, leads to a positive MVA. This performance is influenced
by factors like revenue growth, margin improvement, cost control, and asset
utilization.
2. Management Decisions:
 o Effective capital allocation, strategic investments, and operational decisions
contribute to an increase in MVA. The company's ability to invest in projects
that exceed the cost of capital will result in positive MVA.
3. Market Perception:
o The market value of a company, which influences MVA, is also driven by
investor perception. Factors such as investor confidence, market trends,
economic conditions, and the company’s future prospects all impact the
market value.
4. External Factors:
o Economic conditions, industry performance, and overall market sentiment can
have a significant impact on the market value of a company. These external
factors can influence MVA even if the company is performing well
operationally.
5. Shareholder Expectations:
o Shareholders expect returns that exceed the cost of capital. If a company meets
or exceeds these expectations, it will have a positive MVA. If it fails to meet
these expectations, MVA will be negative.

Relationship Between EVA and MVA

1. EVA is a Leading Indicator; MVA is the Result

 EVA reflects short-term value creation (usually over a year).

 MVA is the accumulated market-based measure over time.
 When a company consistently generates positive EVA, investors expect future
economic profits → market value rises → MVA increases.

Basis EVA (Economic Value Added) MVA (Market Value Added)

Definition Measures the value a company Measures the difference between the
generates from its operations after market value of the company and the
deducting the cost of capital. capital invested by shareholders.

Formula EVA = NOPAT – (Capital × MVA = Market Value of Firm –

Cost of Capital) Capital Invested

Focus Internal performance (how External performance (how the

efficiently capital is used). market perceives the company).

Time Frame Short-term/period-specific (often Long-term cumulative measure.

calculated annually).

Objective Operational efficiency and value Shareholder wealth creation over

 creation in a specific period. time.

Type of Value Accounting-based value metric. Market-based value metric.

Implication of Company is generating returns Company has created value above

Positive Value above its cost of capital. what shareholders invested.