Corporate restructuring refers to changes in ownership, business mix, assets, and alliances to enhance shareholder value. It may involve ownership, business, or assets restructuring through mergers, acquisitions, divestitures, strategic alliances, joint ventures, employee stock ownership plans, or leverage buyouts. The main motives for restructuring include limiting competition, achieving economies of scale, and gaining access to new markets. Valuation methods like discounted cash flow are used to evaluate restructuring transactions.

1. Corporate Restructuring

2. Meaning
Corporate restructuring refers to the changes in
ownership, business mix, assets mix and alliances with a view to
enhance the shareholder value.
Hence, corporate restructuring may involve ownership
restructuring, business restructuring and assets restructuring.

3. Forms of Corporate Restructuring
1) Merger or Amalgamation
 Merger or amalgamation may take two forms:
• Absorption
• Consolidation
 In merger, there is complete amalgamation of the assets and liabilities as
well as shareholders’ interests and businesses of the merging companies.
 There is yet another mode of merger. Here one company may purchase
another company without giving proportionate ownership to the
shareholders’ of the acquired company or without continuing the business
of the acquired company.

4. Forms of Corporate Restructuring (cont..)
Forms of Merger
(1) Horizontal Merger
Acquisition of a company in the same industry in which the acquiring
firm competes increases a firm’s market power by exploiting

5. (2) Vertical Merger
Acquisition of a supplier or distributor of one or more of the
firm’s goods or services
(3) Conglomerate Merger
Acquisition by any company of unrelated industry

6. Forms of Corporate Restructuring (cont..)
 Acquisition may be defined as an act of acquiring effective
control over assets or management of a company by another
company without any combination of businesses or
companies.
 A substantial acquisition occurs when an acquiring firm
acquires substantial quantity of shares or voting rights of the
target company.

7. Forms of Corporate Restructuring (cont..)
Takeover – The term takeover is understood to connote hostility. When
an acquisition is a ‘forced’ or ‘unwilling’ acquisition, it is called a
takeover.
A holding company is a company that holds more than half of the
nominal value of the equity capital of another company, called a
subsidiary company, or controls the composition of its Board of
Directors. Both holding and subsidiary companies retain their separate
legal entities and maintain their separate books of accounts.

8. Motives of Corporate Restructuring
Limit competition.
Utilise under-utilised market power.
Overcome the problem of slow growth and profitability
in one’s own industry.
Achieve diversification.
Gain economies of scale and increase income with
proportionately less investment.
Establish a transnational bridgehead without excessive
start-up costs to gain access to a foreign market

9. Motives of Corporate Restructuring (Cont..)
Utilise under-utilised resources–human and physical
and managerial skills.
Displace existing management.
Circumvent government regulations.
Reap speculative gains attendant upon new security
issue or change in P/E ratio.
Create an image of aggressiveness and strategic
opportunism, empire building and to amass vast economic
powers of the company.

10. Legal Procedures for merger and acquisition
Permission for merger
Information to the stock exchange
Approval of board of directors
Application in the High Court
Shareholders’ and creditors’ meetings
Sanction by the High Court
Filing of the Court order
Transfer of assets and liabilities
10 Payment by cash or securities

11. Legal Process of Merger &
Acquisition

12. Process (Cont…)
Approval of Board of
Approval of Merger Information to stock Directors
Exchange
Sanction by High Court Shareholders & Creditors Application in High Court
meeting

13. Process (Cont…)
Filing of Court Order Transfer of Assets & Payment By cash or
Liabilities Securities

14. Methods of Valuation
Discounted Cash flow Method
 In order to apply DCF technique, the following
information is required:
• Estimating Free Cash Flows
 Revenues and expenses
 Cor.tax and depreciation:
 Working capital changes
• Estimating the Cost of Capital
• Terminal Value

15. Calculation of financial synergy
(1) Pooling of Interests Method:
In the pooling of interests method of
accounting, the balance sheet items and the profit
and loss items of the merged firms are combined
without recording the effects of merger. This implies
that asset, liabilities and other items of the
acquiring and the acquired firms are simply added
at the book values without making any adjustments.

16. Calculation of financial synergy (cont..)
Particulars Company X Company y After Merger
Share Capital 200 240 = 440
Fixed Assets 150 170 = 320
Liabilities 250 200 = 450
Current Assets 250 120 = 370
After merger both balance sheet will be combined is called
pooling of interest method

17. Calculation of financial synergy (cont..)
(2) Purchase Method
Under the purchase method, the assets and
liabilities of the acquiring firm after the
acquisition of the target firm may be stated at their
exiting carrying amounts or at the amounts
adjusted for the purchase price paid to the target
company.

18. Company X Company X
Particulars
Share Capital 200 240
Fixed Assets 150 170
Liabilities 250 200
Current Assets 250 120
If you paid for the company X Rs. 100 than the value of firm is equal to
Firm value = Total Assets – total liabilities
150 = 400-250
So share capital is shown at Rs.100. and Rs.50 is shown as capital premium

19. Divestiture
A divestment involves the sale of a company’s assets, or
product lines, or divisions or brand to the outsiders.
It is reverse of acquisition.
Motives:
 Strategic change
 Selling cash cows
 Disposal of unprofitable businesses
 Consolidation
 Unlocking value

20. Strategic Alliance
“A strategic alliance is a voluntary, formal arrangement
between two or more parties to pool resources to achieve a
common set of objectives that meet critical needs while
remaining independent entities.”
Example -

21. Joint Ventures
 A joint venture (JV) is a business agreement in which
parties agree to develop, for a finite time, a new entity
and new assets by contributing equity. They exercise
control over the enterprise and consequently share
revenues, expenses and assets
ICICI GROUP INDIA PRUDENTIAL GROUP

22. Sell-off
 When a company sells a part of its business to a third party, it is
called sell-off.
 It is a usual practice of a large number of companies to sell-off
to divest unprofitable or less profitable businesses to avoid
further drain on its resources.
 Sometimes the company might sell its profitable but non-core
businesses to ease its liquidity problems.

23. Spin-off
 When a company creates a new company from the
existing single entity, it is called a spin-off.
 The spin-off company would usually be created as a
subsidiary.
 Hence, there is no change in ownership.
 After the spin-off, shareholders hold shares in two
different companies.

24. Employee Stock Ownership
 An employee stock ownership plan (ESOP) is an employee-
owner scheme that provides a company's workforce with an
ownership interest in the company. In an ESOP, companies
provide their employees with stock ownership, often at no cost
to the employees. Shares are given to employees and may be
held in an ESOP trust until the employee retires or leaves the
company. The shares are then sold.
 E.g. First company introduce ESOP is Inforsys.

25. Leverage Buy-out (LBO)
 A leveraged buy-out (LBO) is an acquisition of a company in which
the acquisition is substantially financed through debt. When the
managers buy their company from its owners employing debt, the
leveraged buy-out is called management buy-out (MBO).
 The following firms are generally the targets for LBOs:
 High growth, high market share firms
 High profit potential firms
 High liquidity and high debt capacity firms
 Low operating risk firms
 The evaluation of LBO transactions involves the same analysis as for
mergers and acquisitions. The DCF approach is used to value an LBO.