♦ Expansion/contraction of a firm’s operations or
♦ Changes in its Assets or Financial or Ownership structure
♦ Changes in Corporate control
Forms of Corporate Restructuring
The most common forms of corporate restructuring are mergers/amalgamations, acquisitions/take overs, financial restructuring, divestitures/demergers and buy-outs. It is essentially the process of re-designing one or more aspects of the company.
(A) Mergers and Amalgamation – A merger is a combination of two or more distinct entities into one, the desired effect being accumulation of assets and liabilities of district entities and several other benefits such as, economies of scale, tax benefits, fast growth, synergy and diversification etc. The merging entities cease to be in existence and merge into a single servicing entity.
Amalgamation is an arrangement, whereby the assets and liabilities of two or more companies become vested in another company (amalgamated company) – without giving proportional ownership to the shareholders of the acquired company. The amalgamating companies all lose their identity and emerge as an amalgamated company, though in certain transaction structures the amalgamated company may or may not be the original companies.
Types of Mergers →
Horizontal Merger – It takes place when two or more corporates firms dealing in similar lines of activity combine together.
Vertical Merger – It occurs when a firm acquires firm’s `upstream’ from it and/or downstream from it. It involves combination of two or more stages of Production/distribution that are usually separate. Usually, it occurs between companies producing different products for one specific finished product.
Conglomerate Merger – It takes place between firms which have unrelated business activities. It is a combination in which a firm established in one industry combines with a firm from an unrelated industry (firms engaged in different unrelated activities combine together)
Concentric Merger – It takes place between two companies which share some common expertise that may be mutually advantageous.
(B) Acquisition/Takeovers – It implies acquisition of controlling interest in a company by another company. It does not lead to dissolution of company whose shares are acquired. It can assume three forms –
◊ Negotiated friendly – It is organized by the incumbent management with a view to parting with the control of management to another group through negotiation.
◊ Open market/hostile – The taking over company acquire shares from the open market/financial institutions/mutual funds and willing shareholders at a price higher than prevailing market price.
◊ Bail out takeover – It is a takeover of a financially weak company by a profitable company. Both the holding company and subsidiary retain separate legal entities and maintain their separate book of accounts.
(C ) Demerger – It is a form of corporate restructuring in which a company transfers one or more of its undertakings to another company in such a manner that –
- All the property/liabilities of the undertaking being transferred, becomes the part of the resulting company
- All property/liabilities of the undertakings are transferred at values appearing in the books of account
- The resulting company issues, its shares on a proportionate basis to the share holders of the demerged company
- Shareholders holding not less than 3/4thin the value of shares in the demerged company become shareholders of the resulting company
- The transfer of undertaking is on a going concern basis
- The demerger is in accordance with the conditions, under Sec 27 A by the Central Government
Divestitures – It is a form of corporate restructuring which involves sale of segment of a company for cash or securities. It involves sale of only some assets of the firm. These assets may be a plant, division, product line, subsidiary and so on.
- Split up – Split or division of a company
- Sell off – Selling off assets of a company in a declining market
- Spin Off – It is the division of company into wholly owned subsidiary of parent company by distribution of all its shares of the subsidiary company on a pro-rata basis. (New company from existing company)
(D) Financial Restructuring – It is carried out internally with the consent of the various stakeholders by corporates which have accumulated substantial losses. It is a suitable model for corporate firms accumulating losses over a number of years. It is achieved by formulating appropriate restructuring scheme involving a number of legal formalities. It implies significant change in the financial/capital structure of a firm, leading to the change in the payment of fixed financial charges and change in the pattern of ownership and control.
(E) Buy outs – The Management Buy outs (MBO) involves the sale of the existing firm to the management. The management may be from the same firm, from outside or may assure a hybrid form. When debt forms a substantial part of the total financing form outsiders the buy out transaction is called Leveraged buy out. Leveraged buy out implies acquisition of a firm that is financed principally by borrowing on a secured basis.
(F) Strategic Alliance – It is a voluntary formal agreement between two companies to pool their resources to achieve a common set of objectives while remaining independent entities.