CORPORATE RESTRUCTURING – REGULATIONS AND REGULATORS

Corporate restructuring Note for CS Professional Programme

Important aspects to be considered while planning or implementing corporate restructuring

Strategies

·         Valuation & Funding

·         Legal and procedural issues

·         Taxation and Stamp duty aspects

·         Accounting aspects

·         Competition aspects etc.

·         Human and Cultural synergies

Types of Corporate Restructuring Strategies

1. Merger

2. Demerger

3. Reverse Mergers

4. Disinvestment

5. Takeovers

6. Joint venture

7. Strategic alliance

8. Slump Sale

9. Franchising

10. Strategic alliance etc.

1. Merger

Merger is the combination of two or more companies which can be merged together either by way of amalgamation or absorption. The combining of two or more companies, is generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. Mergers may be

(i) Horizontal Merger: It is a merger of two or more companies that compete in the same industry. It is a merger with a direct competitor and hence expands as the firm's operations in the same industry. Horizontal mergers are designed to achieve economies of scale and result in reduce the number of competitors in the industry.

(ii) Vertical Merger: It is a merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system. If a company takes over its supplier/producers of raw material, then it may result in backward integration of its activities. On the other hand, Forward integration may result if a company decides to take over the retailer or Customer Company. Vertical merger provides a way for total integration to those firms which are striving for owning of all phases of the production schedule together with the marketing network

(iii) Co generic Merger: It is the type of merger, where two companies are in the same or related industries but do not offer the same products, but related products and may share similar distribution channels, providing synergies for the merger. The potential benefit from these mergers is high because these transactions offer opportunities to diversify around a common case of strategic resources.

(iv) Conglomerate Merger: These mergers involve firms engaged in unrelated type of activities i.e. the business of two companies are not related to each other horizontally nor vertically. In a pure conglomerate, there are no important common factors between the companies in production, marketing, research and development and technology. Conglomerate mergers are merger of different kinds of businesses under one flagship company. The purpose of merger remains utilization of financial resources enlarged debt capacity and also synergy of managerial functions. It does not have direct impact on acquisition of monopoly power and is thus favoured throughout the world as a means of diversification.

2. Demerger

It is a form of corporate restructuring in which the entity's business operations are segregated into one or

more components. A demerger is often done to help each of the segments operate more smoothly, as they can focus on a more specific task after demerger.

3. Reverse Merger

Reverse merger is the opportunity for the unlisted companies to become public listed company, without opting for Initial Public offer (IPO).In this process the private company acquires the majority shares of public company, with its own name.

4. Disinvestment

Disinvestment means the action of an organization or government selling or liquidating an asset or subsidiary. It is also known as "divestiture".

5. Takeover/Acquisition

Takeover means an acquirer takes over the control of the target company. It is also known as acquisition.

Normally this type of acquisition is undertaken to achieve market supremacy. It may be friendly or hostile

takeover.

Friendly takeover: In this type, one company takes over the management of the target company with the permission of the board.

Hostile takeover: In this type, one company takes over the management of the target company without its knowledge and against the wish of their management.

6. Joint Venture (JV)

A joint venture is an entity formed by two or more companies to undertake financial activity together. The

parties agree to contribute equity to form a new entity and share the revenues, expenses, and control of the company. It may be Project based joint venture or Functional based joint venture.

Project based Joint venture: The joint venture entered into by the companies in order to achieve a specific task is known as project based JV.

Functional based Joint venture: The joint venture entered into by the companies in order to achieve mutual benefit is known as functional based JV.

7. Strategic Alliance

Any agreement between two or more parties to collaborate with each other, in order to achieve certain objectives while continuing to remain independent organizations is called strategic alliance.

8. Franchising

Franchising may be defined as an arrangement where one party (franchiser) grants another party (franchisee) the right to use trade name as well as certain business systems and process, to produce and

market goods or services according to certain specifications. The franchisee usually pays a one-time franchisee fee plus a percentage of sales revenue as royalty and

gains.

9. Slump sale

Slump sale means the transfer of one or more undertaking as a result of the sale of lump sum consideration without values being assigned to the individual assets and liabilities in such sales. If a company sells or disposes of the whole or substantially the whole of its undertaking for a predetermined lump sum consideration, then it results in a slump sale.