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Corporate Restructuring

Corporate restructuring includes various forms of collaborations, such as takeovers, mergers and acquisitions, spin-offs, leveraged buyouts etc. It refers to an alteration or change in the asset mix, ownership, business mix and alliance with another company with an aim to increase shareholder's value. Thus, there is a change in the business capacity and the portfolio of the business is related in order to increase the performance of the company. Mergers and Acquisitions (M & A) are popular among all forms of corporate restructuring.

Characteristics of Corporate Restructuring:

  • There is a change in the capacity of the business.
  • There is a change in the capital structure, there is called capital restructuring.
  • The ownership[ of the business changes, this is known as ownership restructuring.
  • When the company diversifies itself into a new venture or when there is divestment, outsourcing, band acquisition then it is called business restructuring.
  • When a firm acquires it sells the asset along with ownership then it is called asset restructuring e.g. Receivables factoring, securitization of debt, leasing back of asset, sales of assets.

Objectives of Corporate Restructuring:

  • The key objective is to increase the value/wealth of the shareholders. The company must evaluate its ownership, asset and capital mix along with the business portfolio to explore opportunities to increase the value of the shares.
  • Another objective is to focus on the core strength of the company.
  • Restructuring is done to achieve economies of scale, by gaining access and expanding to the global market.
  • Another motive is to attain operational synergy and effective distribution of infrastructure and management capabilities.
  • Restructuring is done to reduce the cost of capital.
  • With restructuring, a company can ensure an adequate and constant supply of raw materials.
  • Corporate restructuring is done to rehabilitate and survive a sick company by adjusting the losses of the dying company with the gains of a healthy company.
  • Strategically it is done to get on edge over the competitors, e.g. Walmart takes over Flipkart.

Forms of Corporate Restructuring:

1. Merger:

It is a process when two or more companies join and combine to form a company. Thus, there is a combination of two or more companies with an existing one.

2. Consolidation:

The consolidation process creates a new company with separate business, loans, liabilities and assets, of two or more businesses, where these companies cease to exist. Here, the companies are legally dissolved and an entirely new company is formed.  Consolidation comprises transfers of shares, liabilities and assets by the acquiring company to the newly formed company, either in exchange for cash or shares. e.g. Formation of HCL Ltd by the amalgamation of Hindustan computers Ltd, Hindustan Instrument Limited and Indian Reprographic Ltd and Indian Software Company.

3. Amalgamation:

Amalgamation can take place either via consolidation or merger. However, in India, the legal requirements for consolidation and merger are the same.
AS 14 defines the following terms,s with regard to amalgamation 
Transferor Company: The company which is amalgamated into another company.
Transferee Company: It is the company into which the aforementioned or transferor company has amalgamated.
Amalgamated Company: The resultant company.
Amalgamating Companies: The companies coming together in the process of amalgamation.

Forms of Amlgamtion:

Amalgamation in the Nature of Merger: Here, the assets and liabilities are polled in along with this, the interests of the shareholders of the business are also amalgamated. All the assets and liabilities and no adjustments are required to be made in the book value.

Amalgamation in the Nature of Purchase: When the conditions required for the amalgamation in nature of merger are not satisfied then,  this method is used. Here one company purchases or acquires another company and the company which has been purchased doesn't have proportionate shares in the equity capital of the newly amalgamated company.

4. Acquisition:

It is a process where business firms or companies acquire control over other business firms. The company which has been purchased or acquired is known as the target company. The acquirer gets the right to know the control of the policy and management decision of the target company, although the identity of the target company remains intact. One must note, in merger, consolidation or absorption a company takes over another company and merges the operations with its own. However acquisition, actually acquires the control of the business operations, assets and liabilities combining its business.

5. Divestiture:

When a company sells all the assets and claims of its business in exchange for cash and not against equity capital, then it is termed divestiture. The term divestiture is often called 'slump sale' as described by the Income-tax Act, 1961. The term assets are the combination of all investment, current assets, capital work progress and all fixed assets. However, the divest company does not take over the unsecured and secured loans. Generally, cash is chosen for consideration and not equity shares because

  • The divesting company requires cash to repay the unsecured loans and unsecured loans. Divesting company is one that is selling its assets, while the divested company is purchasing these assets.
  • The divesting company also requires cash to inject money into the failing business or to start another business.

6. Demerger:

It is a form of corporate restructuring which is opposite to a merger. Here, the companies decide to sell the assets, divisions, product lines to outsiders and work separately. Companies use it as a technique to consolidate and restructure their business in order to create more value for the shareholders. In this, the company selling the asset wants to create more value for the investors. A part of the business unit is sold at a higher price in comparison to its net worth some of the reasons for the demerger. It includes

Selling Cash Cows: This means that the companies may reach a saturation point by exploiting 'cash cows'. Hence, they sell these units to invest the money in the 'stars' so that higher returns can be generated.

Disposing Unprofitable Activities: With demerger, the company can remove unproductive and loss-making activities or units and focus on strategic activities.

7. Spin-Off:

When a company forms a new company from an existing single entity then it is a spin-off. Usually, the company that has been formed is the subsidiary company. There is no change in the ownership of the companies. The parent company allocates the shares to the company that has been spun off. This is done with no cash consideration.

Thus, the spin-off has various advantages which are explained below

  • The shareholders will be able to easily identify the value of the company because of separation.
  • The management can easily monitor which company is not performing well and quick managerial actions can improve the performance.
  • Now, the shareholders will have securities of two companies, i.e. the parent and its subsidiary.
  • The operational efficiency of the two units will increase because of more concentrated investments.
  • It helps in the allocation of key resources to growth avenues, which leads to increased profits.

8. Split Off:

When a company separates one of its units, then, the shareholders of parent companies are given an option to either choose ownership in the parent company or subsidiary.
Thus, under spin-off, the shareholders own both the companies, while in a split of they own either of the two.
Thus, an investor has two choices
  • Continue holding shares in the existing cooperation.
  • Exchange all of its shares or some of its shares for gaining control over the subsidiary company.

9. Sell-Off:

Here, the existing company sells a part of its company or business to a third party. This is the usual way of divesture. This is done to inhibit further pumping of money in the unproductive business units.

10. Carve Out:

Often known as equity carve-out, it is a strategy of the corporate to sell a portion of its business or a portion of its wholly-owned subsidiary by way of Initial Public Offer (IPO) while retaining full control over the management. Here, limited stocks are offered to the public and the majority of shares are owned or held by the parent company. Thus, we can say equity carve-out is a public sale of shares of a subsidiary company or parent company.

11. Split Up:

It is another alternative of demerger where the company splits up into various divisions and there is a distribution of equity shares of each part to its stockholders and the parent company dissolves and stops functioning.

12. Reduction in Capital:

It is a form of corporate restructuring when a corporate is permitted to reduce the liability of shares or extinguish or cancel any paid-up share capital or is permitted to pay of any paid-up capital which exceeds its requirement. Thus here, the equity of the company is reduced by way of share cancellation.

13. Buyback of Shares:

This is also a form of capital reduction where the company repurchases its own shares. Buyback of shares was illegal or legally prohibited under Section 77 of the Companies Act, 1999. However, now it is permitted to buy back its shares.
However, the Indian company has to satisfy various conditions
  • The company buying back it shares should not issue fresh capital (except bonus issue) for the next 1 year.
  • The company should explicitly tell the amount that it will use to buy back the security. It must also take the approval of the shareholders before such buyback.
  • The company should not raise loans or borrow to finance buyback.
  • The share that has been bought back will cease to exist and cannot be offered /issued again.
  • Buying back of shares should be done only out of the general reserve.
Thus, it is concluded that the buyback of securities is done to return the excess money to the shareholders, especially when the company does not require that money or when there is no investment opportunity to invest into.

14. Joint venture:

Another major form of corporate restructuring is a joint venture. Here, two or more companies come together and contribute to the equity capital to a third company that is newly formed. These are generally formed to fulfill a specific project which is beneficial to both companies.

15. Leveraged Buyouts (LBOs):

It is a transaction where a corporate uses a huge debt portion to gain control over another company, where its assets are used as collateral for these loans. Hence, under leveraged buyouts, the company which is taking over does not invest or pay money, rather it borrows funds on the basis of collateral, which is nothing but the assets of the firm it wishes to acquire. This concept is elaborated in further sections.

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