Merger

Corporate Restructuring
Corporate Restructuring
The concept of restructuring requires
organisations to constantly reconsider their
-----organizational design and structure,
organizational systems and procedures,
formal statements on organizational philosophy ,
values, leader norms and reaction to critical
incidences, criteria for rewarding, recruitment,
selection, promotion and transfer.
Reasons for restructuring
• To induce higher earnings
• To leverage core competencies
• Divestiture and Networking
• To ensure clarity in vision, strategy and
structure
• Empowerment of employees
Merger
• A merger refers to a combination of two or
more companies into a single company.
This combination may be either through
absorption or consolidation.
• In absorption, one company absorbs
another company, whereas under
consolidation, two or more companies
combine to form a new company
• . In general parlance, mergers are also
referred to as amalgamations.
Classification of Mergers
• Horizontal
• A horizontal merger is one that takes place between two companies
in the same line of business.
• Vertical
• A vertical merger is one in which the buyer expands backwards and
merges with the company supplying raw materials or expands
forward in the direction of the ultimate consumer. in a vertical
merger, there is a merging of companies engaged at different
stages of the production cycle within the industry.
• Conglomerate
• In a conglomerate merger, the merging companies are in totally
unrelated lines of business.
Motives
• Synergy
• Synergy is the magic force that allows for
enhanced cost efficiencies of the new business.
Synergy takes the form of revenue enhancement
and cost savings.
• Staff reductions –
• Economies of scale: When two or more
companies combine, the larger volume of
operations of the merged entity results
economies of scale. Economies of scale arises
when increase in the volume of production leads
to a reduction in the cost of production per unit
• Acquiring new technology –
• Improved market reach and industry
visibility –
• Companies buy companies to reach new
markets and grow revenues and earnings.
A merge may expand two companies'
marketing and distribution, giving them
new sales opportunities.
• Utilization of tax shields:
• When a firm with accumulated losses and /or
unabsorbed tax shelters merges with a profit-making
firm, tax shields are utilized better as its losses and /or
unabsorbed tax shelters can be set off against the profits
of the profit-making firm and tax benefits can be quickly
realized.
• Cash Slack
• If a firm has excess cash , can be utilised to invest in a
cash poor firm which has no investment opportunities
• Diversification:
• Managerial Effectiveness
• if a more effective management team
replaces the existing management team,
which is performing poorly.
• Often a firm, plagued with managerial
inadequacies, can gain immensely from
the superior management that is likely to
emerge as a sequel to the merger.
Value creation through mergers
and acquisitions
• It creates an economic advantage when the
combined present values of the merged firms is
greater than the sum of their individual present
values as separate entities
• For example firm A and B , with values as Va
and Vb decide top merge
• Economic advantage will occur if
• Vpq> (Vp + Vq)
• EA= Vpq-(Vp+ Vq)
Valuation
• whether the purchase will be beneficial.
• how much the company being acquired is
really worth.
• Methods and tools when assessing a target
company.
• 1. Comparative Ratios - The following are two
examples of the many comparative metrics on which
acquiring companies may base their offers:
– Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an
acquiring company makes an offer that is a multiple of the
earnings of the target company. Looking at the P/E for all the
stocks within the same industry group will give the acquiring
company good guidance for what the target's P/E multiple
should be.
– Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the
acquiring company makes an offer as a multiple of the revenues,
again, while being aware of the price-to-sales ratio of other
companies in the industry.
• Replacement Cost -
• In a few cases, acquisitions are based on the cost of
replacing the target company. suppose the value of a
company is simply the sum of all its equipment and
staffing costs. The acquiring company can literally order
the target to sell at that price, or it will create a
competitor for the same cost.
• it takes a long time to assemble good management,
acquire property and get the right equipment.
• This method of establishing a price certainly wouldn't
make much sense in a service industry where the key
assets - people and ideas - are hard to value and
develop.
• Discounted Cash Flow (DCF) -
• A key valuation tool in M&A, discounted
cash flow analysis determines a company's
current value according to its estimated
future cash flows.
• Forecasted free cash flows (net income +
depreciation/amortization - capital
expenditures - change in working capital)
are discounted to a present value using the
company's weighted average costs of
capital (WACC).
Takeover
• Takeover implies acquisition of control of a company
which is already registered through the purchase or
exchange of shares.
• Takeover takes place usually by acquisition or purchase
from the shareholders of a company their shares at a
specified price to the extent of at least controlling interest
in order to gain control of the company .
• From legal perspective , takeover is of three;types
• [i] Friendly takeover , [ii] Bail out takeover , [iii] Hostile
takeover
types
• Friendly or Negotiated Takeover:- Friendly takeover means
takeover of one company by change in its management & control
through negotiations between the existing promoters and
prospective investor in a friendly manner.
• Bail Out Takeover - Takeover of a financially sick company by a

financially rich company as per the provisions of Sick Industrial
Companies (Special Provisions) Act, 1985 to bail out the former
from losses.
• Hostile takeover- Hostile takeover is a takeover where one company

unilaterally pursues the acquisition of shares of another company
without being into the knowledge of that other company. The most
dominant purpose which has forced most of the companies to resort
to this kind of takeover is increase in market share.
Context of business
• Horizontal Takeover- Takeover of one company by
another company in the same industry. The main purpose
behind this kind of takeover is achieving the economies of
scale or increasing the market share.
• Vertical Takeover - Takeover by one company with its

suppliers or customers. The former is known as Backward
integration and latter is known as Forward integration..
• [iii] Conglomerate takeover: Takeover of one company by

another company operating in totally different industries.
The main purpose of this kind of takeover is diversification
.
Defensive Tactics
• A target company in practice adopts a number of tactics to defend itself from
hostile takeover
• • Divestiture. In a divestiture the target company divests or spins off some of

its business in the form of an independent, subsidiary company. Thus , it
reduces the attractiveness of the existing business to the acquirer.
• • Crown jewels. When a target company uses the tactic of divestiture it is

said to sell the crown jewels. In some countries such as the UK, such tactic
is not allowed once the deal becomes known and is unavoidable.
• • Poison pill. An acquiring company itself could become a target when it is

bidding for another company. The tactics used by the acquiring company to
make itself unattractive to a potential bidder is called poison pills. For
example, the acquiring company may issue substantial amount of
convertible debentures to its existing shareholders to be converted at future
date when it faces a takeover threat. The task of bidder would become
difficult since the number of shares to have voting control of the company
will increase substantially
• Greenmail. Greenmail refers to an incentive offered by
management of the target company to the potential bidder for
not pursuing the takeover. The management of the target
company may offer the acquirer for its share a price higher than
the market price.
– • White knight. A target company is said to use a white night
when its management offers to be acquired by a friendly
company to escape from hostile takeover. The possible motive
for the management of Target Company to do so is not to lose
the management of the company. The hostile acquirer may
replace the management.
– • Golden parachutes. When a company offers hefty
compensations to its managers if they get ousted due to
takeover, the company is said to offer Golden parachutes. This
reduces their resistance to takeover.
Sell-Offs
• A sell-off, is the outright sale of a company

subsidiary.
• Normally, sell-offs are done because the
subsidiary doesn't fit into the parent company's
core strategy.
• The market may be undervaluing the combined
businesses due to a lack of synergy between the
parent and subsidiary. As a result, management
and the board decide that the subsidiary is better
off under different ownership.
• Sell-offs also raise cash, which can be used to
pay off debt.
Leveraged Buy out
• Acquisition in a company ,which is financed
substantially through debt
• When managers buy their company from its
owners employing debt , the leverage buy out is
called management buy out.
• LBO Targets
• High growth , high market share firms
• High profit potential firms
• High liquidity firms
• Low operating risk firms

Merger

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Corporate Restructuring

• Bail Out Takeover - Takeover of a financially sick company by a

• Hostile takeover- Hostile takeover is a takeover where one company

• Vertical Takeover - Takeover by one company with its

• [iii] Conglomerate takeover: Takeover of one company by

• • Divestiture. In a divestiture the target company divests or spins off some of

• • Crown jewels. When a target company uses the tactic of divestiture it is

• • Poison pill. An acquiring company itself could become a target when it is

• A sell-off, is the outright sale of a company

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