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6 Unit 8 Corporate Restructure
6 Unit 8 Corporate Restructure
Unit 8
Chapter 29
Restructuring - Concepts
Merger / amalgamation
Acquisition / take over
Financial restructuring
Divestiture / demerger
Buy-outs
Merger versus Consolidation
Merger
One firm is acquired by another
Acquiring firm retains name and acquired firm ceases to exist
Advantage – legally simple
Disadvantage – must be approved by stockholders of both firms
Combining of two business entities under common ownership
One party almost always dominates
Consolidation
Entirely new firm is created from combination of existing firms
Acquisitions
A firm can be acquired by another firm or individual(s) purchasing
voting shares of the firm’s stock
Tender offer – public offer to buy shares
Takeover implies the acquiring firm is larger than the target
Reverse takeover if the target is larger than the acquirer
Stock acquisition
No stockholder vote required
Can deal directly with stockholders, even if management is unfriendly
May be delayed if some target shareholders hold out for more money –
complete absorption requires a merger
Types of mergers
Horizontal mergers
Vertical mergers
Conglomerate mergers
And combinations of these
Horizontal mergers
• Involves two firms that operate and compete in the same market
• A horizontal merger results in the consolidation of firms that are direct rivals—that is, sell
substitutable products within overlapping geographic markets.
• Nepali Example: NIC Bank and Bank Of Asia
Vertical Mergers
The existing management buys the firm from the shareholders and takes it private.
The extra debt provides a tax deduction for the new owners, while at the same time turning
the pervious managers into owners.
Equity carve-out – company creates a new company out of a subsidiary and then sells a
minority interest to the public through an IPO
Spin-off – company creates a new company out of a subsidiary and distributes the shares
of the new company to the parent company’s stockholders
Business Failure
Insolvency
returns are negative or even low
losses at operational level
Technical Insolvency
Unable to pay its liabilities as they become due
liquidity crisis
Bankruptcy
assets are less than the liabilities
negative shareholder’s equity
Courts treat technical insolvency and bankruptcy in the same way