P2 sec B TOPIC 4

CORPORATE
RESTRUCTURING
Presented by: muhammad sanooh
 Corporate restructuring is a process of making significant changes to the
organization or structure of a company in order to improve the business
performance, financial position, and long-term sustainability of the
organization. Corporate restructuring usually involves revising the company's
ownership structure, assets, liabilities, and operations, and may involve
significant operational, financial, legal, and strategic changes.

Corporate restructuring may take many different forms, depending on the

objectives of the organization and the challenges it is facing
 Merger

A merger, or statutory merger, is executed under the provisions of applicable

state laws
In a merger, two (or more) entities combine to form a single new corporation,
with the stocks of all merging companies surrendered and replaced with new
stock in the name of the new company.
The boards of directors of both companies initiate and approve the plan, and
notice is given to all shareholders of the companies to attend a meeting and
approve the plan.
Most countries require a supermajority vote (over two-thirds of the votes) in
favor of the merger to be able to complete it.

Vodafone and idea to vi

 Classifications of Mergers

1. Horizontal Merger: A merger between two or more companies that operate

in the same industry or sector is known as a horizontal merger. The goal of a
horizontal merger is typically to gain greater market share, reduce
competition, and improve operational efficiency.

2. Vertical Merger: A vertical merger takes place when two or more firms that
operate at different stages of the production or distribution chain merge
together. For example, a company that manufactures products could merge
with another company that supplies raw materials. The objective of a vertical
merger is to improve supply chain efficiency and reduce costs.
3. Conglomerate Merger: A conglomerate merger is a merger between two or
more companies that operate in completely different industries or sectors. The
goal of a conglomerate merger is usually to diversify the portfolio of the
company and reduce risks associated with operating in a single industry.

4. A diagonal merger, A diagonal merger is a type of business combination

where two companies from related but not directly connected industries
merge. Unlike a vertical merger, where companies are in the same supply
chain, a diagonal merger usually involves firms that offer complementary
services or products.
 Reasons for Business Combinations
Companies enter into business combinations with the premise that such
combinations will result in synergies. Synergies of merging refer to the benefits
that result from combining two or more companies, which are greater than
the sum of the individual benefits achieved by each company working
independently. Synergies can come from different areas, including:
 Cost Synergies

Cost synergies occur when the combined company is able to reduce costs more
than the two companies are able to individually

Economies of scale: With an increase in production volume, the cost per

unit of the product or service decreases.
Elimination of duplicate or redundant functions
Optimization of supply chain
Reduction of administrative expenses
 Revenue Synergies

Revenue synergies occur when the combined company is able to generate

revenues that exceed the sum of the revenues of the separate companies.

Cross-selling and bundling products

Access to new markets
Offering new services
Improved pricing power
Improved brand reputation
 Financial Synergies

Combining companies may result in financial advantages that the smaller,

individual companies could not achieve.

Tax Benefits
Lower Cost of Capital
Increased Liquidity
Improved Operating Efficiency
Improved Valuation
 limitation of merging

While mergers may offer numerous potential benefits, there are several
limitations to this strategy that must be considered

Integration challenges
Cultural differences
Loss of key talent
Regulatory challenges
Unanticipated costs
Failure to achieve synergies
 Acquisition
Acquisition is a business strategy in which one company acquires another
company, either fully or a controlling stake, to gain control of its assets,
technology, operations, intellectual property, and market share. Acquisition is a
common way for companies to expand their business, diversify their product
offerings, enter new markets, or achieve economies of scale and cost synergies.

Acquisitions can take different forms, such as

An asset purchase acquisition is a specific type of merger or acquisition in which

the acquiring company only purchases selected assets of the target company,
instead of acquiring the entire business. This type of acquisition allows the
acquiring company to acquire only the assets it needs and leave behind any
unwanted liabilities or obligations.
 share purchase acquisition is a type of corporate acquisition in which one
company acquires the majority or all of the outstanding shares of another
company, giving the acquiring company full or significant control over the target
company. This type of acquisition is also called a stock acquisition.

A hostile takeover is an unsolicited attempt by one company, referred to as the

acquirer or bidder, to purchase a controlling interest in another company without
the approval of the target company's board of directors or management. In
hostile takeovers, the acquiring company often goes directly to the target
company's shareholders, making a tender offer, or a public offer to purchase
shares of the company at a premium price.

Proxy fight: The acquiring company may attempt to gain control of the target
company's board by encouraging shareholders to vote for new board members or
to support proposed changes to the company's bylaws or structure.
 Takeover Defenses

hostile takeover is a takeover that is not negotiated or approved by the

directors of the target company.

A hostile takeover occurs when a buyer attempts to control another entity (the
target) without the consent of the target's board of directors (or management)

Several methods can be used as defenses against hostile takeovers

Shark Repellent: Shark repellent is a mechanism that involves altering the

company's bylaws to make the acquisition more difficult, such as requiring a
supermajority vote of shareholders to approve a merger.
Golden Parachute: A golden parachute is a provision in a target company's
employment agreement that guarantees key executives significant
compensation if the company is bought out and they lose their jobs.

Poison Put: A poison put is a mechanism that allows bondholders to demand

immediate repayment of their debt if there is a change in control of the
company, which makes the acquisition more expensive.

White Knight: A white knight is a friendly acquirer, i.e., a third-party bidder

that is invited in by the target company to outbid the hostile acquirer.
Pacman defense, or reverse tender: if a hostile acquirer begins accumulating
stock in a target company, the target company may issue new shares to
dilute the acquirer’s holdings and raise cash, then use the cash to attempt a
takeover of the acquirer in a hostile bid

leveraged recapitalization: or restructuring involves having the company

borrow money to pay a large, one-time dividend to its shareholders. The
increased debt discourages any would-be acquirer because it inhibits them
from borrowing against the company’s assets to finance the acquisition

Crown Jewel Defense: The Crown Jewel Defense is a mechanism that involves
the sale of an essential or valuable part of the target company's assets to a
third party to make it less attractive to the hostile acquirer.
Supermajority merger approval: provisions require that more than a majority
(a supermajority) of affirmative votes be required to approve any merger.
Often two-thirds or three-fourths of the shareholder vote constitutes the
required supermajority. The supermajority requirement makes it more difficult
to get shareholder approval. For instance, a merger might require approval of
75% of shareholders for passage.

Voting Rights Plan (Restricted Voting Rights): the company charter may specify
that shareholders holding more than a certain percentage of the company
have no voting rights unless approved by the board of directors.

Fair merger price provisions: require a bidder to pay non-controlling

shareholders at least a “fair price” for their shares. This fair price may be a
stated price or it may be linked to earnings per share by requiring a certain
price/earnings ratio
 A poison pill

is a provision that companies include in their bylaws or shareholder

agreements to protect themselves from hostile takeover attempts

1. Flip-in Poison Pill: This mechanism allows existing shareholders, excluding

the hostile party, to buy additional shares at a discounted price. This dilutes
the share value of the hostile bidder, making the acquisition more expensive.

2. Flip-over Poison Pill: This mechanism allows the existing shareholders,

excluding the hostile bidder, to buy shares of the acquiring company in case of
a merger. This can lead to the dilution of the hostile bidder's shares.
 Corporate divestiture

Divestiture is the process of selling or disposing of assets, businesses, or

subsidiaries by a company. It involves the separation of a part of the company
from its operations, which may occur as a result of strategic restructuring,
regulatory requirements, or financial concerns
Corporate liquidation is the process of selling all of a company’s assets
and dissolving the company completely. This may occur when a company
is unable to pay its debts or when its shareholders decide to close down
the company. the firm’s assets are more valuable to shareholders in
liquidation than the present value of the expected cash flows from those
assets.

a partial sale of assets is when a company sells only a part of its assets,
not all of them. This could be done when a company needs to raise cash to
pay off debts or to invest in other areas of the business. is the sale of part
of one company to another company. if NPV is negative from the asset
then it is better that it be sold
A spinoff involves creating a new, independent company separate from the
original parent company. The parent company distributes shares of the new
company to its shareholders, who become owners of both companies

Equity carve-outs involve the divestiture of a part of the company, as do

spin-offs. However, an equity carve-out is different from a spin-off because
shares in the new company are not given to existing shareholders of the
parent but rather are sold to the public in an initial public offering. The
parent company usually retains the majority of the stock in the carved-out
new company and sells only part of the new company’s stock. The equity
carve-out is a form of equity financing and the carved-out company receives
the cash from the sale of its shares.
A tracking stock is a type of stock that is designed to track the performance of
a specific business unit or division within a company. It allows investors to
invest in a specific business unit without having to invest in the entire
company. The tracking stock allows the business unit to operate more
independently, with its own management team and financial reporting.

A split-up is a type of corporate restructuring in which a company divides into

two or more separate companies. This is done to unlock the value of specific
business units or segments that are not aligned strategically with the core
business or have different growth strategies

Going private" is a term used to describe the process of taking a publicly

traded company private by purchasing its shares and delisting it from the
stock exchange. When a company goes private, it becomes privately owned
and its shares are no longer publicly traded
 Leveraged Buyouts (LBOs)
A leveraged buyout is a method of financing the purchase of a company or a
segment of a company using very little equity. It is usually used when the company,
or part of the company, is sold to management. However, it may also be used in an
acquisition by an outside party
The leveraged buyout may come about because a company wants to divest itself of
a division and that division’s managers want to take over the ownership.
Alternatively, an entire company may be purchased in a leveraged buyout. When
the company is sold to management, it is called a management buyout, or MBO

In an LBO, the purchase is a cash purchase, but a large proportion of the offering
price is financed by the buyer(s) with large amounts of debt. The company or
segment being purchased is the borrower, and its assets are the collateral for the
debt that finances the purchase. To even be able to be considered for a leveraged
buyout, a company needs to have stable cash flows, little debt (before the buyout
debt), and unencumbered assets with market values high enough to be used as
collateral for the buyout borrowings
 Business valuation

Business valuation is the process of determining the economic value of a business or

company. It is an essential activity in any corporate transaction or restructuring; it
allows buyers and sellers to understand what the business is worth and what a
reasonable purchase or sale price would be.

Some common valuation approaches include:

Income approach – estimates the value of a business by its future expected earnings,
assuming a reasonable rate of return.
Market approach – uses the prices of businesses in the same industry or market as
the company being valued to determine its worth.
Asset-based approach – takes into account the tangible and intangible assets of the
business, such as equipment, real estate, intellectual property, and brand value.