K.E.

S SHROFF COLLEGE OF ARTS AND COMMERCE

CLASS: T.Y.B.M.S (SEMESTER- 5)

SUBJECT: FINANCIAL MANAGEMENT

PRESENTATION ON: BUSINESS RESTRUTURING

TEACHER INCHARGE: UMA NAIDU

A.Y: 2010-11
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CREDITS.

SR.NO

NAMES

ROLL-NO

ASHLEY SEQUEIRA

29

CHARMI SHAH

30

NIKUNJ SHAH

31

NISHANT SHAH

32

POOJA SHAH

33

RAKSHA SHETTY

34

TEJAL SHIRODKAR

35

Acknowledgement
Any accomplishments requires the efforts of many people and this work is no different.The completion of the project not only brings an appreciated respite from many months of demanding effort, but also provides a welcome opportunity to acknowledge in writing the soul who helped all along the way, Miss UMA who is our FINANCIAL MANAGEMENT MAM who provided overall guidence regarding the project.Her help was willingly and expertly given at the time of great pressure and need, so we am greatly thankful to her. And, we thank all those who have directly or indirectly helped us in presenting the project.

INDEX

Sr.No

Particulars

Pg.No

INTRODUCTION & OBJECTIVES OF RESTRUCTURING

TYPES OF BUSINESS RESTRUCTURING

FINANCIAL IMPLICATIONS- VALUATION

FORMS OF RESTRUCTING

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ILLUSTRATION

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INTRODUCTION
Business Restructuring or Restructuring is a process where in companies consolidates its business operation activities and attains its desired objective to increase the profits mutually. It involves reorganization of assets and liabilities of the organization through conscious management action with the objective of drastically altering the quality and quantity of future cash flow streams. The main intention of reconstruction is to make the business operation more efficient, competitive and to increase the market share of the organization. The ways of reconstructing the organization are joint venture, mergers acquisition and takeover.

OBJECTIVES OF RESTRUCTURING

1. GROWTH : Growth of the organization is measured on its sales,profits and assets.If the organization grows the shareholders returns also increases,hence it is very essential for the organization to grow after a certain period of time to survive in the market. 2. TECHNOLOGY : Technology changes at a rapid pace, hence to meet the technology the organization has to collaborate with the once which are superior in the technology of that particular field. Many of the Indian firms have collaborated with the foreign companies just to make their firms well equipped with the latest technology. 3. GOVERNMENT POLICY: In order to adapt the changes in the government policy, firms may require going for corporate restructuring. 4. ECONOMIC STABILITY: The economic cycles and condition may force the firm to diversify their business operations. It has generally been seen that during the recession many of the firms face economic instability hence to cop from the situation many firm reconstruct themselves to improve its efficiency and profitability of the firm. 5. TO REDUCE DEPENDENCE: Many companies go for reconstruction in order to reduce the dependence and ensure continuous flow of raw material and other such services from other firm. It has been found that many firms take up reconstruction for these reasons.

TYPES OF BUSINESS RESTRUCTURING

1. MERGER Merger is a tool used by companies for the purpose of expanding their operations which is often aiming at increasing of their long term profitability. In business terms a merger is a combination of two or more than two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target company. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal of merger also they may reap in several benefits. A merger can resemble a takeover but result in a new company name, in some cases combining the names of the original companies, and in new branding. CLASSIFICATION OF MERGERS: a) Horizontal mergers : A horizontal merger takes place where the two merging companies produce similar product and they are in the same industry. In case of a horizontal merger two companies competing in the same market merge or join together. This type of merger can either have a very large effect or little to no effect on the entire market. When two extremely small companies having a small market share combine, or horizontally merge, the results of the merger are less noticeable. Such smaller horizontal mergers are very common. If a small local retail store were to horizontally merge with another retail store, the effect of this merger on the retail store market would be minimal. In case of a large horizontal merger which involves large players the resulting impact can be felt throughout the market sector and sometimes throughout the whole economy. Horizontal merger which involves large companies are often perceived as anticompetitive. If one company holding twenty five percent of the market shares combines with another company also holding twenty five percent of the market share, their combined share holding will then increase to fifty percent. Thus the resultant large horizontal merger has now given the new company an unfair market advantage over its competitors. b) Vertical mergers : Vertical mergers occur when two firms, each working at different stages in the production and involved in the same product combine. Vertical integrations are usually mergers of non- competing companies where ones product is a necessary component or complement of the others. Vertical integration can lower transaction costs, lead to synergistic improvements in design, production and distribution of the final output product and thus enhance competition. Vertical mergers can create or raise entry barriers that lead to higher prices or lower
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quality or innovation for the consumers. A vertical merger can increase entry barriers. Vertical integration can foreclose rivals from access to the much needed inputs or raise their costs of obtaining them. Vertical integration may be further classified into backward integration or forward integration. In case of a backward integration the company moves towards the consumers by eliminating the distributors. Vertical merger is one in which a firm or company combines with a supplier or distributor. This type of merger can be viewed as anticompetitive because it can often rob supply business from its competition. If a contractor has been receiving a material from two separate firms, and then he decides to acquire the two supplying firms, the vertical merger could cause the contractors competitors to go out of business. c) Congeneric mergers : Congeneric mergers occur where the two merging firms are in the same general industry, but they have no mutual buyer/ customer or supplier relationship, such as a merger between a bank and a leasing company, an automobile company merging with a finance company in order to provide auto finance. In this case the business of both the merging firms are co-related and thus it will facilitate both of them. d) Conglomerate mergers : Conglomerate mergers take place when the two firms operate in different industries. Such mergers takes place to their diversify business risk by participating in a number of different markets and products.

Reason of merger:
(1) Increase in effective value:
The principal reason of merger is, the value of the existing company formed by the combination of resources of one or more firms is greater than the earlier companies. Hence, due to merger the value of the firm increases and its works more efficiently. Example: acquiring the assets of Larson & Toubro, Reliance Industries has now highest value of assets. (2) Better Financial Planning: Merger leads for better financial planning and control. For example the long gestation period company. As a result the profits earned from the short gestation period company can be useful for the long gestation period, whereas the profits earned by the long gestation period will be beneficial for both the company.

(3) Economies of Scale: The amalgamated company will have their operation higher than the each individual company. It can thus have economies of scale by having utilization of production plant, distributing networks, engineering services etc. Such advantages can be accrued by same line of business when they are combined. (4) Growth: Growth of the organization can be measured by its volume of sales or the profits earned by the company. The firm may grow at a rapid pace due to external expansion because when two companys mergers, both the firms have expertise in two different areas. (5) Stabilization through diversification: External forms of expansion like merger stabilize the business earning by diversifying its scope of operation. The company experiences wide and various economic fluctuations in the business but due to merger the merged business will consistently earn profits

Demerits of Merger:
(1) Effects the National Economy: Merger is basically for the growth of the organization by reducing competition; maximum utilization of the capacity, operating economies and rehabilitation of the sick unit. Government comes up with various schemes for mergers every scheme should be examined keeping in view its danger to the economy. The schemes should be taken up only when it is advantageous to the economy. (2) Elimination of healthy competition: Merger may convert the small and growing unit into a larger one. Hence, it reduces individual competency to offer competition for healthy growth of the industrial unit.

(3) Concentration of economic power: Mergers have the tendency of concentration of power further it leads to monopoly which is ultimately not beneficial for the customer because they get standardized product than of a quality product.

2. ACQUISITION/TAKEOVER An acquisition, also known as a takeover, is the buying of one company (the target company) by another company. An acquisition may be friendly or hostile. In case of a friendly acquisition, the companies co-operate in the negotiations; whereas in the case of hostile acquisition, the takeover target company is unwilling to be bought or the target companys board has no prior knowledge of the offer. Acquisition usually refers to purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company & keep it name for the combined entity. This is known as a reverse takeover. After the process of acquisition / takeover is completed the acquiring company may retain Target Companys name or it may replace it by its name.

Types of Acquisition: (a) Acquisition by purchase of shares: The buyer buys the shares & therefore control & management of the target company is being purchased. Ownership control over the assets of the company, but since company is acquired intact as a going business; this form of transaction carries with it along with assets all of the risks that company face in its commercial environment. Acquisition by purchase of assets: The buyer buys the assets of the target company. The cash the target receives the consideration from the sell-off which is paid back to its shareholders by dividend or through liquidation proceeds. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to cherry-pick the asset that it wants & leave out the assets & liabilities that it does not. This can be particularly important where foreseeable liabilities may include future, unquantified damage awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage, etc.

(b)

3) AMALGAMATION Amalgamation is a process whereby all the assets and liabilities of existing two or more than two business entities to another new entity which is created specifically for this purpose. In case of amalgamation two or more than two separate entities are combined into one single entity.

4) DE-MERGER De-merger is a process of breakup of the merged entity. De-merger takes place mainly due to failure of the merger process. In case of de-merger a single entity is spilt up into two or more than two separate entities. 5) JOINT VENTURE Joint means together and venture means a project. Thus joint venture is a venture taken up jointly two or more than two separate entities for mutual help and benefit. A commonly accepted definition of an operating joint venture is a partnership through which two or more firms create a separate entity to carry out a productive economic activity in which each partner takes an active role in decision making. Each party to the operating joint venture makes a substantial contribution access to their respective distribution networks.

Essential features of a joint Venture:

1) An agreement between the parties on common long term business objectives such as a production, purchasing, sales, maintenance, repair, research, co-operation, consultation, financing, etc. 2) A pooling by the parties, for the achievement of the agreed objectives of the joint ventures business, of asset such as money, plant, machinery, equipment, management know-how, intellectual property right and other facilities. 3) A. characterization of the pooled assets as capital contribution by theventure parties\ partners. 4) Pursuance of the agreed objectives through management organs which are separate from the management organs of the joint venture parties\ partners. A sharing between the joint venture parties\partners, usually in proportion to their respective capital contributions, of the profits, resulting from and the risks associated with, the pursuance of agreed objectives, the liabilities of the joint venture parties\partners being normally limited to their capital contributions.

Financial Implications- Valuation:

It is said that, beauty lies in the house of the beholder and valuation in those of the buyer. The value of a business is a function of the business logic driving the M & A and it is based on bargaining powers of both the buyers and sellers. Since business is based on expectations which is dynamic and ever changing therefore valuation also tends to be dynamic and not static which means that the same transaction would be valued by the same players at different values at two different times.

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FORMS OF RESTRUCTING:
There are various forms of corporate reconstruction and those are: 1) Expansion : Expansion is the most common reason for reconstructing; it not only expands the business activity but also reduces additional technical expertise. Expansion increases the funds through debt and equity, acquisition of modern machinery and ultimately increases the profitability of the firm. 2) Diversification: Diversification involves entering into a line of business or product difference of the existing business which can be beneficial and economical for both the company. A firm may grow internally or externally. A firm is said to grow internally when it expands its area of operation and the expansion can be in same product or in different line of product. A firm grows externally when it mergers out with the other firm, due to external expansion the firm grow at a faster pace. 3) Collaboration: In Collaboration the firm joins with the other organization which is technically or financially superior to the existing firm. Now-a-days many of the foreign companies collaborate with the Indian companies to bring funds and technological growth in the existing Indian company. 4) Hive Off: Hive Off refers to sales of a loss making division or a product line by a multi product company. This serves a dual purpose. The buyer is benefited because of low acquisition cost of a companys established product line which he can conveniently combine with his existing business and thus increase profit and market share.

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ILLUSTRATION
ABC Ltd is intending to acquire XYZ Ltd. (by merger) and the following information is available in respect of the companies.

Particulars No. of Equity Shares Earning after Tax (RS.) Market Value per share ( RS.) Required:

ABC Ltd 10,000 50,00,000 42

XYZ Ltd 6,00,000 18,00,000 28

1) What is the present EPS of both the companies? 2) What is the present Price Earning Ratio. (P/E Ratio) of both companies? 3) If proposed merger takes place, what would be the new EPS for ABC Ltd (assuming that the merger take place by exchange of equity shares and the exchange ratio is based on the current market price?) 4) What should be the exchange ratio if, XYZ Ltd. Wants to ensure the same EPS to members as before the merger take ANSWER; 1) Present EPS: EPS = Earning After Tax Divide No. of equity Shares

ABC =50 lakhs Divide 10 lakhs = RS . 5 2) Present P/E Ratio: P/E = MPS Divide EPS

XYZ =18 lakhs Divide 6 lakhs = RS. 3

ABC =42 Divide 5

XYZ = 28 Divide 3

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= 8.4 Times

= 9.3 Times

3) New EPS for ABC Ltd after the proposed merger based on current MPS. ABC 42 6,00,000 Opposite Multiple XYZ 28 ?

= 4,00,000 6,00,000 Multiple to 28 AND Divide by 42 = 4,00,000 Shares

Ratio = 4,00,000 : 6,00,000 Ratio = 2:3 Old Shares + New Shares = Total shares 10,00,000 + ABC EAT 50,00,000 + + 4,00,000 = 14,00,000 = Total EAT

XYZ EAT 18,00,000

= RS . 68,00,000

New EPS = Total EAT

Divide by

Total No. of Shares 14,00,000

= 68.00.000 Divide by = RS. 4.85

Total Earnings is ABC Ltd. available to New shareholders = No. of New Shares = 4,00,000 shares = RS. 19,42,857.14 4) Exchange Ratio to earn same EPS as Pre-merger. Old EPS : ABC Ltd XYZ Ltd ABC RS. 5 RS. 3 XYZ
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Multiple Multiple

EPS RS. 4.85

5 6,00,000

Opposite Multiple

3 ?

=3,60,000 =6,00,000 Multiple to 3 Old Shares 10,00,000 + + New Shares 3,60,000 AND = = Divide by 5 = 3,60,000 Shares Total Shares 13,60,000 13,60,000

New EPS = 68,00,000 = RS. 5

Divide by

Total earnings in ABC Ltd. Available to New Shareholders = No. of New Shares = 3,60,000 Mulitiple Mulitiple EPS 5 = Total Earnings = 18,00,000

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THANK YOU
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