Chapter 1

Introduction

1.1 Corporate Restructuring

Meaning: “To give a new structure, to rebuild or rearrange”
Restructuring is corporate management term for the take action of incompletely
dismantling or else reorganizing a company for the purpose of making its well-organized
and consequently more profitable. It usually involves selling off portions of the business
and making severs staff reductions.

One of the mainly high profile features of the company and investment worlds is
corporate restructuring. Corporate restructuring means actions taken to develop or
agreement a firm's basic operations or essentially change its asset or financial structure.
Corporate restructuring refers to a wide range of actions that increase or agreement a
firm’s operations or considerably change its financial structure or take about a major
change in its organizational structure and internal operation.

Corporate restructuring is the procedure of redesigning one or more feature of a

company. The procedure of reorganizing a company may be implemented due to amount
of different factors, such as positioning the business to be more aggressive, stay alive a
currently unfavorable economic climate, or bearing the corporation to move in an
completely new direction. Now are some examples of why corporate restructuring may
take position and what it can represent for the company.

Restructuring a corporate body is often a requirement when the business has grown to the
point that the original structure can no longer competently manage the production and
common interests of the company. For example, a corporate restructuring may call for
spinning-off some departments into subsidiaries as a means of creating a more successful
management representation as well as taking advantage of tax breaks that would agree to
the corporation to divert more returns to the production process. In this situation, the
restructuring is seen as a positive symbol of growth of the company and is often welcome
by those who wish to see the company gain a larger market share.

1.2 Need for corporate restructuring

Corporate restructuring may also get place as a result of the acquisition of the business by
new owners. The acquisition may be in the type of a leveraged buyouts, a hostile
takeover, or a merger of some form that keeps the business whole as a subsidiary of the
controlling company. When the restructuring is due to a hostile takeover, corporate raider
often apply a dismantling of the company, selling-off properties and other assets in order
to make a profit from the buyout. What remains following this restructuring may be a
minor entity that can carry on functioning, although not at the level possible before the
takeover took position.

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In general, the plan of corporate restructuring is to allow the business to carry on
operation in some manner. Even when corporate raiders divide the business and leave
behind a shell of the original structure, there is still regularly a hope, what remains can
function well sufficient for a new buyer to purchase the diminished company and return it
to profitability.

1.3 Purpose:

• To improve the share holder value, The corporation should continuously assess
its:
1. Portfolio of businesses,
2. Capital mix,
3. Ownership &
4. Asset arrangements to find opportunity to increase the share holder’s
value.

• To focus on asset use and profitable investment opportunities.

• To reorganize or divest less profitable or loss making business/products.

• The corporation can also improve value through capital Restructuring, it can
innovate securities that help to reduce cost of capital.

1.4 Characteristic of corporate restructuring

• To develop the company’s Balance sheet, (by selling unprofitable division

from its core business).

• To attain staff reduction ( by selling/closing of unprofitable portion)

• Changes in corporate management.

• Outsourcing of function such as payroll and technical support to a more efficient

third party.

• Moving of procedures such as manufacturing to lower-cost locations.

• Reorganizing of functions such as sales, marketing and distribution

• Renegotiation of labor contracts to reduce overhead

• Refinancing of corporate debt to decrease interest payments.

• A major public relationships campaign to reposition the company with

consumers.

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1.5 Category of corporate restructuring
Corporate restructuring involve a forms of activities including financial restructuring,
organization restructuring; portfolio restructuring.
Figure 1
Category of
corporate
Restructuring

Financial Organizational Portfolio

Restructuring Restructuring Restructuring

1.5.1 Financial restructuring

Financial restructuring is the restructuring of the financial assets and liabilities of a
business in order to make the most beneficial financial environment for the corporation.
The process of financial restructuring is often related with corporate restructuring, in that
restructuring the general function and work of the business is likely to impact the
financial health of the company. When completed, this reorganizes of corporate assets
and liabilities can help the company to remain competitive, even in a low economy.

Just about every business goes throughout a stage of financial restructuring at one time or
another. In some cases, the procedure of restructuring takes place as a means of allocating
resources for a new marketing movement or the launch of a new product line. When this
happen, the restructuring is often viewed as a sign that the business is financially stable
and has set goals for future growth and development.
.
1.5.2 Organizational restructuring

In organizational restructuring, the center of attention is on management and internal

corporate structures. Organizational restructuring has become a very general practice
between the firms in order to match the growing competition of the market. This makes

3
the company to change the organizational structure of the company for the improvement
of the business.

1.5.3 Portfolio restructuring

Portfolio restructuring refers to change in the portfolio of business of the corporation. If a
company is reshuffle its assets by selling a few of its existing production services or
acquiring some new facilities to produce the feeding raw martial for the main product it is
called portfolio restructuring.

It involves changes in the design of business in which a company is operation throughout

acquisitions. It is for creation additional to or disposals from corporations business
through acquisitions or spin-offs. Portfolio restructuring also has a high possibility of
improving performance although the performance gain is likely to be much more
diffident than with financial restructuring.

It refers to changes in the sets of companies comprising the corporation to create a more
effective configuration of businesses. Effectiveness is increased by combining lines of
businesses in areas where the firm has competitive advantage, and by shedding lines of
business where it cannot obtain higher returns than its competitors.

Corporate Restructuring Activities

Figure 2
Expansion
Mergers & acquisition
Tender offers
Joint venture

SELL-OFFs
Spin-off
Split-off

Corporate Restructuring
Activities
Corporate control
A Premium buy-back
Standstill Agreements
Anti-take over
Proxy contests

Change in
ownership
Exchange offer
4 Share repurchase
1.6 Methods of corporate restructuring
1. Joint ventures
2. Sell off and spin off
3. Divestitures
4. Equity carve out
5. Share repurchase
6. Leveraged buy outs
7. Management buy outs
8. Master limited partnerships
9. Employee stock ownership plans

1.6.1 Joint Venture

Joint ventures is a business enterprise for profit, in which two or more parties share
responsibilities in an agreed manner, by providing risk capital technology patent
trademark brand name to access to market. Joint ventures with multinational companies
give to the development of production capacity; transfer of technology and capital and
over all penetrating into global market. Entering into joint ventures is a part of strategic
business policy to diversify and enter into new markets, acquire finance, technology,
patent and brand names.

1.6.2 Spin-offs

Spin-offs are a method to get rid of underperforming or non-core company divisions that
can draw down profits. The common definition of spin-offs is when a division of a
business or organization becomes an independent business. The "spin-out" business takes
assets, intellectual property, technology, and/or existing products from the parent
company.

Some times the management team of the new company is from the same parent company.
A spin-out present the chance for a division to be backed by the company but not be
affected by the parent company's image or background, giving potential to take previous
ideas that had been languishing in an old environment and help them grow in a new
environment.

1.6.3 Spilt off and spilt up

Spilt off is a transaction in which some, but not all, parent company shareholders receive
shares in a subsidiary, in return for relinquishing their parent company’s share.
In other words a number of parent company shareholders receive the subsidiary shares in
come back for which they must give up their parent company shares.

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1.6.4 Split up
Spilt up is a transaction in which a corporation spin-offs all of its subsidiaries to its
shareholders & ceases to exist.

-The whole firm is broken up in a series of spin-offs.

-The parent firm no longer exists and

-Only the new offspring survive.

In a split-up, a corporation is split up into two or more independent companies. As a

follow-up, the parent company disappears as a corporate body and in its place two or
more separate companies emerge.

1.6.5 Sell-off
In a strategic planning process, which a company can take decision to concentrate on core
business activities by selling off the non core business divisions. A sell-off is a sale of
part of the organization to a third party in the following circumstances.
• To come out of shortage of cash a severs liquidity problems.
• To concentrate on core business activities.
• To protect the firm from takeover activities by selling off the desirable division to
the bidder.
• To improve the profitability of the firm by selling off loss making divisions.
• To increase the efficiency of men, machines and money.

1.6.6 Divestments
Divesture is a deal through which a company sells a section of its assets or a division to
another company. It involves selling some of the assets or separation for cash or
securities to a third party which is an outsider. Divestiture is a form of reduction for the
selling company. means of expansion for the purchasing company. It represents the sale
of a section of a business (assets, a product line, a subsidiary) to a third party for cash and
or securities.

1.6.7 Equity carve outs

A agreement in which a parent company offers some of a subsidiaries common stock to
the general public, to bring in a cash combination to the parent without loss of control. In
other words equity carve outs are those in which a number of of a subsidiaries shares are
offered for a sale to the general public, bringing an combination of cash to the parent firm
without loss of control. Equity carve out is also a way of reducing their contact to a
riskier line of business and to increase shareholders value.

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1.6.8 Share repurchases
A program through a company buys back its own shares from the marketplace, reducing
the number of outstanding shares. This is usually a sign that the company's management
thinks the shares are undervalued. Because a share repurchase reduces the amount of
shares outstanding, it increases earnings per share and tends to raise the market value of
the remaining shares. When a corporation does repurchase shares, it will generally say
something along the lines of, "We find no better investment than our own corporation.

In adding to above methods of restructuring, Buy-back is also used as restructuring

strategy so as to increase earning per share of the corporation. Policy used to increase
market price of share is called as Subdivision of shares, which is also type of corporate
restructuring.

1.6.9 Leveraged Buy outs

A leveraged buy outs is any acquisition of a company which leaves the acquired
operating entity with a greater then traditional debt to equity ratio. The consideration for
leveraged buy outs is a mix of debt and equity components with high gearing. Strong
cash flows and high returns are used to serve the high levels of interest and repayments of
principal internal cash flow and sales of assets are used to repay the original owner in
leveraged buy outs.

In a leveraged buyout, the corporation is purchased primarily with borrowed funds. In

fact, as a lot of 90% of the purchase price can be borrowed. This can be a risky decision,
as the assets of the business are regularly used as collateral, and if the business fails to
perform, it can go bankrupt for the reason that the people concerned in the buyout will
not be able to service their debt.

1.6.10 Management buy outs

In this case, management of the corporation buys the business, and they may be joined by
employees in the venture. This practice is from time to time questioned because
management can have inequitable advantages in negotiations, and could potentially
influence the value of the business in order to carry down the purchase price for them. On
the other hand, for employees and management, the opportunity of being able to buy out
their employers in the future may serve as an incentive to make the business physically
powerful. Management buy outs occurs when a company's managers buy or acquire a
large part of the corporation. The goal of a management buy outs may be to make
stronger the managers' interest in the success of the company.

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1.6.11 Master limited partnership
Master Limited Partnership is a type of limited partnership in which the shares are
publicly traded. The limited partnership benefits are divided into units which are traded
as shares of common stock. Shares of rights are referred to as units.

1.6.12 Employee’s stock option plan

An Employee Stock Option is a type of define contribution benefit plan that buys and
holds stock. Employ stock option plan is a qualified, defined contribution, employee
benefit plan designed to invest primarily in the stock of the sponsoring employer.
Employee Stock Options are qualified in the sense that the employ stock option plan
sponsoring company, the selling shareholder and participants receive various tax benefits.
In employ stock option plan employees never buy or hold the stock directly.

1.7 Research objectives

My research objective is that to find out the circumstances in which the company adopted
the process of corporate restructuring. I identified the all process of corporate
restructuring used in organizations. I discussed some of method are used by the
companies adopted corporate restructuring. My objective of research to define why
companies are needs of corporate restructuring? To identify the corporate restructuring
are provide better effect to companies? In the direction of define the structure of
corporate restructuring. My thesis work focus lying on corporate restructuring and a
number of of methods of corporate restructuring.

1.8 Research Process

My research topic is corporate restructuring and its methods. It is general problem area.
My thesis consists as part of the exploratory research. An exploration typically begins
with a search for published data and studies. During research I face many problems in a
position to narrow down from its original broad base and define the issue clearly.
I collected data from different sources and major proportion of data collected through
internet, some books study. My research design is a master plan specifying the methods
and procedures for collecting and analyzing the needed information.

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Chapter 2

Literature review

2.1 Corporate restructuring in Business corporations

Over the 1980 and 1990, companies across the world have engaged in corporate
restructuring activities. This elevates the question as to whether corporate restructuring
actions are similar across national boundaries, or whether patterns of corporate
restructuring are related to national institutional contexts. It also poses the problem as to
the direction of changes: are companies restructuring towards new organizational forms,
as has been claimed by some management authors.
The term corporate restructuring is slightly difficult to define. According to Bowman and

Singh (1989), restructuring include a important and rapid change along one or more of
three dimensions: assets, capital structure or management. A most important difficulty
defining the concept of restructuring is that there is 'a lack of systematic academic theory
and evidence on the consequences of restructuring' (Singh 1993, p. 148). This hold
especially for the third dimension of management.

According to a study by the Harvard Business School (2), corporate restructuring has
enabled thousands of organizations around the world to respond more quickly and
effectively to new opportunities and unexpected pressures, thereby re-establishing their
competitive advantage. (Andreas Kemper) defined that various field have contributed to
the literature, numerous restructuring have failed in practice, which has results from
empirical performance investigations of restructurings reveal a diverse spectrum of
conclusion. While some companies have been very successful in their restructuring
efforts, other has destroyed shareholder value. (Dale f Gray 1999) is defined that
corporate restructuring and improved corporate governance is essential parts of economic
reform programs under way in many countries. (Stijn Claessens 1999) Cross-country
experiences suggest several important principles for successful systemic restructuring. It
need satisfactory public resources, deep changes in institutions, rules of the games, and
attitudes, an early and systematic evaluation of the size of the problem, design of an
overall strategy, and prompt action.

A dominant feature in the literature on the dimension of management has been the
discussion on the shape of the 'new organization'. According to one persistent argument,
we are currently witnessing a major break from the multidivisional form of organization
seen in the past. Emerging organizational forms, referred to alternatively as 'N-forms'
(Hedlund 1994), cellular forms (Miles/Snow/Mathews/Miles/Coleman 1997) or the
individualized corporation (Ghoshal/Bartlett 1997), would be characterized in particular
by less horizontal and vertical differentiation, and by more ad hoc internal linkages.
Research on corporate restructuring has usually focused on one country (cf.
Liebeskind/Opler/Hatfield 1996, Geroski/Gregg 1994), and cross-national study on
corporate restructuring has stay relatively scarce (exceptions include Whittington et al.

9
1999a, Frese/Teuvsen 1999, Buhner/Rasheed/Rosenstein 1997). This may be due e.g. to
the be short of of right to use to comparable data sets, uncertainties in understanding
foreign contexts, and the difficulties of conducting cross-national research (cf. Teagarden
et al. 1995, Kohn 1996). Exploiting attach with six European business schools, this paper
assesses patterns of corporate restructuring and changes in forms of organizing over the
1992-1996 period, using the results of a recent European survey
(Pettigrew/Whittington/Conyon 1995). We look at comparisons and contrasts in the
European evidence on restructuring, in order to assess whether new patterns of
organizing are emerging at different places and at different paces across Europe. In
responsibility so, we shall talk to some of the methodological problems associated with
cross-national research.

Business corporations are of central importance to economic activity at both the national
and global levels. In 2002 there were 13 corporations in the world that had revenues in
excess of $100 billion -- six of them American, three Japanese, two German, one British,
and one British-Dutch. Of the world’s 50 biggest employers– 18 were American, nine
French, seven German, six Chinese, four Japanese, two British, and one each Dutch,
British-Dutch, Russian and Swiss. In

At some point in history – although in many cases that history goes back more than a
hundred years -- even the largest of these business corporations did not exist. These
corporations grew large over time by developing the productive capabilities of their
investments in physical and human capital and then realizing returns on these investments
through the sale of goods and services, thus reaping the benefits of economies of scale
and scope. In historical retrospect, that growth was not inevitable (even if, with careful
research, it may be explicable), and one cannot assume that any particular corporation
will be able to sustain, let alone augment, its current levels of revenue and employment in
the future. Industrial corporations that have grown large often undergo major
restructuring. (Maran Marimuthu 2009) The fundamental reason for carrying out
corporate restructuring is to further enhance the long-term survival of firms through
greater efficiency and cost-effectiveness. As a result, companies are jump to conduct
financial restructuring as part of their corporate restructuring program. This involves
some adjustment on their capital structure as there is a need to have changes on either
their debt proportions or equity proportions. This article explores certain critical areas of
capital structure. The argument here is based on the life cycle of a company, firm specific
characteristics and type of business dimensions.

This learn also present a conceptual understanding on capital structure in a given set of
factors/variables. It is also postulated here that researchers should look into the possibility
of remodeling their work on capital structure. McKinley and Scherer (2000) described
restructuring as some major reconfiguration of internal administrative structure that is
associated with an intentional management change program. This definition is consistent
with Bowman and Singh (1993) description of organizational restructuring. There are
three types of corporate restructuring transactions, first financial restructuring including
recapitalization stock repurchases and changes in capital structure. Second is portfolio
restructuring involving divestment and acquisitions and refocusing on core businesses,

10
follow-on in change of the variety of business in the corporate portfolio, and the third is
operational restructuring including retrenchment, reorganization, and changes in business
level strategies.

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Chapter 3

Corporate spin offs

3.1 What are corporate spin-offs?

Spin-offs divide one firm into two; current shareholders receive a pro-rata sharing of
separate equity claims on a separation of the original firm’s net assets. Spin-offs occur
when a parent firm distributes all or most of its holdings of stock in a subsidiary to the
parent shareholders based on the proportion to their holdings in the parent firm, on a pro
rata basis. As a result, the subsidiary firm is no longer owned or controlled by the parent
firm and there are two separate publicly traded firms. Prior to the spin-offs shareholders
only own the parent firm stock, whereas after the spin-offs they own shares in both the
parent and the subsidiary. In these dealings, no funds modify hands and the assets of the
subsidiary are not revalued.

A Corporate Spin-Offs is the separation of an existing company into two, usually a bigger
one “the parent company” and a smaller one “the Spin-Off”. Corporate Spin-Offs can be
the effect of restructuring of the parent firm or can be formed when employees use their
skill acquired within the parent firm to exploit new ventures outside the parent firm.

Corporate spin-offs are often the result of restructuring or reorganizations of the parent
firm. Activities that are not inside the organization core competencies and that do not
gather minimum performance requirements are also closed down or spun-off.
Furthermore, sectors with high spin-offs frequencies are often sectors that experience a
high level of cost-cutting activity. Deregulation seems to have been one of the driving
factors in encourage the emergence of Corporate spin-offs in the energy and
telecommunications sector. Corporate spin-offs might also be shaped when employees
are not able to understand their ideas in the parent corporation. These employees want to
use an unused potential based on their key experience acquired inside the parent
corporation. Some of them are upset because the parent company does not allow them to
pursue an opportunity, so they decide to leave the parent company. Others mark
opportunities in the external environment and decide to pursue the opportunity
themselves, somewhat sharing it with the parent firm.

The Legal Perspective on Corporate spin-offs.

The legal definition of corporate spin-offs emphasizes the contractual basis of its
founding as follows:
In spin-offs the parent firm establishes one of its divisions as a new publicly traded firm
and distributes the shares of this firm to the parent’s existing shareholders. It is
approximately always structured as a tax-free transaction with no cash flow implications
to the parent, spin-offs or shareholders.

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 Figure 3

3.2 Key motivation for spin-offs

Corporate Spin-offs companies have a variety of motivations for spin-offs, including
management reasons, capital market factors, risks, tax benefits, marketing factors, and
regulatory or legal reasons. Spin-offs can alleviate management problems of both parent
corporations and spun-off firms, because both kinds of corporations have different lines
of business and different business environments. Since the parent firms generally are
large diverse operations, they cannot provide the kind of management financial and
resource support that the subsidiary needs for continuous growth.

In addition, some portfolio managers prefer pure play corporations. Investment

professionals may be interested in one or the other of companies’ basic businesses, but
not both. To the level that financial markets are incomplete spin-offs provide investors
with a wider range of investment opportunities appealing to different investor clienteles.
The issuance of separate financial reports on the operations of the subsidiary facilitates
the evaluation of the company performance. This technique enables managers to uncover
the hidden value of the subsidiary.

Since parent firms and some subsidiaries often unrelated business lines, they also have
different business risks which affect operating earnings. Parent firms sometimes spin-offs
subsidiaries to protect both businesses from each other risks, which generally stabilizes
the earnings of the parent firm. The spin-offs of a riskier subsidiary allow each
corporation to finance its expansion based on its own growth rates and projections.
Marketing concerns also prompt parent firms to spin off subsidiaries. The first concern is
that consumers and suppliers will think parent firm is not devoted to its core line of
companies if it has a not related subsidiary. The second concern is the connection of lines
imperfect of business that are supposed as being incompatible. Therefore, having various
business lines may cause uncertainty among customers, investors, and suppliers who
identify a firm as offering incompatible products or services.

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An further significant motive for corporate spin-offs is to take advantage of tax benefits.
Tax advantages can be achieved by the formation and spin-offs into natural resource
royalty trusts or real estate investment trusts. As long as these entities pay out 90 percent
of their earnings to shareholders, they are tax exempt, permitting the parent firm to shield
income from taxes.

Finally, laws and regulations may cause firms to spin-offs subsidiaries freely or
involuntarily. As earlier mentioned, laws and regulations sometimes lead to involuntary
spin-offs when complaints are filed to federal and state agencies. However parent firms
sometimes spin offs their subsidiaries to split up regulated and unregulated firms or to
keep away from legal hurdles associated with ownership of certain kinds of firms. A
spin-off in such situation allows the unregulated firms to operate and expand unfettered
by regulation.

3.3 Corporate spin-offs implication polices

Measures towards Corporate Spin-Offs have the possible to produce better direct and
indirect impacts on employment and competitiveness compared to other events that
support the formation of new companies. This is due to the information that Corporate
Spin-Offs tap into and profit from their previous experience and relations acquired within
the parent firm to make the new business. Therefore they begin with a competitive
advantage compared with other types of new firms. This produces low failure rates,
higher growth, and longer-term constancy at corporate level. Policy options about
Corporate Spin-Offs can therefore offer the possible to be more effective than measures
expected at supporting normal firm start-ups. However it should be taken into account
that measures about Corporate Spin-Offs should be well balanced in order not to
handicap normal firm formation.

Policy options to support Corporate Spin-Offs

• Measures that promote the incentive to spin-off might be formed through

revised taxation schemes for equity holdings in Spin-Offs.
• Measures that help parent and Spin-Off firms manage with labor and
organizational costs generated by the Spin-Off process. This might comprise
the support given by the parent firm to the Spin-Off or be going to to cover the
organizational costs of change for both firms.
• Measures that allocate more flexibility in labor relationships and encourage
adequate labor arrangements, such as announcements, leaves of lack or transfers.
• Measures that add to the visibility of winning Corporate Spin-Offs and their
wider benefits, for example using benchmarking of experiences and good
practices.

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3.3.1 Implication for corporate polices
The corporate policies of a huge diverse company are forced by its core business. After
the spin-off parent firm and subsidiary firm can implement their own best possible
policies. For the subsidiary the date of the spin-off is clearly the right moment to
implement its own best possible policies, but particularly if the spun-off subsidiary is
large, the spin-off is also the right moment for the parent to reconsider its own policies
because the character of its assets has changed.

In which discuss compensation, financing, dividend and other policies that are affected
by the environment of the investment Opportunity set of the firm.

3.3.1.1 Executive compensation

The investment opportunity set of a firm determines its compensation policy. They
forecast that managerial compensation rises if the company has many growth options.
This forecast is based on two hypotheses: first, the marginal product of investment
decision makers is superior to the marginal product of supervisors; second, a company
with growth options is riskier, which usually translates into higher risk for managerial
compensation. Based on the statement that it is more complicated for shareholders to
observe the manager of a firm that has many growth options than to check the manager of
a firm with its assets largely in place, a firm with growth opportunities is likely to use a
formal motivation plan that ties compensation to firm performance. Their prediction of
incentive compensation based on accounting profits is unclear because accounting
numbers are poor measures of performance in firms with growth options.

However, they definitely forecast higher stock-based incentive compensation as

percentage of total compensation in firms with growth options. This suggests that when a
company has both divisions with assets in place and with growth options, and spin-offs
also the assets in place or the growth options, the best possible compensation policy for
each new company varies with respect to both the level and the companies of
compensation. Particularly in divisions that have growth options changes might be
extensive after the spin-off. First, the level of managerial compensation must rise because
the CEO of the new company makes his/her own investment decisions and manages a
firm that is riskier as a free standing company than as a division of a larger company.
Second before the spin-off the division manager had partial decision rights, and his/her
incentive compensation would mostly consist of bonuses based on accounting numbers of
the division. After the spin-off the former division has it hold stock price. Therefore a
large parts it managerial Compensation should be attached to the stock price of the new
company.

3.3.1.2 Financing policy

Financing policy explain that in companies that are made up of a combination of units
with assets in place and units with growth options external financing of the investment
opportunities of a growth-options unit by an equity issue is expensive because of an

15
asymmetric information difficulty with outside investors. The difficulty is determined by
doubt about the value of the assets in place. Assume managers work in the interest of
existing shareholders. Investors form out that manager who has private information that
the assets in place of the firm are undervalued have no incentives to issue shares if the
cost of issuing shares at bargain prices outweighs the net present value of the new project.
Consequently, an equity offering implies bad news about the assets in place. This affects
the price investors are ready to pay which in turn affects the decision to issue shares.

3.3.1.3Dividend policy
The company dividend policy depends on the company growth opportunities. High
growth companies pay low dividend to avoid constraints in investments, but low growth
companies must pay high dividends as they do not have good opportunities for
reinvestment of their cash flows. In the pre spin-offs company dividend policy is forced
by the parent. After the spin-offs both companies can apply their own most favorable
policies. Given the facts about asset diversity the most favorable dividend policy of the
subsidiary will likely vary from the most favorable dividend policy of the parent. This
can have repercussions for investors. An institutional investor who manages a fund that
specializes in income stocks will sell the shares of a spun-off subsidiary that do not pay
dividend income.

3.3.1.4 Other corporate policies

The company investment opportunity set also has an impact on other corporate policies.
The possible links between the company investment opportunity set and its accounting
process choice. The companies leasing policy also will be affected: Barclay and Smith
(1994) find that growth opportunities are completely related to capitalized leases as
fraction of all fixed claims in the company. This supports their argument that financing
new investment projects with senior claims such as capitalized leases limits wealth
transfers from stockholders to existing bondholders and so helps to decrease the
underinvestment difficulty that was discussed earlier. Finally, a good hedging policy is
important for companies with growth options: it reduces the probability of default and
thus increases the debt capacity of the company.

3.4 Gain from corporate spin-offs

3.4.1 Abnormal returns

Earlier studies have investigated the size of the gains of spin-offs. Some of previous
research shows that announcements of spin-offs are linked with significantly positive
abnormal returns. In addition, Rosenfeld finds in his sample that the gains from spin-offs
are greater than the gains from sell-offs. Schipper and Smith document a significantly
positive abnormal return of 2.8% during the announcement period in a sample of 93 spin-
offs, but they find no preannouncement period gain. Hite and Owers (1983) find

16
significant abnormal returns of 3.3% during the announcement period but also find gains
in the pre-announcement period. In Europe, spin-offs were uncommon before the 1990s.
However, the last few years have seen a large number of European spin-offs. Veld and
Veld-Merkoulova (2004) investigate a sample of European companies that completed a
spin-off in the period 1987 to 2000. During these years most spin-offs in their sample
occurred in the United Kingdom (70 spin-offs), followed by Sweden (24 spin-offs),
Germany (14 spin-offs) and Italy (11 spin-offs). They find wealth effects for shareholders
those are similar to the wealth effects that are documented for U.S. spin-offs: the average
cumulative abnormal return at the announcement of the spin-offs is around 2.6%.

3.4.2 The ex-day puzzle

After the announcement, it typically takes a number of months before the spin-off takes
effect. At that point in time two separate exchange-listed firms are created. Both firms
firstly have the same set of shareholders. However on the first day of trading – the ex date
or allocation date of the spin-off transaction ownership changes: some shareholders sell
shares of one firm but keep their shares of the other firm; other shareholders buy extra
shares in one firm but not in the other. Also, new investors now have the chance to buy
shares of the subsidiary.

Just, researchers have found some puzzling evidence about abnormal price movements at
or shortly after the ex date. Brown and Brooke (1993) investigate the behavior of stock
prices of subsidiaries after the ex date. They find that subsidiary stock experiences an
average negative abnormal return of around 4.3 % in the first 30 days after the ex date.
They dispute that the need for institutional investors to rebalance their portfolios causes
this negative abnormal return. They find that if the parent firm is in the S&P 500, the
decline in stock prices is even higher. Their details are that managers of index funds are
forced to sell the shares of the subsidiary because the subsidiary stock is not part of the
index.

3.4.3 Tax issues

Taxes pressure the gains from spin-offs. In the U.S., most spin-offs are structured as non-
taxable distributions. If the unit to be spun off is not previously a legally separate
subsidiary, but a department or a division, then reorganization under Section 368 of the
Internal Revenue Code must take place first. Section 368 governs the tax-free transfer of
assets from the parent firm to a subsidiary. After the subsidiary is formed, Section 355 of
the Internal Revenue Code of 1954 describes the circumstances under which a subsidiary
is acceptable to split from a parent corporation without the imposition of taxes. Important
conditions are that the parent must distribute at least 80% of the stock of the subsidiary
and that the distribution cannot be a device for the distribution of profits.

17
3.5 Reasons for corporate spin-offs
The benefits and costs of an incorporated firm are discussed. If the costs of integration
are higher than the benefits, then large companies must divest one or more of their units.
Mainly studies that attempt to explain the causes for spin-offs take the benefits as given
and concentrate on the costs of integration.

3.5.1 The benefits of combining units

In numerous cases it is competent to combine smaller companies into one large company.
Coase (1937) argues that firms should be integrated if the costs of transacting within the
firm are lower than the costs of using an external market. He identifies five basic
extensions of his analysis:
(1) Vertical integration; (2) information benefits; (3) economies of scale; (4) financial
synergies; and (5) tax benefits.

3.5.2 The costs of combining units

There are also costs of combining units. This subsection present cost based hypotheses
for spin-offs. In broad, these hypotheses are not mutually exclusive.

3.5.2.1 Focus
The focus hypothesis argues that spin-offs can improve the focus of the parent company.
Focus on core activities is helpful for companies that have evolved in excess of time into
big conglomerates of distinct assets. Divesting assets that are distinct to the core business
of the company increases shareholder value. Some research investigates whether spin-
offs improve focus and therefore increase the value of the company. They categorize
spin-offs as own-industry spin-offs if the spun-off unit operates in the same firm as the
parent firm, and as cross-business spin-offs if the spun-off unit operates in a different
business. They think the firms of parents and subsidiaries different, of the parent. Their
hypothesis is that in contrast to an own industry spin-off, a cross industry spin-off
increases the focus of the parent company. They find facts that cross industry, focus
increasing spin-offs have positive abnormal returns at the announcement, and therefore
create shareholder value, while own industry spin-offs do not appear to create value.
Dependable with the focus hypothesis find that the operations of the parent companies
progress but they do not find evidence of performance improvement by the subsidiaries.
Similarly, focus-increasing spin-offs have higher abnormal returns than non focus
increasing spin-offs.

3.5.2.2 Diversity
A further hypothesis also argues that not linked parts of the company must be spun off,
but this hypothesis is more precise about the exact nature of the diversity in assets.In a
multidivisional company the CEO makes decisions regarding the portion of funds across

18
divisions or the encouragement of one manager instead of another. The managers
affected by these decisions challenge to influence the result of these decisions. Such
actions waste resources, but if the stakes are big then the incentives for influence
activities are high. For example the prospect of layoffs creates influence costs since the
managers of declining units try to protect their jobs. Jongbloed (1994) argues that
activities designed to influence the CEO's decision include overstatements of productivity
and the value of investment opportunities of the manager's own division or sabotage of
the performance of the other divisions. In large companies, top management normally
tries to benefit from financial synergies by channeling funds from cash divisions with
assets in place to divisions with growth options that can use the cash more profitably.

3.5.2.3 Information asymmetry

A spin-off increases the number of traded securities on the stock market; the price system
will become more informative. As a result the degree of information asymmetry between
managers of the company and uninformed investors decreases, more informative price
system improves the quality of investment decisions made by managers and reduces the
doubt of investors about the value of divisions. This will lead to an increase in the value
of parent company and subsidiary after the spin-off.

3.5.2.4 Merger and takeover facilitation

A spin-off is incompetent way to transfer control of certain divisions to acquiring
companies because if bidders are interested only in a part of the company, they do not
have to take over the entire company. Bidders can negotiate directly with the
shareholders of the recently spun-off subsidiary in its place of having to negotiate with
the management of the parent company. Both parents and subsidiaries experience
considerably more takeovers after their spin-off than control groups of similar companies.
Chemmanur and Yan (2004) show that a spin-off can increase the probability of a
takeover of a division. In their model, the management of a diversified company can
mask its lower ability to run some units of the company by better ability to run other
units. After the spin-offs, their lesser ability is revealed, and shareholders might vote in
favor of a takeover when a bidder expresses interest. Also it is easier for a bidder to take
over a smaller company. In their theory, a takeover does not essentially in reality have to
occur: the increased chance of loss of control can force management to work harder to
minimize that probability. On the other hand, management can give up control of the
subsidiary to capable division managers when the spin-off is implemented.

3.5.2.5 Regulations
Sometimes a split of a company is compulsory because of government laws or
regulations. For example, in 1984 the U.S. government forced AT&T to split up into
seven so-called Baby Bells (Pacific Bell, Ameritech, Southwestern Bell, US West, Bell
Atlantic, BellSouth and Nynex) to undo its telecommunications monopoly.

19
3.5.2.6 Wealth expropriation
Finally, shareholders can basically gain by expropriating wealth from other claimholders
of the company. For example, shareholders have gained at the expense of bondholders in
the case of the spin-off of Marriott’s hotel management businesses (Marriott
International) from its hotel properties (Host Marriott) in 1993. The spin-offs were
extraordinary because the spun-off unit represented almost 80% of the value of the
equity. Usually, the spun-off unit is much smaller than the parent. The parent company
became highly leveraged because approximately all debt stayed with the parent (the
initial plan called for even higher leverage). Because the asset base that might support the
bondholder claims on the cash flows decreased, the claims of the bondholders lost value.

3.6 Corporate Spin-Off Processes

In a broad logic, a Corporate Spin-Off process is the partition of an existing firm into
two, usually a bigger one and a smaller one. The process consists of three phases, the
decision phase, the separation phase and the post separation phase. The decision phase
involves all factors important to the decision to spin-off. The separation phase comprises
the strategic and organizational separation of the two firms. The post separation phase
starts with the independent operation of parent firm and Spin-Off and ends when no more
preferential agreements or dealings between parent and Spin-Off survive.

The persons, assets and intangibles transferred from the parent firm make up a key
element of the Spin-Off’s core business. Corporate Spin-Off processes involve deep
changes in ownership, responsibility and liability for the Spin-Off’s actions. The aims of
the Spin-Off process decide how the process is initiated, implemented, perceived and
evaluated.

20
Figure 4: The Corporate Spin-Off process

Depending on the motivations at the back Corporate Spin-Off process, two types can be
famed.
Restructuring-driven Spin-Offs are initiated by the parent firm for strategic or
operational motives related to the parent firm. They are often the result of restructuring or
refocusing activity of the parent firm.

Entrepreneurial Spin-Offs are driven by one or more individuals who want to develop
an unused potential based on their experience acquired within the parent firm.
These two types are presented below.

21
Figure 5: Entrepreneurial vs. Restructuring-driven Spin-Offs

Restructuring-driven Spin-Offs can be regarded as a top down process since the source of
the decision and the driver of the process is the parent firm. Research on 85 US Corporate
Spin-Offs revealed the following effects of the Spin-Off process on the parent:
Excess share price improvements for the parent firm around the announcement date of
the Spin-Off.

Entrepreneurial Spin-Offs are bottom-up processes, where the source of the decision and
the driver of the process is the Spin-Off entrepreneur. In evaluation to other start-ups,
Corporate Spin-Offs combine significantly lower failure rates with the high growth of a
new (or refocused) firm. It seems that there is a strong positive correlation between the
complication and specialization of the Spin-Off’s business and the Spin-Off
entrepreneur’s previous key experience in the field. Mutually with the increasing
availability of venture capital in many European countries, more and more
entrepreneurial personalities take the proposal to form a Spin-Off.

3.7 Accounting for corporate spin-offs

Announcement of the spin-off pending the date it is completed, the parent accounts for
the disposition of its subsidiary in a single line item on its balance sheet called Net Assets
of Discontinued Operations, or similar. The parent company also segregates the net
income attributable to the subsidiary firm on its income statement in an account called
Income from Discontinued Operations, or alike.
The spin-off is recorded at book value on the transaction date as follows:

22
Figure 6
Parent's Journal Entry
dr. Retained Earnings $$$
cr. Net Assets of Discontinued Operations $$$

Subsidiary's Journal Entry

dr. Assets $$$

cr. Liabilities $$$

cr. Equity $$$

23
Chapter 4

Equity carve outs

4.1 What are Equity carve outs?

The sale by a public corporation of a portion of one of its subsidiaries common stock
through an initial public offering.The initial sale of common stock by a company of one
of its business units. The initial public offering in general involves less than the whole
amount of the stock in the unit so the parent firm retains equity stoke in the subsidiary.
An equity carve out is occasionally followed by a distribution of the remaining shares to
the parent stockholders. Also called carve-out, split off IPO.

In equity carve-out, also known as an initial public offering carve-out or a subsidiary

initial public offering, the parent firm sells a portion or all of its interest in a subsidiary
firm to the public in an initial public offering. The equity carve out creates a new legal
entity with its own management team and board of directors, and provides a cash
combination with proceeds distributed to the parent firm, subsidiary firm or both. An
equity carve-out is the sale by a public company of a portion of one of its subsidiaries
common stock through an initial public offering. Each carved-out subsidiary firm has its
own board, operating CEO and financial statements, while the parent firm provides
strategic direction and central resources. As in any other corporate restructure the parent
firm can make available executive management skills, company and government
relationships, and employee plans, and execute time-consuming administrative functions,
freeing the subsidiary firm CEO to focus on products and markets.
Figure 7

24
4.2 Reasons for equity carve outs
The empirically strong-minded motivations for equity carve outs which parent company
state when announcing their future transaction. While it may not be in the interest of the
parent company to declare all of the reasons for an equity carve outs (if an equity carve
outs is agreed outs to sell an overvalued subsidiary companies) some abstract
considerations regarding the sources of value creation for the parent company are also
described. Mutually these two perspectives produce view of the reasons why firm
connect in an equity carve outs.

4.2.1 Motivation of parent firms

The motivation for an equity carve outs can be diverse. The final objective of these
motivations must be the increase of shareholder value. A corporation may bring to a close
on the basis of a strategic review that a definite business segment does not any longer fit
into its generally long term business strategy and therefore decide to dispose of it, joint
with the desire to exit a loss making business of its subsidiary company but may be
lacking the capital to do so, and decide to find the required financing from external
capital markets. Equity carves outs takings may be used to repay debt of the parent
company or subsidiary company. A firm may propose to expand its investor base
nationally or internationally if its subsidiary company is prepared in a different country.
A firm may doubt that its subsidiary firm is valued appropriately by capital markets as
part of the parent firm, and mean for a valuation more in line with the subsidiary firm
peers. The equity carved out a subsidiary company to fulfill with regulatory requirements
or because it wants to protect itself from liability claims in another legislation.

4.2.2 Sources of value creation

In a miller-Modigliani world with perfect capital markets, the value of a company would
only depend on the net present value of the company projects and not on how the
company is prepared financially. A brief overview of the theoretical reasons why an
equity carve outs could be expected to create value, if the assumptions of a perfect world
do not hold.

4.3 Differentiating an equity carve-outs from other forms of

restructuring
A number of type differences between a variety of forms of portfolio and financial
restructuring. An equity carve outs is diverse from all other forms of portfolio and
financial restructuring in that it combines aspects of equally of these events, whereas
mainly other mechanisms have a physically powerful tendency to be classified as either
restructuring or financing. This double nature of equity carve outs implies the
requirement to take into consideration the prime motivation of the parent company in
carrying out the equity carve outs when analyzing short and long term performance. An
equity carve outs differs from a spin-offs in smallest amount three aspects. First in spin-

25
offs existing parent company shareholders receive share in the subsidiary company as a
special dividend, while in an equity carve outs these shares are sold to new shareholder.
Second spin-offs normally do not result in a cash flow to either parent company or
subsidiary company, or both. Third spin-offs frequently results in a complete separation,
whereas in an equity carve outs the parent company in most cases retains a stake in the
carved-outs entity.

Equity carves outs different from a seasoned equity offering in at least two aspects. First
in a seasoned equity offering a parent company sell its own shares, while in an equity
carve outs share of its subsidiary company are sold. Second share of the parent company
have been trading before a seasoned equity offering, while shares of the subsidiary
company have not been trading previous to an equity carve outs.
In summary, here is a important body of evidence that shows, information asymmetry is a
important factor in choosing to spin-off or carve out a division and shareholders’ wealth
seems to increase in common following both spin-offs and carve-outs.

4.4 Accounting for equity carve outs

4.4.1 Strategic Rationale

In adding to the strategic rationale for corporate restructuring outlined in our lesson on
spin-offs and split offs, equity carve-outs can be used to get the subsequent additional
strategic objectives.
Cash infusion – Cash proceeds can be distributed to Parent Company, Subsidiary
Company, or both.
Preparation for complete separation – set up a public market valuation for subsidiary
company in preparation for a subsequent spin-off or split-off of parent company
remaining interest.
Transaction Structure
Parent company stake in subsidiary company sold in a carve-out may consist of primary
and secondary shares. Primary shares are issued by subsidiary company, and secondary
shares are sold by parent company. Even though secondary shares are sometimes sold
beside primary shares in an equity carve-out, they regularly represent a small portion of
the total shares sold in the transaction.

26
Figure 8

alike to monetization techniques employed in spin-offs and split-offs, Parent company

may push down debt to subsidiary company prior to the initial public offering, and/or
extract a special tax-free dividend from subsidiary company up to parent company
outside basis in subsidiary company stock. Cash proceeds from the stock sale might be
distributed to parent company to pay down debt, to subsidiary company for growth
capital, and/or used by subsidiary company to repay an inter company loan from parent
company, for example.

Equity carve-outs are usually follows by a tax-free spin-off or split-off of parent company
remaining interest in subsidiary company.

4.4.2 Tax Implications

Primary or secondary shares are sold in the equity carve-outs has tax implications. If
parent company sells secondary shares of subsidiary company, it recognizes a capital
gain or loss equal to the cash earnings less its outside tax basis in subsidiary company
stock. Though, if primary shares are issued the transaction is well thought-out a non
taxable event to raise capital. Thus advertising primary shares is generally preferable to
selling secondary shares.

Carve-out does not usually exceed 20% of parent company equity interest in subsidiary
company for several reasons.
If parent company divests more than 20% of its voting interest in the subsidiary
company, parent company would loses tax control of subsidiary company and any
succeeding spin-off would fail to qualify for tax-free treatment. Consequently long as
parent company retains at least 80% of subsidiary company, dividends from subsidiary
company to parent company are tax-free under the Dividends Received Deduction.

If more than 20% of parent company voting interest in subsidiary company is sold, parent
company may no longer consolidate subsidiary company for tax purposes. Tax
deconsolidation may result in a tax liability to parent company to the extent of any
negative basis in subsidiary company.

27
4.4.3 Accounting for Equity Carve-Outs
The accounting treatment an equity carve-out depends on whether or not parent company
maintains legal control of subsidiary company following the carve out, where legal
control is generally defined as ownership of at least 50% of subsidiary company voting
common stock. If parent company does not lose legal control, as is most often the case,
the accounting gain or loss from the equity carve-out is recorded either on the
consolidated income statement or as additional paid-in capital on the balance sheet,
depending on whether primary or secondary shares are issued. If secondary shares are
sold for an amount exceeding parent company book basis in the shares and parent
company maintains legal control, parent company makes the following journal entry to
record the carve-out.

Parent Co Sells Secondary Shares

dr. Cash $$$
cr. Minority Interest $$$
cr. Gain on Carve-Out (Inc. Stmt) $$$

If primary shares are sold for an amount exceeding parent company book basis in the
shares, parent company makes the following journal entry.

Sub Co Sells Primary Shares

dr. Cash $$$
cr. Minority Interest $$$
cr. APIC (Bal. Sht.) $$$

If parent company does lose legal control of subsidiary company, it recognizes a gain or
loss on its consolidated income statement despite of whether primary or secondary shares
are issued. Also parent company will be required to account for its investment in
subsidiary companies using the equity method of accounting rather than the consolidation
method.

Parent Co Loses Legal Control

of Sub Co
dr. Equity Investment in
$$$
Sub Co
dr. Minority Interest $$$
cr. Net Assets of Sub Co $$$
cr. Gain on Carve-Out $$$

When primary shares are sold, regardless of whether or not parent company loses legal
control, parent company recognizes a gain or loss for accounting purposes, but not for tax
purposes. This temporary difference gives rise to a deferred tax liability that reverses
when parent company eventually sells its secondary shares. On the other hand, if parent
company sells the shares, a gain or loss is recognized for both accounting and tax

28
purposes and no differed tax liability is created. Parent company makes additional journal
entries when subsidiary company sells primary shares as follows.

Accounting for Tax Effects

dr. Income Tax
$$$
Expense
cr. DTL $$$

Timing Considerations
Like a regular initial public offering, the equity carve-out must be prepared, filed with the
SEC, marketed to investors, and priced. The entire process typically takes around 4 to 6
months to complete.

29
Chapter 5

Divestments

5.1 What are Divestments?

Divestments pass on to the sale of an asset for financial, legal or personal reasons. For
companies, divestment can refer to a firm selling off a portion of its assets, such as a
subsidiary, to raise capital or to center of attention the business on a smaller core of
goods and services. For investors divestment can be used as a common tool to protest
exacting corporate policies such as a firm trading with a country known for child labor
abuses.Divestment is a form of retrenchment strategy used by firm when they downsize
the scope of their firm activities. Divestment usually involves eliminating a portion of a
firm. Corporation may elect to sell, close, or spin-off a strategic business unit, major
operating division, or product line. This move often is the final decision to eliminate not
related, unprofitable, or unmanageable operations, Selling assets, divisions, subsidiaries
to another corporation or combination of corporations or individuals. In finance and
economics divestment or divestiture is the decrease of some type of asset for either
financial or sale of an existing business by a company. A divestment is the opposite of an
investment.

Divestment is usually the result of a growth strategy. Much of the corporate downsizing
of the 1990 has been the result of acquisitions and takeovers that were the range in the
1970 and early 1980. Corporations often acquired other businesses with operations in
areas with which the acquiring company had little knowledge. After trying for a number
of years to incorporate the new activities into the existing firms, many companies have
selected to divest themselves of portions of the firms in order to focus on those activities
in which they had a competitive advantage.

5.2 Reason to divestments

In the majority cases it is not right away obvious that a unit should be divested. Many
times management wills effort to increase investment as a method of giving the unit an
opportunity to rotate its performance around. Portfolio models can be used to identify
operations in need of divestment. Decisions to divest may be ready for a number of
reasons.

5.2.1 Market share too small

Companies may divest when their market share is too small for them to be competitive or
when the market is too small to offer the expected rates of return.

30
5.2.2 Availability of better alternatives
Companies may also make a decision to divest because they see better investment
opportunities. Corporations have limited resources. They are repeatedly able to divert
resources from a margin profitable line of firm to one where the same resources can be
used to achieve a greater rate of return.

5.2.3 Need for increased investment

Companies from time to time reach a point where continuing to maintain an process is
going to need large investments in equipment advertising research and development and
so forth to remain viable. Fairly invest the monetary and management resources,
corporations may elect to divest that portion of the business.

5.2.4 Lake of strategic fit

A general reason for divesting is that the acquired business is not constant with the image
and strategies of the companies. This can be the result of acquiring a diversified
company. It can also result from decisions to restructure and change the existing
business.

5.2.5 Legal pressure to divestments

Corporations can be forced to divest operations to avoid penalties for restraint of trade.
Service Corporation Inc., a large interment home chain acquired so lots of its competitors
in some areas that it created a regional monopoly. The Federal Trade Commission
required the company to divest some of its operations to avoid charges of restraint of
trade.

5.3 Implication to divestments strategy

Companies might follow a divestment strategy by spin-off a portion of the firms and
allow it to operate as an independent business entity. Companies may also divest by
selling a portion of the business to another corporations. In 2005 Teleflex, U.S. $2.1
billions industries product manufacturer implemented a divestment and acquisition
strategy to get rid of underperforming units while acquiring business in markets where it
intended to expand its firm business. Although a firm business may be known as a target
for divestment the implementation of divestment is not always easy. First a buyer must be
found. This may be difficult for a failing firm unit. Just the once a buyer is found, then
price must be negotiated. A lot of divestments are infertile by management expectations
for the operation. Companies may well expect demand for the product to pick up.
Management may also see the poor performance as a short-term setback that can be
overcome with time and patience. Decisions to divest a firm can be seen as an admission
of failure on the part of management and may lead to increasing commitment to the
struggling business as a way of defensive management ego and public image. Divestment

31
is not regularly the first choice of strategy for a firm. Though, as product demand changes
and company alter their strategies, there will almost always be some portion of the firm
that is not performing to management expectations. Such an operation is a prime target
for divestment and may well leave the corporation in a stronger competitive position if it
is divested.

5.4 Motives of divestments

Companies may have several motives for divestments. First a company may divest, sell
businesses that are not part of its core operations so that it can center on what it does best.
For example, Eastman Kodak, Ford Motor Company, and many other firms have sold
various parts of businesses that were not closely associated to their core businesses.
A second motive for divestments is to obtain funds. Divestments generate funds for the
firm because it is selling one of its businesses in exchange for cash. For example, CSX
Corporation prepares divestments to focus on its core push business and also to gain
funds so that it could pay off some of its existing debt.

A third motive for divestments is that a company’s break up value is occasionally

believed to be greater than the value of the company as a whole. In other words, the sum
of a companies individual asset liquidation values exceeds the market value of the
companies combined assets. This encourages companies to sell off what would be worth
more when liquidated than when retained.

A fourth motive to divestments a part of a company may be to create stability. Philips for
example, divestments its chip division called NXP because the chip market was so
volatile and unpredictable that NXP was dependable for the majority of Philips's stock
fluctuations while it represented only a very small part of Philips.
A fifth motive for companies to divest a part of the business is that a division is
underperforming or even failing.

32
Chapter 6

Share repurchase

6.1 What are Share Repurchases?

A program by which a corporation buy back its own shares from the marketplace and
reducing the number of outstanding shares. This is generally a sign that the organization
management thinks the shares are undervalued. Because a share repurchases reduce the
amount of shares outstanding it increases earnings per share and tends to elevate the
market value of the remaining shares. When a corporation does repurchase shares, it will
typically say something along the lines of; we find no better investment than our own
firm. Purchasing of its own shares from the public by a company whose management
believes the shares are undervalued. Its objective is to raise the market value of the shares
by reducing their number available for purchase.

A shares buyback, also known as a share repurchase, is an organization buying backs its
shares from the marketplace. You can think of a buyback as an organization investing in
itself, or using its cash to buy its own shares. The idea is easy because a firm can not act
as its own shareholder, repurchase shares are engaged by the firm, and the number of
outstanding shares on the market is reduced. When this happens, the comparative
ownership stake of each investor increases because there are smaller number shares, or
claims, on the earnings of the firm. Buyback is reverse of issue of shares by a firm
wherever it offers to take back its shares owned by the investors at a specified price; this
offer can be compulsory or optional to the investors.

6.2 Method of share repurchases

There are basically five ways by which a company can repurchase its own shares

6.2.1 Fixed price tender offer

In a public fixed price tender offer a corporation offers to repurchase its shares at a fixed
price for a specific quantity of shares the target number of shares. If the quantity of shares
tendered is larger than the quantity of shares tendered, as long at it treats all shareholders,
who, in common get priority over other shareholders. If the quantity of shares tendered is
less than the target quantity, the corporation commits itself to buy back all shares
tendered.

Some tender offers are meant at eliminate shareholder servicing costs. A further, special
case is a tender offer by a closed end mutual fund. It is well known that stopped end fund
often trade at a discount. These buyback can be considered as partial liquidations or
open-ending where the shareholders are allowed to redeem their shares.

33
6.2.2 Dutch auction tender offer
As an alternative of a single offer price, the Dutch auction specifies a variety of prices
within which each tendering shareholder chooses his minimum acceptable selling price.
Each shareholder informs the offering company of the quantity of share he is willing to
sell and the minimum acceptable selling price. The offering company then pays to all
shareholders the lowest price that will obtain the number of shares sought. Dutch auction
tender offers can be more attractive to organizations than fixed price tender offers for
several reasons. First if the goal of the repurchase is simply to reduce the number of
shares outstanding, it is in general cheaper to repurchase a specific number of shares
through a Dutch auction offer than through a fixed price offer. A fixed price tender offer
the non tendering shareholder is effectively writing a put with a fixed exercise price.

6.2.3 Private or target share repurchases

A corporation can also make a decision to buy back its own shares from a large investor.
Peyer and vermaelen argue that on can differentiate three types of private transactions.
First the repurchase can be measured as greenmail if the firm repurchases stock from a
potential raider at a premium above the market price. These dealings were popular in the
eighties when aggressive bids were common, but have all but disappeared in recent years.
Second, the sellers might be insiders or employees who plan to sell shares after
restrictions are lifted on restricted stock of shares or after the exercise of executive stock
options. In these cases no premium is typically paid. Third the buyback could be at a
premium above the market price, but not from an aggressive bidder, but simply because
the firm believes its stock is undervalued.

6.2.4 Open market share repurchases

The most common way to repurchases stock is through an open market share buyback
program. In this case, the corporation instructs a broker to buy some shares on the open
market. Even though open market buyback programs seem to be the cheapest way to
repurchase stock, they are often subject to various restrictions on repurchase volume and
price paid. The reality that open market buyback authorizations are not followed up by
actual buyback decisions does not mean that managers are doing amazing unsuitable or
unethical. This is reliable with the view that managers try to take advantages of
undervalued share prices, but abstain from buyback stock if the market becomes efficient.
On the other hand, it could mean that the company discovered new growth opportunities,
which made shares buyback relatively unattractive. furthermore to the extent a repurchase
authorization allows a company to take advantage of buying undervalued shares, all
organizations should request such authorizations, in spite of of whether they actually plan
to complete the repurchase. This supposed to be particularly the case where obtaining
authorization requires shareholder approval such as in Europe.

34
6.2.5 Repurchases involving derivatives
Artificial buyback are repurchases that are executed with the use of derivatives. In
common three types of programs can be well-known: 1- writing put options, 2- buying
collar and 3- buying forward contracts. Counterparties in the transactions are investment
banks who consequently hedge their risk. The main difference with other repurchase
methods is those synthetic derivatives allow a firm to take advantage of an undervalued
share price without using cash. So in some ways these types of contracts are ideal for
corporations that consider their shares are undervalued but have nonflexible capital
expenditure needs, large growth opportunities and face large costs of financial suffering.
In other ways these contracts are company commitments and decrease the inherent
flexibility of open market buyback programs. When a firm sells a put it commits itself to
buyback a specific number of shares if the stock price falls below the exercise price at the
expiration date. If the organization is right the option will finish out of the money and the
firm simply pockets the premium. Obviously if the firm is wrong or the market has not
corrected the undervaluation at the time of the exercise the option to settle the option by
issuing share, so even under this situation, the put writer will not have to use any cash to
settle its obligation, there purchase avoiding cost of financial distress.

When a firm buyback shares through a forward contract, no cash will have to be paid at
the time of the initiation of the contract, and if the firm made the right bet (stock price is
above the forward price at maturity) they will receive cash. If a company was wrong and
the stock price ends up below the forward price, the organization would also have the
option to resolve by issuing shares. Finally when the firm purchase a collar (buy a call
and sells a put) the exercise price of the contracts will be set so that no cash is paid or
received at the time of the contract. The case of forward contracts, if the corporation was
indeed undervalued at the time of the buybacks, it will receive cash at the maturity date
of the contract. If the corporation was incorrect it will have the option to settle the put by
issuing stocks.

6.3 Objective of share repurchases

Shares may be repurchases by the organization on account of one or more of the
following reasons

6.3.1 Unused cash

If they have vast cash reserves with not a lot of new profitable projects to invest in and if
the firm thinks the market price of its share is undervalued. Reliance's recent buyback,
however, corporations in emerging markets like India have growth opportunities. For that
reason applying this argument to these corporations is not logical. This argument is valid
for MNCs, which previously have sufficient R&D budget and presence across markets.
While their incremental growth potential limited, they can repurchase shares as a reward
for their shareholders.

35
6.3.2 Tax gain
While dividends are taxed at higher rate than capital gains corporations prefer
repurchases to reward their investors instead of distributing cash dividends, as capital
gains tax is normally lower. At here, short term capital gains are taxed at 10% and long
term capital gains are not taxed.

6.3.3 Market perception

By purchasing their shares at a price higher than prevailing market price firm signals that
its share valuation should be higher. In October 1986 stock prices in US started crashing.
Expecting further fall many firms like Citigroup, IBM et al have come out with
repurchase offers worth billions of dollars at prices higher than the existing rates thus
stemming the fall.

6.3.4 Exit option

If a corporation wants to exit a particular country or wants to close the corporations it can
offer to repurchase its shares that are trading in the market.

6.3.5 Increase promotion stake

Some corporations repurchase stock to contain the dilution in supporter holding, EPS and
reduction in prices arising out of the exercise of issued to employees. Any such
exercising leads to rise in outstanding shares and to drop in prices. This also gives scope
to takeover bids as the stock of promoters dilutes. Technology firms which have issued
ESOPs during dot com boom in 2000-01 have to repurchase after exercise of the same.
However the logic of repurchase stock to protect from hostile takeovers seems not
logical. It may be well-known that one of the risks of public listing is welcoming hostile
takeovers. This is one technique of market disciplining the management. Though this
type of repurchase is touted as protecting over-all interests of the shareholders, it is
accurate only when management is considered as efficient and working in the interests of
the shareholders.

6.3.6 Escape monitoring of accounts and legal controls

A firm wants to avoid the regulation of the market regulator by delisting. They avoid any
public scrutiny of its books of accounts.

36
6.3.7 Show better financial ratio
Corporations try to use repurchase method to show better financial ratios. When a
corporation uses its cash to purchase stock, it reduces outstanding shares and also the
assets on the balance sheet (because cash is an asset). Therefore, return on assets (ROA)
actually increases with reduction in assets, and return on equity (ROE) increases as there
is less outstanding equity. If the corporation earnings are identical before and after the
repurchase earnings per share (EPS) and the P/E ratio would look better even though
earnings did not improve. Because investors carefully scrutinize only EPS and P/E
figures, an improvement could jump start the stock. For this approach to work in the long
term, the stock should truly be undervalued.
In general the intention for the repurchase is a mix of any of the above reasons.
Sometimes Governments nationalize the firms by taking over it and then compensates the
shareholders by repurchase their shares at a predetermined price. Reserve Bank of India
in 1949 repurchases the shares.

6.4 Dividends vs. Share Repurchase Plans

If a corporation is profitable, it will look to return wealth to its shareholders or investors
in the corporation. While the approval in share price is often its own reward, if the
organization is still profitable after paying expenses and taxes, it may still have money
available. Whereas many corporations may choose to reinvest this cash in new projects,
others may also wish to pay out dividends or repurchase its own stock through a share
repurchase plan.

6.4.1 The Facts

If a corporation has surplus profits after taxes, it may choose to distribute the money to
stockholders by declaring a dividend. A dividend amount is resolute and then each
investor receives that amount, multiplied by the number of stocks he owns.
In a share repurchase plan, the corporation repurchases outstanding shares from its
stockholders, reducing the number of stock on the market and increasing the earnings per
share, due to the lower number of available shares.

6.4.2 Function
A dividend program is designed to stock profits with investors in the organization. Many
organizations can and do offer regular dividend payments, which are striking to investors
looking for the steady income dividends provide.
Shares buyback plans are normally used to boost a stock whose price is flagging. By
purchasing its own shares, a corporation may be indicating that it feels that the best place
to invest its money is with itself, which increases investors' confidence.

37
6.4.3 Benefits
By offering and paying reliable dividends, a corporation can raise its stock price because
more investors will be looking to take advantage of the consistent income. At the same
time, many shares offer a dividend reinvestment program (DRIP), allowing stockholders
to put their profits reverse into the corporations, thus increasing their investment.
In a share buyback plan, the firm normally pays greater than the trading price of the stock
to repurchase the shares, to give investors a reason to sell.

6.4.4 Considerations
Whereas many corporations offer regular dividends, and investors buying stock with the
expectation of receiving these payments, dividends are not guaranteed. Still the strongest
blue chip shares stock can have a bad quarter or year and suspend dividend payments.
Share buyback plans are normally a one-time offer. Corporations do not regularly
repurchase their own stock, and there is no guarantee that they will do it again or that the
stock price will increase even if you sell.

6.4.5 Warning
Dividends and share buyback programs are much related in that the firm is distributing
profits to investors. In the history dividends were taxed at the lower rate, while dividends
were taxed as ordinary income. On the other hand, as of 2009, both are taxed equally.
While dividends are paid repeatedly, you should consult a tax adviser before taking
advantage of any share buyback program. You may want to hold the shares and wait for
the price to increase.

6.5 Share repurchases and the protection of Shareholders

The risk faced by shareholders depends on the kind of buyback involved. In a
discriminating repurchase the business acquires shares from one or more specific
shareholders only. The reason may be to provide accommodation a shareholder in a
closely held business who upon reaching retirement age wants to withdraw her
investment from the corporation. Getting rid of a worrying shareholder is another
motivation. It stands to reason that the price paid by the corporation is basically
important. If it is too low down, the non selling shareholders will benefit at the expense
of the vendor. This is mostly problematic if the shareholder is being coerced into selling
her shares to the corporation, but is also a matter in consensual sales where the
corporation is withholding price sensitive information from the shareholder. Should the
price be also high, the value of the shareholding of non selling shareholders will be
diluted. Shareholder defense can be achieved in different ways. Some jurisdictions
prescribe procedural requirements for buybacks while others rely primarily on
substantive principles of fairness.

38
6.5.1 The United Kingdom
As the standard of capital protection applies in the United Kingdom, buybacks and
redemptions can in wide-ranging be made only out of distributable profits or out of the
proceeds of a fresh issue of shares. By way of exception, private corporations may
buyback or redeem their shares out of share capital, although distributable profits and the
proceeds of a fresh issue of shares must be tired first so that the resultant capital reduction
is limited to the allowable capital payment. The type of shareholder approval needed and
the technical requirements depend on the kind of buyback that is involved. A difference
is made between off market repurchases, market repurchases and repurchases out of
capital.

6.5.2 Off-market repurchases

A corporation may obtain its shares under an off market contract that has been approved
by special resolution of the shareholders. In a public corporation the resolution may
remain valid for a maximum period of 18 months. Minority shareholders are protected by
the voting exclusion that applies in respect of the shares that will be acquired in the off
market buybacks. The individuality of the vendor shareholder and the terms of the
repurchase must also be disclosed. Any difference of the contract must be approved by
special resolution, subject to similar requirements.

It is clear that coercive buybacks are not possible as there must be a contract between the
corporation and the vendor shareholder that must be accepted by the non selling
shareholders.

6.5.3 Market repurchases

Even though an ordinary rather than a special resolution is required to approve market
buybacks, the resolution must be stuck with the registrar in similar fashion as a special
resolution.

The approval must specify the maximum number of shares that may be Acquired, the
maximum and minimum prices, and the date upon which the right expires. The expiration
date for authority in a public corporation may not be later than 18 months after the
passing of the resolution. The authority could be conditional or unconditional, and could
either be wide-ranging or refer to shares of a specific class or description. Once the
market buybacks has been made, the accurate terms of the contract including the
maximum and minimum prices paid must be disclosed in a return submitted to the
registrar.

The Financial Services Authority’s (FSA) Listing Rules that apply to listings on the
London Stock Exchange need equal treatment once more than 15 per cent of a
corporations equity shares is to be acquired. Such buybacks are referred to as substantial

39
market purchases and must be carried out by way of a partial offer to all shareholders or
by way of a tender offer.

6.5.4 Repurchases out of share capital

The repurchase of shares out of capital, which is likely for private corporations only, is
subject to extra requirements pertaining to publicity and timing. The payment of the
consideration elsewhere of capital must be approved by special resolution. The special
resolution will not be valid if not the statutory solvency declaration by the directors and
the auditors’ report is available for inspection by members at the meeting passing the
resolution. Members whose shares are being acquired may not vote in deference of those
shares.

A protection device which is available only for buyback out of capital is the right to
object to the approval resolution. Any nonconforming member and any creditor of the
corporation may apply to court for the cancellation of the resolution.

The court may possibly order that the dissentient members be buy out by other members
or by the corporation and may make any order for the defense of the dissentient creditors.
It appears that the court may not make any other order on the request of a shareholder
than for that shareholder to be bought out, which clearly limits the situation where
shareholders would make use of this right. The existence of a shareholder right of
objection in buybacks out of capital appears to be irregular. While it could make wisdom,
in a system relying on the principle of capital maintenance, to provide such additional
protection to creditors when share capital is used to fund a buyback, shareholders face the
same risks in spite of of the source of funding. It is achievable that the right to object was
made accessible to shareholders only because such a right was being inserted for
creditors and it was quite easy to extend it to shareholders.

40
Chapter 7

Corporate recovery

7.1 What is Corporate Recovery?

Corporate recovery is the word given to the rescue undertaken by professional
accountants, who are professionally qualified, to assist the management of corporation in
nursing a firm in financial and other difficulty back to health.
A situation in which a corporation is saved from insolvency by means of restructuring,
debt management or external investment

7.2 Need for corporate recovery

If your company is in need of restructuring its debt, the services of a corporate recovery
examine can help you make the change by guiding your objectives and presentations
towards building a more productive and balanced approach in future extension by
handling current debt.

Excessively often company and businesses alternative to paying for a corporate recovery
service only when the situation has turned dire and their corporation is in deep water
without an oar left to paddle. Doing company as usual when creditors are storming the
may not be practical and the directors have no new skills to deal with the new situation.
So as to be while director rotate to a professional debt restructuring service, but it may be
turn to a professional debt restructuring service before execute has been sharpened and
the company debt can be restructured.

The earlier a company turns to a corporate recovery service, the better. A corporate
recovery service has its example in time management spiritual leader who used to make
complicated charts teaching managers and staff how to be more cost efficient. What they
bring with them now is a group of qualified managers with a set of steps that can be taken
to bring a firm back from its downward curved into insolvency. Some of the steps so as to
a corporate recovery service takes are to begin by opening discussions with creditors to
work out a plan to keep the company working while going through recovery. After that
step is, of course, to see for ways to get money from the corporation assets while
allowing the basic infrastructure to exist and continue to do business. Division of looking
for compulsory funds might mean making adjustments in the corporation hierarchy as
well as looking for sources of returns from without the corporation.
Obviously, if the corporate recovery services team has been called when the insolvency
situation is very terrible then selling off assets before the creditors group in may be the
only answer to avoid out and out plunder of the corporation's property.

Although it might sound tongue in cheek to be worried about the costs of a corporate
recovery team when the company is at risk for losing the whole thing, costs to discuss
with with a professional team are usually minimal or free. Fees are really deferred until
the restructuring process have been completed and the success of that restructuring would

41
have some weight on the authentic fees assessed even though an agreement can be
reached before that when the team agrees to the project.

7.3 Corporate recovery strategies

7.3.1 A contingency approach to recovery

The contingency approach to the design of recovery strategies is very important a horses
for courses approach. As through any other feature of strategy, a one size fits all
philosophy is equally dangerous and wrong. The exacting circumstances of the business
must be analyzed to determine the action needed. It is important to reminder that the
options I shall talk about below are not mutually exclusive; in other words, it may
possibly (and, indeed, desirable) to select and implement several of these strategies either
simultaneously or sequentially.

7.3.2 Management changes

An increase of the current team is quite common in recovery situations in exacting, the
appointment of a new chief executive officer. In carrying out a transformation at
Continental Airlines, a consultant working on the project became President, after that
cleaned out’ the existing management at every level. He wanted forgiveness from
wronged customers, and shaped a ‘new look’ image by refurbishing aircraft and terminal
furnishings.

7.3.3 Asset reductions

A huge majority of successful recoveries engage cash generation strategies, with
divestments being the most common. A producer may select certain plants for closing
with a view to rationalizing production. Marks & Spencer recently announced it was to
close up all its stores outside the United Kingdom to enable it to focus on its core market.
In announcing the closing of its eighteen French outlets, it received heavy criticism for
failing to consult with and inform local staff. C&A is a further high street retailer that
announced a closure of stores; it determined to withdraw from the United Kingdom
market entirely and focus on what it felt to be its core market in mainland Europe.

The existence of major equity in the plants or stores being closed may well provide much
needed cash injection to an ailing corporation. A sale is made and leaseback is another
possible cash generation option that utilizes equity in properties owned by corporations.
In some case, divestment involves the selling of complete firm units or brands; large
multinational often select non core businesses for divestment.

42
7.3.4 Cost reduction
The cost reduction strategies are used more commonly by companies that fail to recover
than those that do. Despite being what some would believe one of the more obvious
options for a declining corporation, it is clear that such a strategy is not enough on its
possess. One technique to reduce costs might be throughout the implementation of a
redundancy programmed. Concern must be taken to make sure that this will not result in
unnecessary deficiencies in knowledge and skills. There is an increasing fashion towards
reducing the number of traditional full time staff in favor of creating a margin of part
time, informal and self-employed workers. A reduction in committed and fixed overheads
will carry about a flexibility and compactness that may have eluded the declining
company. Outsourcing might be measured for non core service functions.

Activity based costing can emphasize the true cost of carrying out functions in house and
facilitate a fairer assessment to be made with external agencies willing to provide these
services. The restructuring procedure referred to earlier may lead to a compliment, leaner
corporations with a corresponding reduction in managerial overheads. And just-in-time
purchasing and production methods can get rid of the high costs of stockholding. Maybe
new production technology can be hold to reduce unit costs.

7.3.4 Product-market repositioning

The outstanding organizations studied by Tom Peters and Bob Waterman understood
their customers superior than their competitors did. The deliverance of superior products
and levels of service to customers should be proceeding by a systematic analysis of their
needs and expectations. I have previously referred to the need to assessment pricing
policies, and further aspects of the marketing mix should be subjected to a similar
analysis. A decision can be taken to redefine the target market, or to make separately
particular segments and approach each with a unique offering. Healthy products and
brands, or replacing ageing products within a brand portfolio might be a solution. Once
again, Marks & Spencer is a useful case in point.

As an effect of using up to date management accounting techniques such as customer

account profitability, it might even be decided to take out products from some market
segments and to focus resources on more profitable groups of customers. A number of
United Kingdom banks have reached this conclusion. An in detail analysis of product
costs can show the way to a better understanding of true product profitability. A
rationalization of product lines strength is the result. The approach that overheads are
allocated and assign may need to be addressed using an activity based approach. A good
accepting of cost drivers is essential.

Marketing is general to both successful and unsuccessful recovery situations. The

successful organizations are likely to combine it with a more fundamental product market
reorientation and through acquisitions.

43
7.3.5 Investment in R&D
Having survived the short-range, establishing a long term competitive advantage must be
high on the corporations list of priorities. Investment in research and development may be
a necessary element in such a method for long term success. In segments such as
technology and pharmaceuticals, but is of vital importance. Research and development
does not all the time lead to the development of breakthrough products, but may basically
result in an improved version of an existing product. This as well can give the company a
competitive edge over its competitor.

7.3.6 Acquisitions
A method of growth, an acquisition has a lot of advantages over the whole option. Market
share can be increased with instant effect, rather than having to remain for aggressive
pricing and promotion policies to have an impact. Payment for the acquired organization
can be made in shares rather than cash, or a combination of the two. At any time
purchasing of intangible assets such as goodwill and brand names possibly will be of
great benefit, especially if the turnaround involves developing new growth markets in
which it is at present unknown. Asset stripping and possible synergy is additional
attractive opportunity that an acquisition might present. The economies of scale that must
be available from better operations will increase competitiveness.

44
Chapter 8

Analysis

8.1 Case Study

The case discusses the company 2005 plan; a six-year long organizational restructuring
implement conducted by the US based Procter & Gamble global leader in the fast moving
consumer goods industry. The case examines in factor, the important elements of the
restructuring program as well as changing the organizational structure, regulate the work
processes and restore the corporate culture. The case complicated on the mistakes
devoted by Durk Jager, the previous CEO of P&G and examines the reasons as to why
Organization 2005 program did not deliver the desired results. Finally, the case talks
about how Alan George Lafley, the new CEO, goes faster the initiatives under the
Organization 2005 program and revived P&G' financial performance. Change in
Organization Structure P&G had been prepared along geographic lines with more than
100 profit centers. Under Organization restructuring 2005 program, P&G sought to
reorganize its organizational structure from four geographically-based business units to
five product-based global business units - Baby, Feminine and Family Care, Beauty Care,
Fabric & Home Care, Food & Beverages, and Health Care.

Introduction
The US based Procter and Gamble (P&G), one of the major fast touching consumer
goods companies in the world, was in deep problem in the first half of 2000. The
company, in May 2000, announced that its earnings growth for the financial year 1999-
2000 would be 7% instead of 14% as announced earlier. The news led P&G' stock to lose
$27 in one day, clean out $40 billion in its market capitalization.

To add to this, in April 2000, P&G announced an 18% decline in its net profit for January
May 2000 quarter. For the first time in the previous eight years P&G was showing a
decline in profits. In the late 1990s, P&G faced the problem of inactive revenues and
profitability. In order to increase speed growth, the erstwhile P&G President and CEO,
Durk Jager (Jager) officially launched the Organization restructuring 2005 program in
July 1999. Company 2005 was a six-year long organizational restructuring exercise
which included the consistency of work processes to expedite growth.

Through the implementation of the program, P&G meant to increase its global revenues
from $38 billion to $70 billion by 2005. According to analysts, though company 2005
restructuring program was well planned, the implementation of the plan was a failure.
Analysts assumed that Jager concentrated more on development of new products rather
than on P&G' well-established brands. Forecaster felt, and Jager himself admitted, that he
did too many things in too short a time. This resulted in the turn down of the company
revenues and profitability. Following a brief stint of 17 months, Jager had to quit his post.
In June 2000, Alan George Lafley took over as the new president & CEO of P&G. Under
Lafley, P&G seemed to be on the right path. He was bright to turn the company around
through his excellent planning, execution and focus. Through Lafley at the controls, P&G

45
financial performance improved significantly. The company share price turn up by 58%
to $92 by July 2003, as against a fall of 32% in S&P 500 stock index. The cost of this
program was expected to be $1.9 billion and it was estimated to generate an annual
savings (after tax deductions) of approximately $900 million per annum by 2004.

8.2 Corporate Restructuring:

General Motors, all along with many other us based companies, go through a decline in
stock market activity and overall company finances following the attacks of September
11, 2001. The firm increasing costs of retiree health care, pensions and benefits have
surpass expected rates of return, impelling GM to develop a corporate restructuring
program (General Motors, 2006). Subsequent $10.6 Billion loss in 2005 company
decided to carry out its three year restructuring strategy, which take in the closure of
nearly a dozen manufacturing plants, making significant job cuts, introducing new
automobile lines, and redeveloping General Motor’s overall marketing strategy (General
Motors, 2006). Most in recent times, General Motors announced it would consider a joint
venture with competitors Renault and Nissan; however, efforts to form the alliance failed.
Generally, the company still trusts it is on track with the new plan and CEO Rick
Wagoner believes that both job cuts and plant closures are necessary for GM to get its
costs in line with other major global competitors.

Throughout the implementation of long term corporate restructuring, company plans on

developing promising new product lines; as a result, increasing market share, improving
product quality, and Increase Company finances. In the first quarter of 2006, general
motor earned nearly $400 million in sales revenue representing the potential long-term
benefits of such a plan (General Motors, 2006). Company was also able to cut its annual
dividend from $2 per share to $1 per share, saving the general motors nearly $565 million
a year (General Motors, 2006). Through recent company reduce as well as health care
benefit reductions taking effect, General Motors possibly will potentially reduce
company costs of up to $7 billion by the end of 2006, $1 billion further in savings than
previously projected, saving the general motors nearly $565 million a year (General
Motors, 2006). Closing down plants, assembly lines, and reducing employee numbers
will very much reduce additional firm costs; allocate the money to benefit better product
development. Through improving sales, company can open new plants and change
existing plants to maximize the quality and efficiency of output.

46
8.3 Case study:
Reconstruction of company
A Ltd, has became sick since a few years. The management feels that the company has
recently turned the corner. Balance sheet of the company as at 30 June 2009 and other
relevant particulars are given below.

Balance Sheet on 30 June 2009

Liabilities Rs. Assets Rs.

Equity share capital of Rs.10 Land and Building 1,00,000
each fully paid up 6,00,000 Plant and Machinery 2,00,000
6% preference share capital of Stock 2,00,000
Rs.100 each fully paid up 2,00,000 Sundry Debtor 2,00,000
9% Debenture of Rs.300 each 3,00,000 Cash and Bank balance 30,000
fully paid Profit and Loss account 8,20,000
Trade creditor 400,000
Expenses creditor 50,000
---------------- ---------------
15,50,000 15,50,000

(a) Land and building are worth Rs.400, 000.

(b) Stock and sundry Debtor are expected to fetch 20% less.
(c) Equity shares are to be reduced to Ra.2.50 each, fully paid up.
(d) Preference shares are to be reduced to Rs.50 each, fully paid up the rate of
preference dividend being raise proportionately.
(e) Debentures are to be reduced to Rs.200 each fully paid up the rate of interest
being raised proportionately.
(f) Trade creditors and expense creditor will wait for payment and continue
business on existing terms if 20% of their dues are paid formalities.
Some of Director wants to go in for capital reduction and some others prefer external
reconstruction.
You are required to prepare Reconstruction Accounts, Realization Accounts and two
sets of Balance Sheet as may be appropriate under the above alternative schemes
giving effect to the various points indicated.

47
 Accounting for internal Reconstruction Scheme
Capital Reconstruction A/c
Rs. Rs.
To provision for doubtful 40,000 By Land Building A/c 3,00,000
debts A/c By 6% Preference share 1,00,000
To Stock A/c 40,000 A/c
To Cash /Bank A/c 20,000 By 9% Debentures A/c 1,00,000
To Profit and loss A/c 8,20,000 By Equity Share Capital 4,50,000
To Capital reserve A/c 30000 A/c
9,50,000 9,50,000

Cash/Bank A/c

Rs. Rs.
To Balance B/d 30,000 By Capital reconstruction 20,000
To Equity Share Capital 100,000 A/c
A/c By Trade creditor A/c 80,000
By Expense Creditor A/c 10,000
By Balance B/d 20,000
130,000 130,000

A ltd (reduced)
Balance sheet as on 30Jun 2009
Liabilities Rs. Assets Rs.
Issued and Subscribed Fixed Assets:
100,000 Equity share of Land and Building
Rs.2.50 each fully paid 250,000 100,000 400,000
up Add: Appreciation
Opening balance of 300,000 200,000
capital stands at Nil
Rs.600,000 under 100,000 Plant and Machinery
scheme of reconstruction Investment 160,000
and Rs.100,000 issued Current Assets:
during year 2000 12% Stock in Trade
preference share of Sundry Debtors 160,000
Rs.50 each fully paid up 30,000 200,000
Capital Reserve Less: Provision 20,000
13.5% 1000 Debenture 200,000 For doubtful debt Nil
of Rs.200 each fully paid 40,000 Nil
A Current Liabilities: 320,000
Trade creditor 40,000 Cash at Bank
Expense Creditor Nil Loan and Advance
B Provisions 940,000 Miscellaneous Exp 940,000

48
Accounting for External Reconstruction Scheme
Calculate of purchases consideration
Rs
Amount payable to:
Equity shareholder (60,000 share @Rs2.50 each) 150,000
6% Preference shareholders 100,000
9% Debenture holders 200,000
Trade Creditors 80,000
Expense Creditors 10,000
-----------
540,000
-----------

Cash Accounts
Rs Rs
To Balance A/c 30,000 By Formation Exp A/c 20,000
To Equity share Capital 100,000 By Vendor A/c 90,000
A/c By Balance c/d 20,000

130,000 130,000

Realization A/c
Rs Rs
To land and Building A/c 100,000 By Trade Creditors A/c 400,000
To Plant and Machinery 200,000 By Expense Creditor A/c 50,000
A/c By A (new) Ltd A/c
To Stock A/c 200,000 Purchase consideration 540,000
To Sundry Debtor A/c 200,000 By 6% Preference share 100,000
To Cash A/c 30,000 Capital
To Cash a/c paid trade 90,000 By 9% Debenture A/c 100,000
&expense creditor 1,190,000 1,190,000

Equity Shareholder A/c

Rs Rs
To Profit and loss A/c 820,000 By Balance B/d 600,000
To equity shares in A By Realization A/c 370,000
(new) Ltd A/c 150,000
970,000 970,000

49
 A (new) Ltd. (and reduced)
Balance Sheet as on 30 June 2009
Liabilities Rs Assets Rs
Share Capital Fixed Assets
Issued and Subscribed Land and Building 400,000
100,000 Equity shares of Plant and Machinery 200,000
Rs.2.50 each fully paid up 250,000 Investment Nil
2000 12% Preference Current Assets
shares of Rs.50 each fully 100,000 Stock in Trade 160,000
paid up Sundry Debtor 200,000
Reserve and Surplus Less: Provision
Capital Reserve 50,000 For Doubtful debt 40,000 160,000
Secured Loans Cash at Bank 20,000
13.5% 1000 Debenture of 200,000 Miscellaneous Expenses
Rs.200 each fully paid Formation Expenses 20,000
Current Liabilities
Trade Creditor 320,000
Expense Creditor 40,000
960,000 960,000

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Chapter 9

Conclusion
Even through corporate restructuring as a mean of enhancing shareholder value is gaining
important in the corporate world. The research is related to the process of corporate
restructuring.

In our research I conclude that corporate restructuring is changing the organization big
change in internal structure, such as changes in assets and financial structure. Corporate
restructuring may take place as some forms such as acquit ion leveraged buyouts hostile
take over or a merger. Some of reasons in which company adopt the method of corporate
restructuring with a motive to increase the shareholder value. Corporate restructuring
allow focusing on assets use and profitable investment opportunities, to reorganize or
divest less profitable or loss making business or products. The corporation can also
improve value through capital restructuring and can innovate securities that help to
reduce cost of capital. Company is reorganizing of faction such as sales marketing and
distribution. In our research I conclude that corporate restructuring has enable thousands
of companies around the world to respond more quickly and effectively to new
opportunities and unexpected pressures, and get competitive advantage. In this regard the
distinguishing factor of the success or failure of corporate restructuring may lie more in
the process by which the specific strategies are implemented rather than in their content
Each of the three modes of corporate restructuring portfolio restructuring financial
restructuring organization restructuring has different strategic legal financial and
organizational implications which are to be addressed correctly which formulation and
implementing which are to be addressed correctly which formulating and implementing
any corporate restructuring move.

In financial restructuring be able to be seen as a means that can ensure the company is
making the most efficient use of available resources and thus generating the highest
amount of net profit. In portfolio restructuring is refer to changes in the sets of companies
comprising the corporation to create a move effective configuration of business and
increase effectiveness in combining lines of business. Some of methods of corporate
restructuring are showing positive results in adopting companies. There are many
examples of corporate restructuring which just did not produce the desired benefits and
had to be reversed on a number of occasions. It is to be noted that favorable financial pay
off from any corporate restructuring move is always the outcome of a well thought out
programme for strategic repositioning of the concerned firm.

In corporate spin offs Shares in the new company are distributed to parent company
shareholders. The spin-offs company goes public. In addition, spin-offs may result after
major shifts in the economic environment affecting corporations and their subsidiaries.
Motivation contracts tied to the performance of the common stock of the parent firm may
not be meaningful for managers in the subsidiary. I conclude that some parents
companies decide to spin offs subsidiaries because they believe that all their lines of
business are not accurately valued in the capital market. A spin-off also engages the

51
research of a plan of reorganization, which serves as the agreement between the parent
and subsidiary for the specifics of the spin-off. Corporate Spin-off announcements are go
with by increases in share prices and that share prices of highly diversified or
unprofitable companies showed the most dramatic increases. In corporate spin offs is take
advantage of tax benefits. Some of benefits is getting by companies in spin offs such as
abnormal returns, ex-day puzzle, tax incentives, information benefits. The main effect of
corporate spin offs is to enjoy the cost of combined units.

In equity carve outs I conclude that the companies are adopt the method of equity carve
outs to motivation for parent firm and sources of value creation. In equity carve out I
identified that equity carve out are highly differentiate from other methods of corporate
restructuring. Equity carve outs is also a way of reducing their exposure to a riskier line
of firm and to boost shareholders value. In equity carve outs A new legal entity is created,
and A new control group is immediately created. Every one carved-out subsidiary has its
own board, operating CEO, and financial statements, while the parent provides strategic
direction and central resources.

In divestments I conclude that company is adopted the divestments method to increase

the markets share, availability of better alternatives for company and the need for
increased investment. Some of other condition involved as lake of strategic fit, some of
legal pressure to divestments. I conclude that among the various methods of divestiture,
the most important ones are partial sell-off; demerger (spin-off & split off) and equity
carve out. I conclude some of motives for divestment as Change of focus or corporate
strategy, Unit unprofitable can mistake, Defend against takeover, good price and need for
cash.

In share repurchase in conclude that some off outcome of share repurchase in firm such
as increase in confidence in management, enhances share holder value, higher share
price, increase ROE. Share repurchase allows a company to pass on extra cash to
shareholders without raising the dividend. Some of other effects as Stock buybacks also
raise the demand for the stock on the open market, tax implication and excellent tool for
financial reengineering. I conclude that some circumstances in which the company is
adopted the method of share repurchase are firm had big quantity of unused cash and
some objectives as, market perception, exit option, increase promotion stake and show
better financial ratios. In share repurchase some of other relevance is discussed.

In corporate recovery I have trying covered every possible option for corporate recovery.
In research of corporate recovery it concludes that the company to adopt the process of
corporate recovery need to expert management for the purpose of consultation. I
conclude that if the company used the method of corporate recovery is saved the risk of
insolvency. The company is bearing some of professional team cost in process of
corporate recovery. Corporation is used some of corporate recovery strategies for
implementing the process of corporate recovery.

52
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Words count

Chapter 1 ……………………..2466
Chapter 2 .…………………….963
Chapter 3 …………………… 4017
Chapter 4 ……………………..1772
Chapter 5 .……………………..1128
Chapter 6 .……………………….3292
Chapter 7 .……………………..1522
Chapter 8 .……………………..1647
Chapter 9……………………….992
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Total words …………………..17,800
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