Chapter

Corporate Restructuring
1 An Overview

1.1 Introduction
1.2 Meaning and Definitions
1.3 Historical Background
1.4 Motives behind Corporate Restructuring
Motives behind Expansion
Motives behind Corporate Control
Motives behind Contraction
Motives behind Change in Ownership Structure
1.5 Significance of Corporate Restructuring
1.6 Kinds/Forms of Corporate Restructuring
Portfolio Restructuring
Financial Restructuring
Organisational Restructuring
Technological Restructuring
1.7 Choice of Corporate Restructuring
Expansion
Contraction
Corporate Control
Changes in Ownership Structure
1.8 Present Scenario of Corporate Restructuring
1.9 Limitations of Corporate Restructuring
References
Review Questions
 Merger. AcquisRbn and Otler Forms Corporate Restructurf•g: An 6

1.2 MEANING AND DEFINITIONS

1.1 INTRODUCTION
The word structure used in an economic context impfies a specific, stable relatbnsho
In chnged bus-ess only those organisations rule who visualize the
among the key elements of a panicular function or process.To restrt.cturemeans
appear as $au•ie. Present business environment,characterized (hopefully) purposeful process of changing the structure of an inqituüon: a cornpany, an
by R-e rab.zaton, accommodates organisations that are coming up with industry, a market, a country, the world economy, etc. This structure defines tie constraints
and nourish. Companies, in this punishing global economic
under which institutions function in their day-to-day operations and their pursuit of better
to the panac}e of success seeking competitiveedge over their economic performance.
eves of beraksabon and deregulation have been shaking the corporate
(a) The term 'RestruMuring'as per OMorddWonaryrneans, •togive a new structure
eve he te don-estic organisations are fatling prey to tie fierce competition
to rebuild or rearrange".
caned by tus emerghg business scenario.The recessionary
trend tc ne Wai Street tsunami has rrede forthe organisations a maze withno (b) Sander defines as •Restructuringis an attemptto change the <ructure of an
n i,-mry of producing goods only to keep life simple is suicidal, rather an institution in order to relax some or all of tie short-run constraints. It is concemed
prevai that rnakes the quest for value sustainable. Falling with changing structures in pursuit of a bng-run strategy.
market and number of disceming consumer abash (c) Crum & Goldberg definerestructuring
of a companyas •a set of Gscrete
a eep forward. An incessant quest with inventing intelligence only decisive taken in orderto increase tie cornpetiti•ænessoftle enErprÉe
way Étver s-Qerior perfomzrce and value for all the stakeholders. and thereby to enhance its value'.
mr•rpeiton wm its nurtber and volume also made the textureof the
We deme corporate restructuringas a change in the operaional structures, in',eestrent
scv•ger ard ±sorber bott financially and strategically creating a wide
the structures, financing structures and govemance structures of a company. The objective of
epos:e forte enterprises to bund an amour for protecting themselves from
organisations are left with no restructuring is to transform the company intoan enterprise that is of high value to its omers.
twats n and fot•tmn-uhgfrom t•.eenvironment Thus,
exæUent al be it product or process, staff or Simply stated, corporaterestructuringis a comprehensiveprocess, by which a
Szret•dders. c—vners or credtors. company can consolidate/split up its business operations and strengthen its posüions for
Show to become world class". So, achieving its short-term as well as long-term corporate objectives, synergistic, dynamic, and
The for al t•jebusiness concems now is continuing as a competitiveand successful entity.
to re-establishorganisation's
corporæ re—nn.rhg tat brings excellence is inevitable opportunities and
øvznage and respond rnore quicwy and effectively to new
of all strategies, holds great 1.3 HISTORICAL BACKGROUND
dznerges. Bust•ess excegeru, as tie terminalstation to shape their
tiernselves
gorrise for organizations mat desire to transform
Corporations all overthe worldare striving hard The financial crisis of the late 1990s devastated emerging market economics and
destny and he future of meir stakeholders.
from their present condition to world-class presented considerable obstacles to achieve a sustainable recovery.The rises in
to a&iieve exceberce that hews tiem navigate
resonating phrase business excellence, in its unernployment, sharp junvs in interest rates. double-digit decline in outputand plummeting
and tum to satisfy t•eir stakeholders. The
business performanceto get
true sense, is systemajc and continuous improvementof exchange rates engendered considerable sufferings; enomous shifts in the profitabilityof
and increased shareholders' value. business activities and a massive overhang of bankrupt corporations and bad loans on the
enlightened cu%mers. efficient process management
excellence through strategic tools broadly balance sheets of banks.
By irnprovng organization's cutture, business
and encwrage the use of into areas where its effect will be most Since the announcement ofthe New Econonic polS' in July 1991, the Indan Corporate
a
excellence and thereby creating value for
beneficial to performance. Adlieving business objectiveof todays sector has witnessed several changes and new challenges in the Indian economy. The tide
well as significant
cornpany is consøered to be me moMvital as and sustainable growthover
of Iberalizatbns, privatizations and globalization (LPG) has been speeded around the globe.
run survival
business enterprises wit) an aim to ensure long In order to keep pace with the global rhythm of LPG, restructuring the corporate sector form
concept of corporate restructuringhas emerged.
time. Keeping tiis objeclive in mind, Tue multidimensional angles has got due importance in the Indian economy. The major policy
restructuring the corporate sector from
Corporate restructuring usually implies and thereby ensuring
changes introduced since July 1991 include:(a) abolition of industrial licensing; (b) liftingof
competitiveedge
multidimensionalangles witha view to obtain restrictions on the size of firms; (c) drastic reduction in the areas resented for the public
business success.
 AQA&n md 00M Forms An 7

(d) Government equfty in public sector undertakings; serve many masters in nuny differentways. In my event, mig ttzir primarycaMng,
lei o' regulattons.(0 &ralization of invort tariffs;(g) which is to stick to the business of creating value for t•eir
al on •noons. (h) abolition of the office of the Controller So corporate restructuringis one of the rneans that be to meet the
0' iss.•es to Corvantes to set prenua on their share issues; (i) freedom challenges which confront business and also enharzd value for sharehoøers.
seacv to rat* trom abroad; (j) reducing the central excise
re50cng nmme tax rates both for corporate and individual
1.4 MOTIVES BEHIND CORPORATE RESTRUCTURING
cha-ves Nt-porate restructurings wave started in India from 1994. If we look at the motives behind corporate restuctumg we wi four s"arate sets
Of co..ry t •as Swaral Paul he triedto takeover Escorts. The othermajor of reasons for differentchoice of corporate structuring,Vt. expansbn, corporate control,
tea: o' Leyåand by the Hndup•s Shaw Wallace, Dunlop owned contraction, and change in ownership structure. The detai of he reasons can be found as:
-.r-es Group. Ceat Tyres by he Goenkas and Consolidated Coffee
a-e RP- Tata Tea's Everaged buputofTetley andrestructuring
1.4.1 MOTIVES BEHIND EXPANSION
.-tc a-e sc or.
Any single reason for expansion can be found irrebvart as it fifers wtl
me forthe fnancel year 1999-2000, the then finance Minister subdivided as:
and companfs strategy. Irnportantreasons for expansion an
d resse: need for corporate restruaumg •withgrowing liberalizations of the
-as need far cotporzte regruaurng so that companies can focus better (a) Growå.•Every company wants to grow and corporate restructumg provides
r
aa Rjes corporate seaor has been voicing the need for a flexible fiscal ways for the companies to throwoff cash flows beyond iB internal needs.
reorganzabons In response to this need, I propose a Present day of globalization demands an absoluæ Evel of ste to be able
se Income Tax Act to make such business re- to carry out the operations of the convany.
tax in Paragraph 87 of he same budget the finance Minister (b) Ted'no/ogy:Technologyplaysan strategy.
Demqerwave started n India from 2000-01 for availing huge amount Generally a firm with improved and superior technology wants to engineer its
r-efps nc•easr.g corporate control and enhancing shareholders'value. So technological superiority by acquiring firrns of inferior tæhnobgy. The reverse is
vaiue c•eation s utrro< "root'W•ttin me present backdrop of corporate also true as the firm with inferior technology prefer to acquire technologZaJly
superior firm to sharpen its competitive edge.
md he CEO Cca-Cola. Mr.RobertoC. Goizueta,made a (c) gee morerelevance
n fanur vaue whichis
throu# mrporaterestructuring in expansion intemationally when a fim finds acceptance for its product abroad.
(d) reguhtbns, irnposed
by the govemment also induce companies to increase size. To enjoy specific
•Atbe Cua-C.oe Corrouty, p..bbdy stated rrission is to create value over timefor
besee.ess. In fad, in our society, that is the mission of any business: to advantage in different zones and in different economies, wrnpanys first choice
he o«zs
We Eve a democratic capitalist society, and here, people create goes for acquiring a firm with existing facilities in that place.
aee Zoe for as
E nee meet speafic needs. Govemments are created to help meet civic (e) Exchange Rates: This reason is specially identifiedwith expansion leading to
Pter&ropes are created to help meet soaal needs and cornpanies are created to intemational mergers. Comparative strength or weakness of the don•resticversus
hee meet unorric needs Bueness dtstrbutes the lifeblood that flows through
economic foreign currency makes a differencein price paid for acquisition,production
rd mty formd 9Øds and services, but also in the formof taxes, salaries and costs and the value repatriated profitto the parent.
phia-ttvopies. Creathg vaiue is a wre principleon our economic system is based; (f) PoäticaVEconomic Stability: Political stability i.e. the frequen%/ with which
is the job we owe to mose have entrusted us with Ü•jeirassets. We wod( for our share govemrnent changes, the order of transferring power and the change in the policy
wort for
owners. That is —Eter&i —*fiat they have put us in business to do. Saying that we and outlook due to change in the administration becomes a decisive factor in
our share owners rrey sound sirrplistc —but we frequentlysee companies that have expansion. Economic stability demands a low and predictableinflationrate,
forgottenthe reason exist. They rnay even try in vain to be all things to all people and controlled industrial relations. etc.
 Resncturüv.• An
and Other Forms æporate
8 Corporate Restructumg.•Merger, Acquisition
created by restructuring
in labour costs in different (n) ImprovingPedomance: The accountability
(g) OfferentialLabour Costs, Productivity:Difference impact in demerger often improves performance, and investors also benefit
certainly creates an
geographic region withits associated productivity greater visibility of the demerged entities to analysts and the public.
monitoring companies to expand.
0 is the diversification (o) Booming Independence: Demerger is intended to promoteindependenceas
(h) Diversification: One of the importantdrivers for expansion
of vertical separated company can operate freely at its own discretion. Often the function
both geographicallyand by productline. It may come in the form
risk. of this kind of restructuring is to move assets to owners who can utilize them
integration, both forward and backward, which also helps in reducing
more effectively. This helps the economic system move assets to theirhighest
valued uses.
1.4.2 MOTIVES BEHIND CORPORATE CONTROL
(p) Effort to Unleam: Some demerger effort is undoubtedly an attemptto correct
An importantmotive for corporatecontrol is to ensure that a programme for the previous invest decisions materialized through Mergers and Acquisitions.The
successful performance of the firm can be carried through without interruption. But there fims• inabiity to effectively expbit the possible opportunities through consolidatbn,
remain several other motives to gain corporate control, such as — motivate them to salvage a portion of their investments by separating where the
(i) Improving Leverage Ratio: To reinforce effective control capital structure of the opportunitiescould be exploited more effectively.
fim is changed. Adopting buyback mechanism debt equity ratio or leverage ratio (q) StrategZAdjustment: Sometime divestiture involves selling to a value-increasing
is attemptedto improve.This is because even if the amountof debt is not buyer, which is planned at the time of prior Mergers and Acquisitions activity.
changed, the amount of common stock is reduced so the leverage ratio is Such type of dWestitureis preplanned because they may represent a poor fit to
increased. the acquiring firm.
(j) Utilizationof Surplus Cash: In order to increase shareholders retum and finally
(r) Inaeashg Value: Demerger represents harvesting value by unlocking the hidden
the wealth of shareholders the firm may undertake the strategy of distributing
value. By making financial and managerial resources available and concentrating
surplus cash and therebythe firm is able to enhance the eamings per share.
on the core competency the firm is able to enhance shareholders' value as well
Thus, the company can maintain shareholders' value in a situation of poor state
as value of the firm.
of secondary market by a retum of surplus cash to shareholders.
(k) Enhancement of Voting Power: Another important motive of corporate control is
to enhance the voting or controlling power of the promoters without spending own 1.4.4 MOTIVES BEHIND CHANGE IN OWNERSHIP STRUCTURE
money.
Various motives act as drivers in restructuring activities that result in change in
(l) Preventing Undervaluation: If the management believes that the common stock ownership structure. Some of them can be summarized as —
of the company is unden.'aluedby the market they can enhance control on the
(s) Manoeuwing Leverage: The most important reason for changes in ownership
valuation of shares by buyback of the shares with a view to recognize true value
structure, whether debt preferred stock is exchanged for common stock, or
of those shares as the announced buyback price is invariably higher than the conversely common stock for more senior claims is to manoeuvreleverage of
prevailing market price.
the firm.
(m) Anti TakeoverDefence: If the insiders judge the firm to be undervalued, they may
(t) Aåematim me Contra' Strudure: Restructuring of this Knd is aimed at changing
have concems that the firm is subject to a takeover bid at a relatively small
the control structure of the firm. By repurchasing substantial percentage of
premium. The large premium involved in the repurchase tender offer may convey
shares or by initial public offerings the firms want to reshuffle the voting rights of
infomation to the non-insiders that the value of the shares is at least as high as
the shareholders to change the control pattem of the firm.
conveyed by the premiumand may be perhaps even higher in the future.
(u) Pmviding faimess to Minority Shareholders: A critical element in restructuring
1.4.3 MOTIVES BEHIND CONTRACTION activities through going private transactions is faimess to minorityor outside
shareholders to avoid accusations of security fraud against controlling
The companies, trimmingsize through demerger anticipates the benefits of restrudurhg shareholders.
by outperfomjng the market indexes. Differentmechanism shedding the business off
through demerger takes place with a number of motivations like —
 An Ovøfvtøw

(O the ot It to come out nom t•uulntlonaof unnbeotbod deptoolatlon. A largo number of oompanlon In India havo merged to
take advnntetge of thia provielon. The oondltionn to olalm thio tax bonont havo
will buy equity been releued by Åtnendrnontmade in gootlon 72A of tho Incomo Tax Act.
(V) ManetgøtiAl Ono of tho potential boneflto of morger an Inoroano
ANCE Of CORPORATE RESTRUCTURING In Thin mny occur If tho oxloting managomont team.
whloh perfonning poorly. roplgood by a mote ottlolontone,
(VI) Other teagong ot corpotäte tvstmotudng are appended below.'
toduoed competition, froe flow (a) to return to the gharoholdorg of tho outplun cnoh. which 10not roqulrod In
Of AOt the near forogoonblo futuro,
a løulelativø that faeltltatpg In veuiety Of WAYS. To enhanco tho oatnlngo por oharo of tho company.
with (ho Ability to be ettlcipnt and to moot tho (c) To provldo to oharoholdom/lnvostors that tho markot Is prosontly undor•
a bualnpng tonllty, Cotpotate negttuctutinu INone of tho
valuing tho sham of tho company In rotation to Its Intrinsic valuo and tho
a, to the ehallenuen and ptobloma which confront buolnogg,
proposed buyback will facllltato mcognltlon of tho ttuo valuo.
he law bp Blow to 01 Intpedo tho dlnctotion ot cotpotato ont00)tiN0 to adapt
(d) To Incroaso tho promotors• voting powor.
to the need' ot atanging times and to meot tho demand' of Inctoaglng competition.
(o) To maintain gharoholdors' valuo In a situation of poor stato of secondary
Sonte of the moat common reasons of corporate resttuctudng are discuggod briefly markot by a rotum of surplus cash to tho shareholders.
hereunder. Eliminating tho takoovor threats.
(i) Emttonøesot Economlosof scale adso when Increase In volumeof (g) opportunity to grow faster. with a ready-made market share.
An
productionleads to a reductionIn cost of productionpot unit. For Instance, (h) To eliminato a competition by buying it out.
overhead costs can be substantially reduced on account of shadng central Diversification with minimum cost and immediato profit.
services such as: accounting and finance. potsonnol and legal. sales ptomotion 0) To forestall the company's own takeover by a third party.
and advertisement.top level management and so on. So when two or mom
companies cx»mbine.certain economies am realized duo to tho larger volume of 1.6 KINDS/FORMS OF CORPORATE RESTRUCTURING
operations of the combined entity. These economies adso duo to increased
production capacity. strong distribution networks. ottoctivo engineedng services, It is argued that managers should restructure companies to improve value; otherwise.
research and developmentfacilities, data processing system and others. extemal raiders will get an opportunityto takeover the company. Therefore, they claim that
(R) q»erating Emnotwes.• Apart from economies ot scale, a combination ot two or it is in the best interest of both managers and shareholders to keep the gap between potential
more firms may result in reduction of costs due to operating economies. A and actual value as close as possible. Management can improve operations by increasing
merged tinn may avoid overlapping. Various functions may be consolidated and revenue or reducing cost, acquihng or disposing of assets and improvingthe financial
duplicate channels may bo eliminatedby implementingproper planning and structure of the company. Moreover, executives often restructure their comparies tot
control system. enhancing productivity,reducing costs or increasing shareholders wealth. They dassty
(N) Synergy: Synergy refers to a situation where the combined firm is more valuable restructuring activities into four categories: porttoio restructumg, fnanczl
than the sum ot the individual combining firms. It refers to benefits other than organisationalrestructuringand technohgul restructuring.These are béow
those related to economies of scale. Apart from operating economies, synergy
may also arise from managerial capabilities, creativüy, innovati•aness, (a) It he ofassee
R&D. productivity improvements, improved procurement and the eimination of by a fim or the lines of business a operates i-.ck&g Svdaæn.
divestnures,
asst saks and Corvany rznagerent mayresen•æ
(iv) Tax In India, a profitable convany is allowed to merge with its business in order to sharpen focus by of a hat
a company to set-off against its profits. the accumulated bsses and theirmee busæs and in orderto or rid a
 Restructumg: Merger,Acquisitionand Otler Foms Corporate Restructuring:An Overvøw

operation by selling off a division. Moreover,a company can involve on an

agyessi•æ mrnbination of acquisitions and divestitures to restructure its portfolio. Average Impact of Restructuring on Company Performance
Mean Uedl•n Per w•tt Number
(b) Rian&l æstrudunng• Financial structure refers to the allocation of the corporate Positive of Studles Sample
stiucturlng Percentage Per cz•rt
flow of funds —cash or credit —and to the strategic or contractual decision rules Performance Performance Means Size
that direct the flow and determine the value-added and its distribution among the 1m rovement
various corporate constituencies. It includes significant changes in the capital 5.6 2.9 21 154
d Olio
structure of a firm, including leveraged buyouts, leveraged recapitalisations and ncial 37.5 24S 27 35
debt for equity swaps, mergers, acquisitions, joint ventures, strategic alliances, 4 207
ahlsational • -0.21 0.1 50
etc. The elements of the corporate financial structure include the scale of the
• Significantly from 50 per cent (base case) at P < 0.01
hvestrnent base, the mix between active investment and defensive reserves, the
BowmanH. Edwardet d, Does RestrwturingIrrprove EconomicPerforrnance?•,
foa.JS of investment (choice of revenue source), the rate at which eamings are Califomia•Mana ent Review, Vdurne 41. Number 2. -winter 1999. page 36.
rehvested, the mix of debt and equity contracts, the nature, degree and cost of
corporate oversight (overhead), the distribution of expenditures between current
and future revenue potential, and the nature and duration of wage and benefit
1.7 CHOICE OF CORPORATE RESTRUCTURING
contracts. Financial restructuring generates economic value.
The term "corporaterestructuring"is quite wide covering various aspects. It may be
(c) Restructuring: Organisational restructuring includes significant chosen from among four broad groups, viz
changes in the organisational structure of a firm, including redrawing of divisional
boundaries, flattening of hierarchic levels, spreading of the span of control, (a) Expansion,
reducing product diversification, revising compensation, streamlining processes, (b) Contraction,
reforming govemance and downsizing employment. It is observed that lay-offs (c) Corporate Control and
unaccompanied by other organisational changes tend to have a negative impact
(d) Changes in Ownership Structures.
on performance. Downsizing announcements combined with organisational
restructuring are likely to have a positive, though small effect on performance. The various components under each and every group of corporate restructuringare
discussed below in brief:
Studies reveal that generally, there is a statistically significant improvementin the
organisational performance after a restructuring event. However, it may not be the case
always. It is cned that the average percentage change in performance is positive for financial
and porffobore<ructuring , 'Mlile itis negügible or sometimes negative in case of organisational
re<ruäuring.
The portfolio and financial restructuring display higher percentage of positive retums
than organisational restructuring. In five out of six cases (i.e. 86%) of financial and portfolio
restructuring, the impact on performance was positive, while fororganisational restructuring,
Ta&r Swe
the impact was positive for 50% of the cases. Proxy
Reprezse
(d) Technological Restructuring: An alliance with other companies to exploit
technological expertise is termed as technological restructuring.
spit on
turæ

ESOPs
PrWate

Source: %llik. & Rakshit. •Corporate throughDemerger. A Case StiÆy•. Finance India,
 md 00M Fom Coqnmtø nostnmtumg An Onrßw 15

to soft drinks from Pado and pad a totalconsi&ratjon of Rsl. 70crore. Ranbaxy Laboratorfs
1.7.t
brand acquisition from OtJfic Laboratories must be one of the few cases, where tie revenues
ot increasing the size and volume of business from the brands have matched projections in the first year after the acquisition. The four
Unenand (Merger and Acquisiions), Tender brands -Mox, Exe', Zole and RoMhro- acquired fromGufic helped notchup sales of Rs 72
Ages and Jont Ventures crore in first year. a 20% improvernent over meir sales figure under Gufic.
A transaction where two firms agree to integrate their (d) Joint Venture: In the case of pint venture Wo cornpames enter into an agreement
cr 8 co-equal bass ts caned nwger. It is defined as the fusion of two and accumulate certain resources with a view to achieve a particular cornmon business
drect acqursitton of the net assets of the other(s). It results when goal. lt.generalty involves fusion of only a srnall pan of me actiditiesof he cornpanies
he o' one cornpany. usually two. decide to pool the resources of the involved in the agreement and usually for limited period of time durajon. The retums arising
E entry. Accordingly, in a merger two or more companies out of such venture are shared by the partners according to their prearranged agreement.
E cni and lose their ndrvidual 'dentties. While entering into any foreign market, multinational companies pursue ths strategy ofjoint
venture. For example, in order to manufacture automobiles in Inda, Daewoo Motors and
strategy 'here me firm.buys a controlling or 100% interest in another
DCM group entered into a joint venture programmed.
e. -namg the aq,nred fim a subsidiarywithinits portfolio.
A an acausmon where me target firm did not solicit the bid of the acquiring 1.7.2 CONTRACTION
either
acorns sha res or rdreaty by participatng in the management. The objective Contraction is the second form of restructumg. In tie case of æntradon, generalY the
anc acoure large share ot he rnarket. The regulatory framework of takeover size of the firm gets reduced. Contraction may take place in tie fom of spry-off, spüt-off,
coroanes ts governed by the Securities and Exchange Board of India SEBI divestitures, split-ups and equity-carved out.
Acousoor of Shares and Takeovers) Regulations, 1997. (a) Spin-offs: A spin-off is a type of transaction in which a company dsüibutes all the
ze of mergers he consent of tee majorityof shareholders of all companies shares owned by it on its subsidiary to its own shareholders. Such of shares
e#ereas. tve case of acquisition the controlling interest in a among the shareholders is made on a pro-rata basis. As a result, the proportional ownership
with he consent of its rnanagement- of shares of the shareholders becomes tie same in the new legal subsidary as well as the
e z co—pan,' PJtcnases me shares of another company by giving advance information parent company. The new entity has its own management and is operated independently
E regardng pur$sase of shares it is called takeover. So takeover is an without the interventions of the parent company. A spin-off generally does not result in an
infusion of cash to the parent firm. Forexample, by spinning off its investrnent fiision, Kotak
of shares carryng voting rights in a cornpany with a view to gaining control over
rz•zFrerr. of tne zrrpany. However, wfiere the shares of a company are widely held MahindraCapital Finance Ltd. fomed a subsidiary krtownas Koäk MahindraCapital
genera pubic t nvotvestie processas set outbytheSEBI. Corporation.
the (b) Split-offs: In the case of split-off, a new company is created in orderto takeoverthe
(b) Te e-or offers: In t-.e case of a tender offer, a public offer is made for acquiring
retarget wrrparry. Here , me acquisition of shares of tie target company indicates operations of an existing division or unit of a company. A portion of the existing shareholders
o' menagement control in mat company. For instance, India Cements giving of the company obtains stocks in the subsidiary (i.e. the new cornpany) in exchange for
rrøe for me shares of Raasi Cements. stocks ofthe parent company. As a result. the equity base of tie parent company is reduced
representing the downsizing of the fim. Thus, shareholding ofthe new entity (i.e. , subsidiary)
(c) Asset Acqusttions: Asset acquisitions imply buying the assets of another company. does not imply the shareholding of the parent company. In the case of a split-off, there is no
intangible assets
Su&t asse mey be tangbie assets [ke; a manufaduring unit of the firm or question of cash inflow to the parent company. For example, the Board of Directors of the
acquisitions, the acquirer company may limit
üe brandl trade mark, etc. In the case of asset Dabur India Ltd. decided to split-off the Pharma segment (including assets) and transfer it
is acquisitionsto those pans of me firm whi&l match with the needs of the acquirer to a new company for the Financial Year 2002-03. The demerger proposal was a significant
corroany. For it-stance, Laffarge of France acquired only the cement division of Tata group. strategic decision reflecting corporate restructuring initiative and was expected to provide
related to
Lafarge ætualt•j acquired only the 1.70 million tone cement plant and the assets greaterfocus on independence to the companys two main segments. The FMCG business,
such division from Tata group. Such assets may also be intangible in nature. For example, which would remain within Dabur India Ltd. would concentrate on its core competencies in
Coca-Cola acquired sorne popular brands like Thumps-Up, Limca; Gold Spot, etc.. related
 RSÄdtriv.• An
16 Restuaurtv: Merger, Acquisition and Omer Forms
followed by a company to
(a) Anti-Takeover Defences: It is a technique
personal care, Health care and Ayurvedic Specialities. The new pharmaceutical cornpany level of hostile takeover activity in recent -—--
forcefully acquiring of its management. With the
Dabur Phama Ltd. willfocus on its expertise in Allopathic, Oncology , Formulations and Bulk of takeover defences. Such takeover
years, various cornpanies are resorting to the strategy
Drugs. or active defences. Pre-bid
defences be pre-bid or preventive defences and post-bid
(c) Divesfitures: A divestiture involves the sale of a portion or segment of the company to prevent a sudden, unexpected
or preventive defences are generally employed with a view
to an extemal party. Such sale may cover assets, product lines, subsidiaries or divisions of preventive takeover defences
hostile bid from obtaining control of the company. When
the undertaking. A divestiture generally results in an infusion of cash to the parent company. or active defences are
become unsuccessful in preventing an unwanted bid, the post-bid
A company may choose to sell an undervalued operationwhich according to the company control position of
implemented. Such takeoverdefenses attempt at changing the corporate
is unrelated or non-strategic to its core business activities. The sale proceed arising out of the promoters.
such sale may be utilized for investing in profitable investment opportunities that are from the
expected to offer potentiallyhigher retums. Divestitureis considered to be a fom of (b) Share Repurchases: It involves repurchasing its own shares by a company
expansion on the part of the buying company and a form of contraction on the part of the market. Shares may be repurchased by following either the tender offer method or through
selling company. open market method.Shares repurchased also called Buyback of shares. leading to
reductions in the equity capital of the company. Shares buyback facilitates in strengthening
(d) Equity Carved-out: An equity carved-out implies the sale of a segment or portion of the promoters' controlling position in the company by increasing their stake in the equity of
the firm through an equity offering to the extemal parties. Here, new shares of equity are sold
the company. It is also used as a takeover defence to reduce the numberof shares that could
to outsiders who, in tum, give them ownership of a portion of the previously existing firm. In be purchased by the potential acquirer.
thatcase, a new legal entity is created. The equity holders in the newly generated entity need
not be the same as the equity holders in the original seller. (c) Exchange Offers:Exchange offergenerallyprovidesone or more classes of
seaurtties, the right or option to exchange a portion or all of their holding for a different class
(e) Split-ups: In the case of a split-up, the entire company is broken up in series of spin- of securities of the firm. The terms of exchange offered necessarily Involve new securities
offs. As a result, the parent company no longer exists and only the new off-springs continue of greater market value than the pre-exchange offer announcement n•ørketvalue. Exchange
to survive. A split-up basically involves the creation of a new class of stock for each of the offer includes exchanging debt for common stock, which enhances the degree of leverage
parents operating subsidiaries, paying current shareholders a dividend of each new class or conversely. exchanging common stock for debt, which reduces leverage. Exchange
may
of stock, and hen dissolving the parents company. Stock holders in the new companies offers help a company to change its capital structure while holding the investment policy
be different as shareholders in the parent company may exchange their stock for stock in Inattered.
one or more of the spin-offs. Restructuring of the Andhra Pradesh State Electricity Board
(APSEB) is a good example of split-up. APSEB was split-up in 1999 as a part of the power (d) Proxy Contests: The proxy contest is a way to take control of a company without
sector reforms. The power generation division and the transmission and distribution division owning a majority of its voting right. So it is an attempt made by a single shareholder or a group
of APSEB was transferred to two different companies namely APGENCo and APTRANACo of shareholders to undertake control or bring about other changes in a company by the use
respectively. As a result of such split-up, the APSEB ceased to exist. of the proxy mechanized of corporate voting. In a proxy might, a bidder may attempt to use
his voting rights and gamer the support from other shareholders with a view to expel the
1.7.3 CORPORATE CONTROL incumbent board or management. Proxy contests are less frequently used than tender offer
for effecting transfer of control. It provides an altematjve means of corporate control but cost
Corporate restructuring may be done without necessarily acquiring new firms or of proxy challenges is high. Inefficiency in proxy context raises the question of adverse
divesting existing organizations. Corporate control is another type of restructuring which selections which is the rrnin disadvantage of corporate restructuring through proxy contest.
involves obtaining control over the management of the fin. Controlling here, is basically
defined as a process through which top managers influence other related members of an
entity to implement the predetemined organizational strategies. The top managers and
1.7.4 CHANGES IN O'nERSHIP STRUCTURE
promoters group who stand to lose from competition in the market for corporate control may The fouflh group of restructuring activities is the change in ownership structure, which
use the democratic rules to benefit themselves. Ownership and control are not always basically results in a change in the structure of ownership in the company. The ownership
separated. A large block of shares may give effective control even when there is no majority structureof a fim affects and its affected by otier variables, and these variables also
owners. Corporate control generally includes anti-takeover defence, share repurchases, influence the market value. Such variables include the levels of principal agent conflicts and
exchange offers and proxy contests.
 Reshäuiw: Merwr, AcquisRion and Other Forms cnoratø Restnctuüw: An 19

asymrretry and their effects on other variables like the operating strategy of the 1.8 PRESENTSCENARIO OF CORPORATE RESTRUCTURING
capital structure. etc. The various techniques of changing ownership
heraged as Buyout Gong Private.MLPs and ESOPs. Today, a restructuringwave is sweeping the corporate sector an over the world, taking
(41 Lee-aged BuyotJt (LBO): Buyouts constitute yet another form of corporate withinits fold both big and small entities, cornprisülg old economy bugnesses congbrærates
and new economy companies and even in the infrastructure and servte sector. Mergers,
reS'ßuring. n happens, when a group of persons gain controlof a company by buying all
its $.ares. There are two comrnon types of buyout: Leveraged buyout (LBO) acquisitions,and takeovershave become an integralpart of new economicparagm.
ot a rnaprty
Conglomerates are being formed to combine businesses and w•here»mergies are not
arc Managernent buyout (MBO). LBO is the purchase of assets or the equity of a company
achieved, demergers have become the order of the day. With the increasing cornpeffon and
•here he buyer uses a sqnificant amount of debt and very little equity capital of his own for
it the economy heading towards globalization, the corporate restructuring actWiües are
payrrent of me consideration for acquisition. Since LBOs cause substantial financial risk,
have a relatively low degree of business risk. LBO expected to occur at a much larger scale than at any time in the past, and are sEted to pay
±Sred that LBO acquismons should
high a major role in achieving the competitive edge for India in intemationalmarket place.
not be a *itable fom of mrporate restructuring if the acquired firm already has a
degee of business risk. The process of restructuringthrough mergers and acquisitions has been a regular
Limned PartnershØs (MLPs): Master limitedpartnerships(MLPs) are featurein the developedand free economy nations like Japan, the US and European
runs the countries with special reference to the UKwhere hmdreds of rTErgers take place every year.
foared a general partner and one or more limited partners. The general partner
partnership provides an investor witha The mergers and takeovers of multinationalcorporatehouses across the borders have
and bears unrmted ftabifity.The limited
ltnited partnership units become a normal phenornenon.
ntere< a group of asets, usually, oil, coal, gas, etc. Master
than ordinary limited
are traded pabZy Eke stock and thus provde the investor more liquidity Corporate restructuringbeing a matterof business convenience, the role of legislation.
corporate
pamer•ps. One of the rnost irrportant advantages of MLP is its elimination of the executive and judiciary is that of a facilitator for restructuing on healthy lines. In this era of
twice on their
layer of taxaton. In case of a company, the shareholders are taxed hyper competitivecapitalism and technological change, industrialists have realized that
of
at me corporate level and other at the individual level at the distribution corporaterestructuringsare perhaps the best route to reach a size comparable to global
thattheirretums
evends. However, many cornpanies use MLPs to redistributeassets so companies so as to effectively compete with them. The harsh reality of globalization has
ze not subjected to double taxation. dawned that companies which cannot compete globally must sell out as an inevitable
(c) Going Private: It is repurchasing of all of a company's outstandingstock by
attemative.
stops being
errobyees or a private investor. As a result of such an initiative,the company GlÖd Scenrio
traded. Sometimes, the company might have to take on significant debt to finance During the past decade, corporate restructuringhas increasingly become a staple of
restructure
me diange in wmership structure. Companies might want to go private in orderto management lifeand a common phenomenon around the world. Unprecedented number of
stock prices poorly in the
ter businesses (when they feel that the process might affect their companies across the world have reorganised their divisions. restructured their assets,
regulations
*tort run). They might also want to go private to avoid the expense and streamlinedtheir operations and spun-off their divisions in a bid to spur the company's
assoaated with remaininglisted on a stock exchange. performance. Ithas enabled numerous organisations to respond quickly and more effectively
(d) Enployee Option Plan (ESOP): The term employee stock option plan to new opportunitiesand unexpected pressures so as to re-establish their competitive
company the
(ESOP) means the option given to the whole-time directors, or employees of a advantage. The suppliers, customers and competitors also have an equally profound impact
company at a
Wit to purdiase or subscribe at a future date, the securities offered by the while working with a restructured company.
predeterrnined pfce. The basic objective of ESOP is to motivate the directors or employees technologies are changing, established
the employees, Gbbalization gives the consumer many
to perforrn better and irnprove firm's value. Apart from giving financial gains to brands are being challenged by value —for many products, the movement of goods across
to
they also create a sense of ownership amongst directors and employees. ESOPs tend countries is on the rise and entry barriers are being reduced. As markets consolidate into
management since they own stock and an
develop an entrepreneurial spirit among top level fewer and larger entities. economies become more concentrated. In this intemational
increase in stock price, if the firm does well and to their wealth. ESOPs also help companies scenario, there is a heavy pronunciation on the quality, range, cost and reliability of product
of the
to attract talent, motivate employees by enabling them to share the long-term growth and services. Companies all over the world have been reshaping and repositioning
themselves to meet the challenges and grab the opportunities thrown open by globalization.
 Overview
Corporate Restrwtudng.•An
Ot'ter Forms
20 CotporateRestructuring:Merger, Acquisitionand
skill levels and requirements,
loss (üi) Skills: New work practices are raising
The management strategy in turbulent times is to focus on core competencies —selling thus are required to continuously upgrade their skills so as to be able to
making companies and acquiring those, which can contribute to profit and growth of the thanks to new information
group. The underlying objective is to achieve and sustain superior performance. In fact, rnost (iv) Wor@lace: Home• and tele•working is growing,
companies in the world are merging to achieve an economic size as a means of survival and communicationtechnologies.
growth in the competitive economy. There has been a substantial increase in quantum of (v) Workingtime: Increases in demand are met by overtime work or by "a more
funds across nations in search of restructuring and takeover candidates. The UK has flexible approach as to when and how to work", so as to extend operating hours
been the most important foreign investor in the US in recent years with British companies. withouthaving to pay overtime rates;
In telecom, the biggest deals indude AT&T- TCI, SBC-Ameritech, etc. There have been huge
oil sector mergers, the biggest being Euon-Mobile, BP-Amoco and Total-Petrofina. It is (vi) Remuneration:Profit-sharing,ESOPs and various types of bonuses are becoming
estimated that one-in-fourUS workers have been affected by the wave of mergers and more and more common;
acquisition activity. In the Japanese context, mergers and acquisitions are less relevant as (vii) Management:Indians are beginning to understand that a more flexible world is
they believe in alliances and jointventures than mergers and acquisitions. Also, research demanding a different kind of management philosophy; and
has shown that Japanese are least preferred merger partner/acquirer. (viii) Organisation:There is a trend towards flatter organisational structures. It is clear
Indan Sceærio thatcorporaterestructuringis a deep and pervasive phenomenon across India.
The increasing trend of mergers and acquisitions is one of the clearest and most
In the last few years, India has followed the worldwide trends in consolidation amongst
readily measurable manifestations of restructuring.
companies through mergers and acquisitions. Companies are being taken over, units are
being hived off. joint ventures tantamount to acquisitions are being made and so on. It may
be reasonably be stated that the quantum of corporate restructurings in the last few years 1.9 LIMITATIONS OF CORPORATE RESTRUCTURING
must be more than the correspondingquantumin the four and a half decades post
independence. Corporate restructuringis the buzzword for those companies which are in dire straits.
The best thing that may be done by these companies Is to restructure operations so that
Today Indian economy is passing through recession. In such a situation, corporates
things may improve. But how practicable are the Corporate Restructuring activities? Is it the
which are capable of restructuring can contributetowards economic revival and growth.
panacea for all corporate ills? A number of limitationscan be associated with Corporate
Despite the sluggish economic scenario in India, merger and amalgamation deals have been
Restructuring, they are:
on the increase. The obvious reason is —as the size of the market shrinks, it becomes
extremely difficult for all the companies to survive, unless they cut costs and maintain prices. (a) WorkAssurance: Before the announcementof Corporate Restructuring,
especially
In such a situation, merger eliminates duplication of administrative and marketing expenses. during integration the employees of the ailing firm feel relief, but in most cases
the
The other important reason is that it prevents price war in a shrinking market. Companies, reality becomes betterthan the employees used to experience before integration.
by merging, reduce the number of competitors and increase their market share. The management of the acquiring firm takes policy for performance
improvement
resulting closure of certain divisions or departments affecting a number of
Supreme Court of India in the landmark judgment of HLL-TOMCO merger has said that jobs.
"in this era of hypercompetitivecapitalism and technological change, industrialists have (b) Retention ofBest Management: Retaining the best management
combination is
realised that corporate restructurings are pemaps the best route to reach a size comparable always an uphilltask, withdiffering pay scales, responsibility levels,
product and
to global companies so as to effectively compete with them". service portfolios, and organizational vision. Companies pay more attention
to
the financial figures and benefit is weighed only numerically but
Corporate India is facing new flexibilityrequirementsdue to restructuring,some of they remain very
unprofessional in handling the transition process, since corporate
which are discussed below: restructuring
is still a new phenomenon.Joint committeesto determine new
(i) Employment:Companies are moving away from relying on workers on open- management
provisions are rare, and often ineffective.
ended, full-timecontracts and, increasingly, use part-time, temporary, 'contigent'
(c) Delayin Deal finalization: New structures are announced after
and contract workers; long delays, and
communicationis woefully lacking. A gag order is a knee-jerk reaction when
(ii) Jobs: The content of jobs is being expanded to encompass a greater variety of corporate senses that things are going wrong. After the initial
announcement of
tasks;
 Restructuring it takes to finalize the deal as it involves so many issues REVIEW QUESTIONS
boardroom tussles. labor trouble, and queries from shareholders.
1. What is Corporate Restructuring? Discuss the significance of corporate
(Ø Stress: In most cases the divisionsand productsget closureafter restructuring.
Corporate Restructuring. After restructuring the control of the companies goes to Do
2. 'Corporate Restructuring is a new concept of shard-ohers' value
separate set of management creating a stress on the executives. While the you agree? Why?
restruäuring takes place through contraction by way of separation the distribution
of management brings a large number of denials from the management. 3. Trace ttE historicalbackgroundof CorporateResmnring-
4. List and explain the most common reasors of corporde
(e) Woes: At union levels, there is outrightoppositionto restructuring
a±v'äes- Number of mergers awaits legal clearance months after announcement. 5. Briefly explain tie various elements of Corporate
6. Write a critical noe on tie present scenario of mrporate botl from
This is because unions protest pay changes, proposed lay-offs, outsourcing and
asset liquidafion. global viewpoint and Indian viewpoint.
(O anural situation mostly arises in merger and takeovers when the 7. Write short rwtes on:
organizational cutwre of one firm gets mismatched with other firms. This results (a) Joint Venture
in destromg eficiency of the worker as well as management of both the (b) Leveraged Buyout
(c) Divestitures
(g) Create Value: Corporate restructuring is aimed at generating value for (d) Equity carved out
tie firm and finally for the shareholders. But very frequently it is observed that the (e) Employee Stock Option Plan
organizaüonscould not create value instead they have destroyed it. Sudden 8. What are the limitations of corporate restructuring? Discuss.
&lange in the management and organizationalvision creates a gap leaving 9. List and explain tie various motives behind expansion, as part of mergers and
certain capacity idle and promotinginefficiency in utilizationof resources. acquisitions.
10. Briefly discuss the various forms of Corporate Restructuring.
1. "Companies witl SEBI Rules/Regulations/GuidelineS, Taxrnann's Publication. New 11. List and explain the various techniques of changing ownership.
12. What are the Limitations of Corporate Restructuring?
2 ICSI Pubicatbn. 13. Briefly explain tie different forms of corporate control.
3. MalD(,AK, & Rakshit, D., •Corporate Restructuringthrough De-merger. A Case Study", 14. Distinguish between spin-offs and split-offs.
ma, No.4, December-2006, pp.1321-1338
4. Raßit. D, ßCorporate restructuringthrough of shares: A case study of Raymond
Edted volume of Merger and Acquisition: Indian Scenario, Edited by B. Das & A.
K Pramanik, pp. 142-156.
5. V. K Si@ania, 'Direct Taxes - Law & Practice", Taxmann's Publication,New Delhi.
6. A Weinberg, Takeover and Amalgamations (London: Sweet and Maxwell Publishers,
1967).
7. J. Fred Weston and Samuel C. Weaver, Mergers and Acquisitions, McGraw-Hill.
 S M (20&). Managernent,Tamwtn's PLNications,New Chapter

R. (1997). The ot affect negotiations:An overview. hirnd of JointVenture

33: W 100.
7.R (198), Side of Anarces: Lessons from
Mu•gnent Jour* 16: pp. 136-150.

EWE* QUESTIO*Ö
1. De&• tE Aüance'.Discuss natureof strat* alliarwesin
daybu*ess.
2. md he salimt of Stratoc Alliance.
3. major reæons tor Alliances?
4. ust md dsass te categoriesard typesof Strate# Niances.
5. WriE tües on: 1
(a) Licmsing
(b)
6. Osass tE tas$c for start-up phase ot an Alliance.
7. on tie of Stratoc Alliarwe. Providefew suiuUe exartves.
8. List he risks associated witl Alliance.
14.1
9. l&rüfy md briefly explau•tbe key drivers of Strate#
142 Definiüon
10. Baborate on tie detailed process of forminga Strategic Alliance. 14.3 Basic Elements
11. Mance benefits of corporate alterprises? Give ex- 14.4 Joint Venture vs Strategic Alliance
of your answer. 14.5 Equity Variations
12. Disass Zaman and model of successful in strat"c alliance. 14.6 Why to Form a Joint Venture?
Ventures
14.7 Some Examples of Recent Joint
14.8 Structuringthe Joint Venture
14.9 Managing the Joint Venture
a Joint Venture
14.10 Factors to be Considered to Form
14.11 The Advantages
14.12 The Disadvantages
India
14.13 Setting up a Joint Venture in
a Joint Venture
14.14 Documents for establishing
RefMmoes
ReviewQuestms
 316 Restructumg.• Mew. Acquisithn and Other
Venture 317
14.1 INTRODUCTION
Research indicates that two out of five JV amangementslast less than four
An ina•easing numbers, businesses have been years, and are dissolved in acrimony*.
reaching beyond national boundaries
in an effort to locate new opportunities forgrowth,
new markets, and new venture capital. As
business projects get larger, technology more
expensive, and the costs of failure too large
4.3 BASIC ELEMENTS
to be bome alone, businesses feel the need to work withjoint venture
market offers unique opponunities and (JV). Each foreign
risks, and many firms naturally look to joint ventures A joint venture possesses following basic elements:
with one or more partners for assistance (a) Contractual Agreement: JVs are established by express contracts that consist
in entering new markets. Joint ventures have
beconp a rnajor feature of the intemational of one or more agreements involving twoor more individuals or organisations and
business landscape due to increased global
convefiveness and technological innovation. that are entered into for a specific business purpose.
JVs are common and successful in several industries. (b) Specific Limited Purpose and Duration:JVs are formedfor a specific business
For example, in the land
devebpmentand construction industries, JVs are often used objectiveand can have a limited life span or be long-term.JVs are frequently
to obtain sufficient financing to
acquire large land tracts orto undertake major building established for a limited duration because of the fact that (i)the complementary
projects. These are also common in
the manufactuing, mining, and service industries. activities involve a limited amount of assets; (ii) the complementary assets have
It may be formed to conduct research and
devebpment work on a new product or technical application, only a limitedservice life; and/or (iii) the complementary production activities will
to manufacture or produce
various products, to market and distribute products and services be of only limited efficacy.
in a specified geographic
area, orto perform a combination of these functions. (c) Joint Property Interest: Each JV participant contributes property, cash, or other
In general, a joint venture is an association of two or more entities assets and organisationalcapital for the pursuit of a common and specific
(whether corporate, business purpose. Thus, a JV is not merely a contractual relationship, but rather
govemment, individual or otherwise) combining property and expertise to carry
out a single the contributionsare made to a newly-formedbusiness enterprise, usually a
business enterprise and having a joint proprietary interest, a joint right to control and a sharing
of profits and
corporation,limited liability company, or partnership. As such, the participants
Josses.
acquire a joint property interest in the assets and subject matter of the JV.

14.2 DEFINITION (d) Common Financial and Intangible Goals and Objectives: The JV participants
share a common expectation regarding the nature and amount of the expected
(a) Wikipedia defines Joint Venture (often abbreviated JV) as "an entity formed financial and intangible goals and objectives of the JV. The goals and objectives
between two or more parties to undertake economic activity together. The parties of a JV tend to be narrowlyfocused, recognisihg that the assets deployed by
agree to create a new entity by both contributing equity, and they then share in each participant represent only a portion of the overall resource base.
the revenues, expenses, and control of the enterprise. The venture can be for (e) Shared Profits, Losses, Management, and Control: The JV participants share in
one specific project only, or a continuing business relationship. This is in contrast the specific and identifiable financial and intangible profits and losses, as well as
to a strategic alliance, which involves no equity stake by the participants,
and is in certain elements of the management and control of the JV.
a much less rigid arrangement".
(b) In the words of Cary and James "A joint ventureis a contractual
agreement 14.4 JOINT VENTURE vs STRATEGIC ALLIANCE
joining together two or more parties for the purpose of executing a particular
business undertaking. All parties agree to share in the profits and losses of Through Joint Venture and strategic Alliance are two forms of corporate restructuring,
the
enterprise". both are same. The points of distinction between these two are presented in the following
(c) Levins opines a Joint venture as "a new firm formed to table as mentioned below.
achieve specific objectives
of a partnership like temporary arrangement between two or
more firms. JVs are
advantageous as a risk reducing mechanism in new-market penetration,
and in
pooling of resource for large projects. They, however, present unique
problems
in equity ownership, operational control, and distribution
of profits (or losses).
 Restnxturhg: Md Otwr Form. Bit Venture
to appoint other Directors
a company; it is possible
Strategic Alliance If a joint venture is fomwd as
bring other levels of skill or influence to the venture.
'.81ture. two oc more oganisations 1. A strategic alliance is simply a business- to the Board who can also
a neutral, independent chairperson who
-se a ndependent
organisation to-business collaboration where two or This includes the option of appointing
a purpose. more corporates shares resources and has the respect of all parties.
capabilities to achieve some business
purpose.
venture some forrnalitiesare made. 2. Strategic alliances are less formalthan 14.6 WHY TO FORM A JOINT VENTURE?
A contraa or agreement is written. jointventures. A new entity need not be
created. There are many that lead to the forrnationof a JV.
form a JV, particularly,in
case of pnt venture, it has clear and 3. In strategic alliance, the boundaries are (a) Risk Sharing:Risk sharing is a commonreason to
eea tto.rx5anes. where the high costs of
defined by partnering firms.
highly capital intensive industriesand in industries product.
particular
ve-tures are formed to capitatise on 4. Strategic alliances are formedin order product development equal a high likelihood of failure of any
in parent firrns and to generate to learn from the partners Knowledge. JV with a larger
(b) Economiesof Sæle: If an industryhas high fixed costs, a
compete globally and
company can provide the economies of scale necessary to
and
14.5 EQUITY VARIATIONS can be an effectiveway by whth two companies can pool resources
achieve critical mass.
(c) MarketAccess: For companiesthat lack a basic of customers
Jotlt Ventures are of differenttypes depending upon variation of equity.
and the to di<ribute their prodwts to customers, foming
Joht Væltures: Majority ownership whereby the 'foreign' company has the a JV with the right panner can provide instant access to establish, efficient and
comrohg Éiare. It has tie advantages of great control and confidence towards the joint effectivedistributionchannels and receptivecustomerbases. This is important
vernre mrrvany as wellas morecorrmitment. to a company because creating new distribution channels and identifying
new
The Joint Venture: The best mown and probably the ideal type of joint venture customer bases can be extremely difficult, time consuming and expensive
a completely new entity is created "from scratch Øand each partner has an equal activities.
cortütion in the form of a 50-50 sharehokiing. It has the advantages of providing maximum (d) Geographical Constraints: When there is an attractive business opportunityin a
hcentive forboti parties to make the relationship work and focusing the activities of the joint foreign market, partnering with a local company is attractive to a foreign company
of
vent-aretowards dearly defined goals which complement the independentactivities of each because penetrating a foreign market can be difficult both because of a tack
experience in such rrertet and bcal barriers to foreign-owned or foreign-controlled

%ority Joint Ventures: The 50-50 joint venture may not be appropriate in every companies.
nor will it be possible in countries with strict foreign investment rules which require (e) Funding Constraints:Whenacorrpanßconfrontedwithhighupfrontdevelopn-mt
financing and
rrziority control to rernain in local hands. Hence in a minorityJoint Venture majoritya local costs, finding the right jointventure partner can provide necessary
corrpany becomes dominant, just reverse of majority joint ventures. credibility with third parties.
another, but cannot
Minorityownership ofa joint venture, however, should not automatically be regarded as (f) Prelude to Acquisition: When a company wants to acquire
restrictions or legal barriers, teaming up with
a 6tsincentive since there are other ways to protect the interests of the minoritypartner. due to cost, size, or geographical
thus less
a JVP is an attractiveoption.The JV is substantiallyless costly and
Regardless of shareholding, it is usually possible to build into any agreement a formal sometimes used as a first step to a
risky than complete acquisitions, and is
relating to the management and control of the joint venture, as well as clauses allows the purchaser
complete acquisition with the JVP. Such an arrangement
covering otw potential areas of difficulty. This could include when and how profits should less fruitfulthan anticipated
the flexibility to cut its losses if the investment proves
be distributed, how the product is to be marketed, financing of the joint venture, how certain circumstances.
or to acquire the remainder of the company under
arbitration will be managed, and so on.
- One way of maintaining more control in a 50:50 or minority joint venture is to keep
control over supply of a key component.
14.7 SOME EXAMPLES OF RECENT JOINT VENTURES Subject: Slovenian gaming cornpany Hrt and U.S. casino operator
Harrah'8 Entertainment formed a JV to build a major new
Parties to Joint Venture: IBM (U.s.) and Lenovo Group(Chlna) (2004) gaming and entertainmentcentre in Slovenia, scheduled
for completion in 2009 provided that the Slovenian
Per cent Participation: 1&9/81.1 govemment loosens gaming legislation. The projectrests
Dollar Value: $1.75 billion on the Slovenia government's willingness to tweak
legislation: currently, foreigners can hold no more than
Su*ct: IBM sold its PC dvision to China-based Lenovo Group. 20% in a gaming venture,and the gaming tax is set at a
Companies entered into a joint venture that would make high 30%. Harrah's was in talks with the government on
Lenovo the third largest PC maker in the world, behind Dell changes to the gaming law that would allow foreigners to
and Hewlett Packard, and give IBM an 18.9 percent stake hold a 50% stake. Harrah's would also like the government
in Lenovo. to lower the gaming tax.
Pa-ties to Joint Venture: Pontiac Land Group (Singapore) and WestPaces Hotel Farties to Joint Venture: Posco (South Korea), SeAH Corp. (South Korea) and
Group (U.s.) (2006) U.s. steel (U.S.)(2007)
Per cent Participation: 50•so Per cent Participation:

Su*t Pontiac and West Paces formed a joint venture known as Dollar Value: $93 million
tE West Paces Hotel Group Asia. Headquartered in Subject: U.S. Steel partneredwith Posco, South Korea's leading
Singapore, this hotel management company will introduce steel producer,and SeAH, a tubular steel maker. in the
new luxury hotels across Asia. Pontiac Land will focus on venture to be called United Spiral Pipe LLC, to build a new
business development and securing strategic partnerships U.S. facility that will produce spiral-welded pipe for the
in Asia with leading high net worthfamilies and natural gas industry.
institutions. West Paces Hotel Group, headquartered in
Atlanta, Georgia (USA). will contributemanagement and
operations expertise in designing properties geared toward 14.8 STRUCTURING THE JOINT VENTURE
affluent travellers.
Structuring any JV may pose a challenge. This is especially true where parties are from
Parties to Joint Venture: Siemens AG (Germany) and Nokia Corp.(FinIand) (2006)
differentjurisdictions and various cultural backgrounds are involved. After parties have
Per cent Participation: 50:50 decidedon fundamental issues such as the commercial nature, scope and mutual objectives
Dollar Value: $19.9 billion ofthejointventure, the JVPs must determine the geographic location of the venture and whal
SLI*t: Siemens AG and Nokia Corp. combined their fixed and formor legal structurethe joint venture will take.
mobile network infrastructure businesses in a joint venture Generally, the structure chosen will be between different types of partnerships,
known as Nokia Siemens Networks. The JV formation was corporations, or some form of a limited liability company, depending on the tax liability eacr
a reaction to recent mergers in the industry, such as
Alcatel with Lucent, and the rise of low-cost Chinese JVP wants to be exposed to. The precise tax and legal features of vehicles of the same
competitorssuch as Huawei Technologies Co. Ltd. and general type will vary from one country to another, but forms of businesses can be broadb
ZTE Corp. Nokia Siemens Networks became the second classified as follows:
largest company, behind Ericsson, in wireless networks (a) Corporations:Corporations are a commonly preferred choice for JVs. The lega
and third in fixed-line, behind Alcatel and Cisco Systems
status of a corporation is clear. and its ability to own assets, incur liabilities anc
and is headquartered in Finland.
enter into legally binding contracts is obvious to third parties. The liability
Parties to Joint Venture: Hit Company (Rep. of Slovenia) and Harrah's shareholders for the corporation's debts and obligations is limitedto their capaa
Entertainment (U.s.) (2007)
investment in the corporation, something that is not always the case with othe
Per cent Participation: 50:50 entities. From a tax perspective, corporations may be undesirable because tr.
Dollar Value: $700 million generally lack pass-through tax status, making its shareholders unable to set 01
profits and losses generated by the JV against income or expenses from othe
activities.
 Restrwturing: %røer, Fomn Venture

JVs are shared management ventures,

(b) General Parmershps: All panners in a general partnership have personal liability (b) Shared Management Ventures:Other
parent supplies both functional managers
for debts and other obligations incurred by the partnership. One advantage of a wherebothparents manage the enterprise. Each
the board of directors has a real
general partnership in the India and many other countries is that normally no and executives to serve on the board of directors. Here,
income or franchise tax is imposed on it. Also, all partners can act on behalf Of, decision-makingfunction.
and legally bind, the partnership via third parties. in which each partner
One type of shared managementventureis the 50:50 JV
(c) Lå•nnedParmerships: Under a limited partnership there are two distinct types of control. Under such
contributes50 percent of the equity in retum for 50 per cent participating
partners: general and limited.The general panner carries responsibilities similar other JVP as would
participation,each JVP is equally at risk, and is not subservient to the
to the one he carries in a general partnership, including the ability to legally bind interest and control
be the case where majority control is vested in one party. This sharing of
tie *101e partnership and being personally liable for debts and obligations of the and early termination of the JV.
also raises the possibility of deadlock during disputes
partnership. The limited partner, on the other hand, mainly contributes capital and
receives a specified share of the profits. The limited partner is excluded from It is importantto note that notall shared management ventures own equal shares. JVs
active management of the partnership, but is exempt from personal liabilityfor are flexible so that they can be structured in such as way that one JVP has more than a co-
debts and obligations of the partnership. equalrole in theJV (e.g., 40/60). Shared runagement is critical in ventures where both JVPs
(d) Limited Liability Company: A limited liability company is a hybrid between the are needed for managerial input, as in manufacturing situations where one parent is
pannership and the corporation in that it provides the JVPs with insulation from supplyingtechnology and the other knowledge of the local market. However, deteriorating
tie liabilitiesof a corporation, while generally being classified as a partnership for performancein a shared management venture obliges each parent to become more involved
tax purposes. All members may take part in management. However, hybrid inthe operation of the venture. Unless either parent is willing to deferto the other's knowledge
vehicles are not recognised in all parts of the world. orexpertise,the decision-makingprocess can become slow can confused and trigger a
series of events that can lead to the destruction of the venture.

14.9 MANAGING THE JOINT VENTURE Because the amount and type of help needed from a partner may change over time,
somecompanies opt to begin their venture under a shared management that they can later
The management of a joint venture is not an easy task. The following issues are more convertto a dominant venture. However, once both parents have become accustomed to
important in its management. operatingthe venture, such transitions become difficult to make.

(a) DominantParent Enterprises: Some JVs are dominant parent enterprises—projects The highfailure rate of shared management ventures suggests that dominant ventures
are managed by one parent like wholly-owned subsidiaries. The dominant parent selects all outperformshared managementventures. Since shared management ventures are not
the functionalmanagers for the enterprise. The board of directors, although made up of consistentlyused for riskier business tasks, their high failure rate is a strong indication
that
executives from each parent, plays a largely ceremonial role as the dominant parent theyare more difficultto operate than dominant parent ventures. Parents
of the venture may,
executives make all the venture's operating and strategic decisions. Having managers from andoftendo, disagree over strategic and organisational decisions.
Differences in the parent
only one parent can lead to frustrations for the managers as well as parent company venture's priorities, direction, and perhaps values result in confusion,
frustration, and
executives. slownessin the decision-makingprocess and may place a joint
venture at a distinct
competitivedisadvantage.As a result, if a partneris chosen for
A dominant parent enterprise is appropriate where a JVP is chosen for reasons other reasons other than
managerial input a dominant parent structure will usually be
than managerial input, i.e., financial backing, access to resources, patents, or because it best.
consumes a large amount of the product to be made. Dominant parentjoint ventures are also
appropriate when a company takes on a partner solely in response to pressures from a host 14.10 FACTORS TO BE CONSIDERED TO FORM A JOINT
govemment. In such situations, a foreign company often prefers to find a passive local VENTURE
company that (1 ) has no knowledge of the product, (2) is willing to be a passive investor, and
(3) is neither a govemment agency nor controlled by the govemment. The passive partner, The various factors that are usually considered before
who may be supplying technology or money, must trust the competence and
formationof Joint Venture
honesty of the hdude:
dominant parent. If the local partner never leams the business of the JV, the dominant
parent's bargaining position withthe host government will remain strong.
324 Restruåurhg: Mnec. Acql±itbn Md
OtherForm. Venture 325
(a) screening of prospective partners
(viii) Improving access to financial resources for both partners: financial resources
(b) joilt devebpment of a detailed business plan increases because when two parties undertake economZ activity together then
and short-listinga set of prospective
partners based on their contributionto developing they share expenses this leads to moreaccess to each otier's financial sources.
a business plan
(c) due diligence — checking the credentials of (ix) financial support or sharing of economic risk: It reduces the risks in a number
the other party firust and verify*
tust the information you receive from the prospective of ways as the activities can be expanded with smaller investment outlays than
partner, but it's good
busness practice to verify the facts through intemews if financed independently. A small firm with a new product idea that involves high
with third parties)
(d) development of an exit strategy and terms of dissolution risk and requires relatively large amounts of investment capital may form a joint
of the joint venture venture witha large firm. The larger firm might be able to carry the financial risks
(e) most appropriate structure (e.g. most joint ventures involving fast growing and be interestedin becoming involved in a new business adivity that promises
cornpanies are structured as strategic corporate partnerships) growth and profitability. In addition, the larger firm might thereby gain experience
(f) avaiabifity of appreciated or depreciated property being contributed to the joint in the new area of activity that may represent the opportunityfor a major new
venWre•,by misunderstanding the significance of appreciated property, companies business thrust in the future.
can fundamentally weaken the economics of the deal for themselves and their (x) Proper utilisationof resources: Resources are inputs into a firm's production
partners. process, such as capital, equipment,the skills of individual employees, patents,
(g) spedal allocations of income, gain, loss or deductionto be made among the finance, and talented managers. Resources are either tangible or intangible in
partners nature. Withincreasing effectiveness, the set of resources available to the firm
tends to become larger. Individual resources may not yield to a competitive
(h) Ørnpensatjon to the members that provide services
advantage. It is through the synergistic combination and integration of sets of
resources that competitiveadvantages are formed.
14.11 THE ADVANTAGES (xi) Acceleration of revenue growth
(xii) Ability to increase profit margins
Busæsses of any size can use joint ventures to strengthen long-term relationships or
mllaborate on short-tem projects.A successful joint venturegives rise to following (xiii) Expansion to new domestic markets and intemational markets: It also helps in
expanding the firm's operations into foregl countries. The local partners contribute
(i) Corrbining complementaryR&D or technology: in the formof specialised knowdedgeabout local conditions, which are essential
to the success of the venture.
(i) Provide companies withthe opportunityto obtain new capacity and expertise
(xiv) New product development
(i) Effcient commercialisationof a technology or business concept
(xv) Higher rate of profitand more control over the operations.
(iv) Devebping or acquiring marketing or distribution expertise
(xvi) Sharing of risk and ability to combine the local in-depth knowledge with a foreign
(v) Sharing of scientists or professionals with unique skills — The complexity of the
partner with know-how in technology or process.
knowledgeto be transferredis a key factor in determiningthe contractual
relationshipbetween the partners. One or more participants may seek to leam (xvii) Tax advantages are a significant factor in many joint ventures.
more about a relativelynew product market activity. This might concem all (xviii) A joint venture can also be very flexible. For example, a joint
venture can have
aspects of the activityor a limitedsegment like R&D, production, marketing or a limitedlife span and only cover part of what company needs,
product servicing.
thus limiting the
commitmentfor both parties and the business' exposure.
(vi) Allow companies to enter into related businesses or new geographic markets or
obtain new technological knowledge 14.12 THE DISADVANTAGES
(vii) Have a relativelyshort life span (5-7 years) and therefore do not represent a
long-termcommitment, Partnering withanother business can be complex: It takes
time and effort to build the
relationship. Problems are likely to arise if:
 Corporate Restructumg.• Merger.Acquisitbn and Other Form. Venture 32

(i) The objectives of the venture are not 100 per cent clear and communicated to investment outside of high priority an application in the form FC (SIA) has to be filed with the
everyone involved Secretariatfor IndustrialApprovals. A response is given within 6 weeks. Full foreign
(ii) The panners have differentobjectives for the joint venture .ownership (100% equity) is readily allowed in power generation, coal washeries, electronics,
(üi) Varied organisational structures may lead to less efficientdecision-making Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZs").
(iv) There is an imbalance in levels of expertise, investmentor assets brought into For major investment proposals or for those that do not fit within the existing policy
the venture by the different partners parameters, there is the high-powered Foreign Investment Promotion Board ("FIPB"). The
(v) Cultural difference: Differentcultures and managementstyles result in poor FIPB is located in the office of the Prime Minister and can provide single-window clearance
to proposals in their totalitywithout being restricted by any pre-determined parameters.
integraüon and co-operation
(vi) The partners don't provide sufficient leadership and support in the early stages Foreign investmentis also welcomed in many of infrastructure areas such as power,
steel, coal washeries, luxury railways, and telecommunications.The entire hydrocarbon
(vii) High level of commitmentof staff and management
sector, including exploration, producing, refining and marketing of petroleum products has
(viii) Time consuming (especially where a new ventureis involved) now been opened to foreign participation.The govemment had recently allowed foreign
(ix) Pofiücal risks in the country where the joint venture is based investment up to 51 % in mining forcommercial purposes and up to 49% in telecommunication
(x) Working in a different legal and commercial system sector. The govemment is also examining a proposal to do away with the stipulation that
foreign equity should cover the foreign exchange needs for import of capital goods. In view
Success in a joint venture depends on thorough research and analysis of aims and of the country's improved balance of payments position, this requirement may be eliminated.
objectives. This should be followed up with effective communication of the business plan to
This section sets forthsome importantsteps for forming a Joint Venture Company in
everyoneirwolved.
Ir.dia.

(1) Types ofJolnt Ventures

14.13 SETTING UP A JOINT VENTURE IN INDIA
Three most commontypes ofjoint venturecompanies may be described as follows:
Joint Venture companies are the most preferred form of corporate entities for doing (a) Two parties, who/whichmay be individualsor companies, one of them non-
business in India. There are no separate laws for joint ventures in India. The companies resident or both residents, incorporate a company in India. Business of one party
incorporated in India, even with up to 100% foreign equity, are treated as the same as is transferred to the company and as consideration for such transfer; shares are
domestic companies. A Joint Venture may be any ofthe business entities available in India. issued by the company and subscribed by that party. The other party subscribes
for the shares in cash.
Govemment for Wit
(b) Altemately, the above two parties subscribe to the shares of the joint venture
All the joint ventures in India require govemmental approvals, if a foreign partner or an
company in agreed proportion,in cash, and start a new business.
NRI or PIO partner is involved. The approval can be obtained from either from RBI or FIPB.
In case, a joint venture is covered under automatic route, then the approval of Reserve Bank (c) Promoter shareholderof an existing Indian company and a third party, who/which
of India is required. In other special cases, not covered under the automatic route, a special may be individuaVcornpany, one of them non-resident or both residents, collaborate
approval of FIPB is required. to jointly carry on the business of that company and its shares are taken by the
said third party through payment in cash.
The govemment has outlined 37 high priorityareas covering most of the industrial
sectors. Investment proposals involving up to 74% foreign equity in these areas receive (2)Incorporation
automatic approval withintwo weeks. An application to the Reserve Bank of India is required. In case a new joint venture company has to be formed in India, the following are pertinent
Besides the 37 high priorityareas, automatic approval is available for 74% foreign equity issues to decide:
holdings setting up intemational trading companies engaged primarily in export activities.
[al Fomalities:
Approval of foreign equity is not limited to 74% and to high priority industries. Greater
(i) whether the joint venture company will be a public or a private limited company,
than 74% of equity and areas outside the high prioritylist are open to investment, but
govemment approval is required. For these greater equity investments or for areas Of (ii) the place of Registered Office of the Joint venture Company,
 Restructumg.• %rger. 329
Otwr Joint Venture

obtaining all
(ii) propose a name of the joint venture company and check its availability fromthe Approvals: The Joint Venture agreement should be conditional upon
agencies of
Registrar of Companies (ROC) where the registered office of the company is to necessary approvals/ consents/ licenses [permissions of appropriate not
If anyofthe approvals are
be situated and the company is to be incorporated, Govemment of India like RBVSIA, etc., within specified period.
enforced and the joint venture cannot
(iv) choose tie subscribers to the Memrandum of Association which will obviously received, or received late, the agreement cannot be
include the partners to the joint venture and their nominees, proceed on the basis of the Agreement.
of a good local partner is the
Importantclauses ofajoint venture agreement: Selection
(v) prepare the Memorandum and Articles of Association in consultation with the joint interviews with a prospective joint venture
key to the success of any joint venture. Personal
venture parmers, get them printed and suitably stamped, and submittingthe Once a partner is selected
partnershould be supplementedwith proper due diligence.
same required documents like statutory declaration u/s 33 of the Companies letter of intent is signed by the parties
generally a memorandumof understanding or a
Act, 1956 and Form no. 18 u/s 146 of the Act regarding address of the registered A Joint venture Agreement
highlightingthe basis of the futurejoint venture agreement. clauses that
the relevant
offce, to ROC along withfees payable. requiresdexterous legal drafting and should incorporateclearly
parties as to the formation and
(vi) receipt of certificate of incorporation, the new company may start business, specify the mutual understanding arrived at between both
operations of the Joint Venture Company.
- in case of privatecompany, immediately.
Commencement of (4) Termlnadon ofJolnt Ventures
- in case of public company, after obtaining certificate of Many termination events are
Any numberof events may lead to the termination of a JV.
Business for which the companyhas to file with the ROC prospectus/ Forexample, a breach of the joint
<atement in lieu of prospectus, and the statutory declaration
u/s 149 of the anticipated and provided for in the joint venture agreement.
as failure to meet
Companies Act, 1956, duly starved. ventureagreement may trigger termination, as will other events, such
achieving its objectives.
contain the research and developmentdeadlines. A JV may terminate upon
[b] To avoid contradictions, the Articles of Association should Altematively, a JV may terminate upon failing to meet its objectives.
The agreement could
mentioned in the joint venture agreement and clearly delineate the rights and
provide that one JVP buy the other out or sell its shares, or vice-versa.
ob6gatbns of tie partners.
Excessive costs, failure to achieve projected income, or unforeseen capital requirements
venture company is a
[cl t•bl-resäent Pamer: In case one of the panners of the joint may make the continuation of a JV unattractive. In addition, a change in the JV's
objectives
for acquiring shares in
non-resident, approval of Reserve Bank of India (RBI) will be required or those of a shareholder may also lead to the early terminationof the JV. Changes
of Foreign Exchange
ome coavanyand establishing place of business in I ndia u/s 19 and 29 objectives may result from a JVP's intemal strategic redirection, competitive advances, or
Act, 1973, (FERA). However, RBI has granted general permission vide its market changes beyond the control of the JV or its shareholders. Disagreement by JVPs on
notificationdated 264-1993, as amended, u/s 19 (1 ) (d) and u/s 29(1 of FERA to a non
fundamental management issues may also lead to termination.
subscribe to the memorandum and articles
resident Indian ciüzen / person of Indian origin to
in India. And such company is An obvious disadvantage of sharing capital obligations is the need to share profits
of association of a company for the purpose of incorporation
the condition that the total face generated from the actual operation of the JV. Issues can arise in this area not so much
also pemitted to issue shares to the non-residents subject to
activity of because of the cash contributed,but because of the fact that the parties will also be
value of shares is not to exceed Rs 10,000/-, the company will not engage in the
agricuture/plantation/deafing in real estate ofrerthan its developrnent and the company files contributingintangibleassets to the business, such as intellectual property rights and
more technicalexpertise. Technology and management sharing can potentiallycreate significant
a dedaration with RBI within 90 days of its incorporation. With the on going liberalisation
problems among the parties. In particular, one partys mastery of the other's technology can
general pemissions of RBI are expected.
lead to improvements on that technology beyond the intended services of the JV, a factor that
(3) Inter-corporate Invesånent u/s 372Aof Companies Act tends to discourage companies from disclosing their technologies for fear of losing the
Where an Indian company (partner) acquires shares of the joint venture company whbh competitive edge to their JVP.
is exceeding 60% of its (Indian company's) paid-up capital and free reserves or 100% of its
Many commentators argue that JVs offer a structure for reducing the 'free riding" of the
free reserves, whichever is more, Section 372A will apply requiring prior Board decision Of
local JV partner because both partners contribute to the costs associated with the
the Indian company as well as special resolution of its shareholders. If a foreign company
exploitation of the technology in proportion to their expected benefits. The theory is that a JV
acquires the shares, this section will not be invoked as itapplies only to a "company" defined
Partnerwill have an incentive to focus on protecting the results of the JV activities rather than
under Section 3 (1) of the Act, which does not take into account a foreign company.
trying to replicate independently the results for its own account.