UNIT-1

INTRODUCTION AND CONCEPTS

INTRODUCTION
There are primarily two ways of growth of business organization, i.e. organic and inorganic growth.
Organic growth is through internal strategies, which may relate to business or financial restructuring
within the organization that results in enhanced customer base, higher sales, increased revenue,
without resulting in change of corporate entity.
Inorganic growth provides an organization with an avenue for attaining accelerated growth enabling
it to skip few steps on the growth ladder. Restructuring through mergers, amalgamations etc
constitute one of the most important methods for securing inorganic growth.
Inorganic growth is the rate of growth of business by increasing output and business reach by
acquiring new businesses by way of mergers, acquisitions and take-overs and other corporate
restructuring Strategies that may create a change in the corporate entity.
Corporate restructuring is the process of significantly changing a company's business model,
management team or financial structure to address challenges and increase shareholder value.
Corporate restructuring is an inorganic growth strategy.
The business environment is rapidly changing with respect to technology, competition, products,
people, geographical area, markets, customers. It is not enough if companies keep pace with these
changes but are expected to beat competition and innovate in order to continuously maximize
shareholder value. Inorganic growth strategies like mergers, acquisitions, takeovers and spinoffs are
regarded as important engines that help companies to enter new markets, expand customer base, cut
competition, consolidate and grow in size quickly, employ new technology with respect to products,
people and processes. Thus the inorganic growth strategies are regarded as fast track corporate
restructuring strategies for
MEANING OF CORPORATE RESTRUCTURING
Restructuring as per Oxford dictionary means “to give a new structure to, rebuild or rearrange"
•Corporate restructuring refers to the changes in ownership, business mix, asset mix & alliance with a
view to enhance the shareholders value. Hence, corporate restructuring may involve ownership
restructuring, business restructuring, asset restructuring for the purpose of making it more efficient
and more profitable.
Corporate restructuring is defined as the process involved in changing the organization of a business.
Corporate restructuring can involve making dramatic changes to a business by cutting out or merging
departments. It implies rearranging the business for increased efficiency and profitability. In other
words, it is a comprehensive process, by which a company can consolidate its business operations
and strengthen its position for achieving corporate objectives-synergies and continuing as
competitive and successful entity.

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CORPORATE RESTRUCTURING - HISTORICAL BACKGROUND
In earlier years, India was a highly regulated economy. Though Government participation was
overwhelming, the economy was controlled in a centralized way by Government participation and
intervention. In other words, economy was closed as economic forces such as demand and supply
were not allowed to have a fullfledged liberty to rule the market. There was no scope of realignments
and everything was controlled. In such a scenario, the scope and mode of Corporate Restructuring
were very limited due to restrictive government policies and rigid regulatory framework.
These restrictions remained in vogue, practically, for over two decades. These, however, proved
incompatible with the economic system in keeping pace with the global economic developments if
the objective of faster economic growth were to be achieved. The Government had to review its
entire policy framework and under the economic liberalization measures removed the above
restrictions by omitting the relevant sections and provisions.
The real opening up of the economy started with the Industrial Policy, 1991 whereby 'continuity with
change' was emphasized and main thrust was on relaxations in industrial licensing, foreign
investments, transfer of foreign technology etc. With the economic liberalization, globalization and
opening up of economies, the Indian corporate sector started restructuring to meet the opportunities
and challenges of competition
The economic and liberalization reforms, have transformed the business scenario all over the world.
The most significant development has been the integration of national economy with 'market-oriented
globalized economy'. The multilateral trade agenda and the World Trade Organization (WTO) have
been facilitating easy and free flow of technology, capital and expertise across the globe. A
restructuring wave is sweeping the corporate sector the world over, taking within its fold both big and
small entities, comprising old economy businesses, conglomerates and new economy companies and
even the infrastructure and service sector. From banking to oil exploration and telecommunication to
power generation, petrochemicals to aviation, companies are coming together as never before. Not
only this new industries like e-commerce and biotechnology have been exploding and old industries
are being transformed.
With the increasing competition and the economy, heading towards globalisation, the corporate
restructuring activities are expected to occur at a much larger scale than at any time in the past.
Corporate Restructuring play a major role in enabling enterprises to achieve economies of scale,
global competitiveness, right size, and a host of other benefits including reduction of cost of
operations and administration
OBJECTIVES OF CORPORATE RESTRUCTURING
Corporate Restructuring is concerned with arranging the business activities of the corporate as a
whole so as to achieve certain predetermined objectives at corporate level. Such objectives include
the following:
— orderly redirection of the firm's activities;
— deploying surplus cash from one business to finance profitable growth in another;
— exploiting inter-dependence among present or prospective businesses within the corporate
portfolio;
— risk reduction; and

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— development of core competencies.
REASONS FOR CORPORATE RESTRUCTURING:

1. Rising competition
2. Financial crisis
3. Immediate reduction in real estate or property prices
4. Technological changes
5. New government policy
6. Any seen opportunity in growing market
7. Increasing demand for products and services
8. New product development by the company
9. Stock market volatility
10. Change of ownership or ownership structure
11. Country’s economic situations like inflation, domestic demand etc
12. Relaxation of legal norms like taxation, MRTP, licensing policy etc
13. Corporate frauds
Corporate restructuring is implemented in the following situations:
Change in the strategy:
The management of the distressed entity attempts to improve its performance by eliminating certain
divisions and subsidiaries which do not align with the core strategy of the company. The division or
subsidiaries may not appear to fit strategically with the company’s long-term vision. Thus, the
corporate entity decides to focus on its core strategy and dispose of such assets to the potential buyers
Lack of profits
The undertaking may not be enough profit-making to cover the cost of capital of the company and
may cause economic losses. The poor performance of the undertaking may be the result of a wrong
decision taken by the management to start the division or the decline in the profitability of the
undertaking due to the change in customer needs or increasing costs
Reverse synergy
This concept is in contrast to the principles of synergy, where the value of a merged unit is more than
the value of individual units collectively. According to reverse synergy, the value of an individual
unit may be more than the merged unit. This is one of the common reasons for divesting the assets of
the company. The concerned entity may decide that by divesting a division to a third party can fetch
more value rather than owning it
Cash flow requirement
Disposing of an unproductive undertaking can provide a considerable cash inflow to the company. If
the concerned corporate entity is facing some complexity in obtaining finance, disposing of an asset
is an approach in order to raise money and to reduce debt.
The organizations around the world are taking the help of corporate restructuring to respond more
quickly and effectively to new opportunities and unexpected threats which ultimately helps them
to maintain their competitive position. In India, there were several corporate restructurings
processes executed by various organizations like Larsen and Toubro Ltd., Reliance Industries Ltd.,

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 Siemens Ltd etc. In most of the cases, the firms think about corporate restructuring only when they
are facing trouble in their day-to-day operations, so they should take restructuring as a normal part
of business to compete in today’s market place

NEED OF CORPORATE RESTRUCTURING

Corporate Restructuring aims at different things at different times for different companies and the
single common objective in every restructuring exercise is to eliminate the disadvantages and
combine the advantages. The various needs for undertaking a Corporate Restructuring exercise are as
follows:
(i) to focus on core strengths, operational synergy and efficient allocation of managerial
capabilities and infrastructure.
(ii) consolidation and economies of scale by expansion and diversion to exploit extended
domestic and global markets.
(iii) revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a
healthy company.
(iv) acquiring constant supply of raw materials and access to scientific research and
technological developments.
(v) capital restructuring by appropriate mix of loan and equity funds to reduce the cost of
servicing and improve return on capital employed.
(vi) Improve corporate performance to bring it at par with competitors by adopting the radical
changes brought out by information technology.
(vii) The basic purpose is to enhance the share holder value.
(viii) The company should continuously evaluate its portfolio of businesses, capital mix &
ownership & assets arrangements to find opportunities to increase the share holders’
value.
(ix) It should focus on asset utilization & profitable investment opportunities, & reorganize or
divest less profitable or loss making businesses/products.
(x) The company can also enhance value through capital restructuring; it can innovate
securities that help to reduce cost of capital.

THE SCOPE OF CORPORATE RESTRUCTURING

 The scope of Corporate Restructuring encompasses enhancing economy (cost reduction) and
improving efficiency (profitability).
 When a company wants to grow or survive in a competitive environment, it needs to
restructure itself and focus on its competitive advantage.
 The survival and growth of companies in this environment depends on their ability to pool all
their resources and put them to optimum use.
 A larger company, resulting from merger of smaller ones, can achieve economies of scale. If
the size is bigger, it enjoys a higher corporate status.

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  The status allows it to leverage the same to its own advantage by being able to raise larger
funds at lower costs.
 Reducing the cost of capital translates into profits.
 Availability of funds allows the enterprise to grow in all levels and thereby become more and
more competitive

Characteristics of Corporate Restructuring

 To improve the Balance Sheet of the company (by disposing of the unprofitable division
from its core business)
 Staff reduction (by closing down or selling off the unprofitable portion)
 Changes in corporate management
 Disposing of the underutilised assets, such as brands/patent rights.
 Outsourcing its operations such as technical support and payroll management to a more
efficient 3rd party.
 Shifting of operations such as moving of manufacturing operations to lower-cost locations.
 Reorganising functions such as marketing, sales, and distribution.
 Renegotiating labour contracts to reduce overhead.
 Rescheduling or refinancing of debt to minimise the interest payments.
 Conducting a public relations campaign at large to reposition the company with its
consumers.

SIGNIFICANCE OR IMPORTANCE OF CORPORATE RESTRUCTURING

Corporate restructuring is a strategic decision leading to the maximization of company growth by

enhancing its production and marketing operations, reduced competition, free flow of capital,
globalization of business, etc. Some of the most common reasons of corporate restructuring are
discussed briefly hereunder:
(i) Economies of scale: Economies of scale arises when increase in volume of production
leads to a reduction in cost of production per unit. For instance, overhead costs can be
substantially reduced on account of sharing central services such as – accounting and
finance, personnel and legal, sales promotion and advertisement, top level management
and so on. So when two or more companies combine, certain economies are realized due
to the larger volume of operations of the combined entity. These economies arise due to
increased production capacity, strong distribution networks, effective engineering
services, research development facilities, data processing system and others
(ii) Operating Economies: Various functions may be consolidated and duplicate channels
may be eliminated by implementing proper planning and control system
(iii) Synergy: Synergy refers to a situation where the combined firm is more valuable than the
sum of the individual firms. It refers to benefits other than those related to economies of
scale. Apart from operating economies, synergy may also arise from enhanced managerial

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 capabilities, creativity, innovativeness, R&D, productivity improvements, improved
procurement and the elimination of duplication.
(iv) Reduction in Tax liability: In India, a profitable company is allowed to merge with a
sick company to set-off against its profits, the accumulated losses and unabsorbed
depreciation. The conditions to claim this tax benefit have further been relaxed by
amendment made in Section 72A of the Income Tax Act.
(v) Managerial Effectiveness: One of the potential benefits of merger is an increase in
managerial effectiveness. This may occur if the existing management team, which has
performed poorly, is replaced by a more efficient one
(vi) Other reasons of corporate restructuring are given below:
a) To return to the shareholders of the surplus cash, which is not required in the near
foreseeable future.
(b) To enhance the earnings per share of the company.
(c) To provide to shareholders/investors that the company is presently undervaluing the
share of the company in relation to its intrinsic value and the proposed buy back will
facilitate recognition of the true value.
(d) To increase the promoters’ voting power.
(e) To maintain shareholders’ value in a situation of poor state of secondary market by
return of surplus cash to the shareholders.
(f) Eliminate the takeover threats.
(g) An opportunity to grow faster, with ready-made market share.
(h) To eliminate the competition by buying it out.
(i) Diversification with minimum cost and immediate profit.
(j) To forestall the company’s own takeover by a third party

LIMITATIONS OF CORPORATE RESTRUCTURING

Corporate Restructuring is essential for those companies which are in dire straits. The best thing for
these companies is to restructure operations so that things may improve. Corporate Restructuring is
not the panacea for all corporate ills. A number of limitations can be associated with Corporate
Restructuring, they are:
(a) Work Assurance: Before the announcement of Corporate Restructuring, especially during
integration the employees of the ailing firm feel relief, but in most cases the reality becomes better
than the employees used to experience before integration. The management of the acquiring firm
takes policy for performance improvement resulting closure of certain divisions or departments
affecting a number of jobs.
(b) Retention of Best Management: Retaining the best management combination is always an
uphill task, with differing pay scales, responsibility levels, product and service portfolios, and
organizational vision. Companies pay more attention to the financial figures and benefit is weighed
only numerically but they remain very unprofessional in handling the transition process, since new
management provisions are rare, and often ineffective.

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(c) Delay in Deal Finalization: New structures are announced after long delays and communication
is woefully lacking. After initial announcement of Corporate restructuring it takes to finalize the deal
as it involves so may issues like boardroom tussles, labour trouble and queries from the shareholders.
(d) Executive Stress: In some cases the divisions and products get closed after Corporate
Restructuring. After restructuring the control of the companies goes to separate set of management
creating a stress on the executives. While the restructuring takes place through contraction by way of
separation the distribution of management brings a large number of denials from the management
(e) Workers’ Woes: At union levels, there is outright opposition to restructuring activities. Number
of mergers awaits legal clearance months after announcements. This is because unions protest pay
changes, proposed lay-offs, out sourcing and asset liquidation.
(f) Cultural Mismatch: The situation mostly arises in merger and takeovers when the organizational
culture of one firm gets mismatch with other firm. This results in destroying efficiency of the worker
as well as management of both the firms
(g) Inability to Create Value: Corporate restructuring is aimed at generating value for the firm and
finally for the shareholders. But frequently it is observed that the organizations could not create value
instead they have destroyed it. Sudden change in the management and organizational vision creates a
gap leaving certain capacity idle and promoting inefficiency in utilization of resources.

KINDS/FORMS OF CORPORATE RESTRUCTURING

These are discussed below –

(a) Portfolio Restructuring - It includes significant changes in the mix of assets owned by a firm or
the lines of business in which a firm operates, including liquidation, divestures, asset sales and spin-
offs. Company management may restructure its business in order to sharpen focus by disposing of a
unit that is peripheral to their core business and in order to raise capital or rid itself of a languishing
operation by selling off a division. Moreover, a company can involve on an aggressive combination
of acquisition and divestures to restructure its portfolio
(b) Financial Restructuring –
Financial restructuring of a company involves a re-arrangement of its financial structure to make the
company's finance more balanced. It is an adjustment of debt-equity ratio. Financial structure refers
to the allocation of the corporate flow of fundscash or credit – and to the strategic or contractual
decision rules that direct the flow and determine the value added and its distribution among the
various corporate constituencies. It includes significant changes in the capital structure of a firm,
including leveraged buyouts, leveraged recapitalizations and debt for equity swaps, mergers,
acquisitions, joint ventures, strategic alliances, etc. The elements of the corporate financial structure
include the scale of the investment base, the mix between active investment and defensive reserves,
the focus of investment (choice of revenue source), the rate at which earnings are reinvested, 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 contracts. Financial restructuring generates economic value.

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(c) Organizational Restructuring –
Organizational restructuring means setting up of procedures and systems in an organization to enable
its employees to respond to changes in a positive way Organizational restructuring includes
significant changes in the organizational structure of a firm, including redrawing of divisional
boundaries, flattening of hierarchic levels, spreading the span of control, reducing product
diversification, revising compensation, streamlining processes, reforming governance and
downsizing employment. It is observed that lay offs reforming unaccompanied by other
organizational changes tend to have a negative impact on performance. Downsizing announcements
combined with organizational restructuring are likely to have a positive, though small effect on
performance.
(d) Technological Restructuring - An alliance with other companies to exploit technological
expertise is termed as technological restructuring. It deals with alliances with other companies to get
the better technology.

EMERGING TRENDS

In order to present a composite view of effective practices that have emerged from inbound investors’
experience conducting M&A in India. KPMG in India and mergermarket in the year 2012, shortlisted
a number of successful deals based on their size and prominence in the Indian marketplace.
They conducted interviews with key M&A Heads or equivalent from International companies
involved in these transactions over the course of 2012. The report represents a summary of these
conversations and the learnings that have emerged from these transactions.
Almost all participants acknowledged that India was an important part of their overall global
expansion strategy, and by and large, participants have been pleased with the success of their
respective deals despite the fact that some are still in the process of completing integration.
The key insights that emerged are as follows:
Acquirers come to India for its domestic market and the innovation capabilities of its
companies
The primary attraction for acquirers when investing in India is the potential of its domestic market
and the opportunity to use India as a springboard to access some of the regional South Asian, Middle
East and even African markets. Participants also cited capabilities for innovation that Indian
companies have built over the last two decades, especially to serve low cost value conscious
consumers in the emerging markets as a key reason behind doing deals in India.
Investable targets are hard (but not impossible) to find
Given India’s size, its federal regulatory structure and socio-political diversity, most businesses take
a regional approach to market growth in the country, and as a result, few truly national players exist.
Having said that, many of the regional markets these businesses serve have the potential of being as
large as or even larger than national markets in other countries.

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Coverage and availability of information on domestic companies in India is still patchy, making
secondary market scans difficult. And while auction processes are prevalent, many deals are done
based on local relationships and a deep understanding of the regional operations of potential targets.
In fact, for many of the successful acquisitions and partnerships highlighted in this report, acquirers
were in India building relationships well before their transactions materialized either by forming an
Indian subsidiary or by maintaining trading relationships.
Even once a potential deal is on the table it can take time for a seller to furnish historical financials
and realistic forecasts that link back to past performance. Most acquirers tended to take an
independent view of a target’s growth prospects while factoring in the right level of investment
support post deal.
It takes time and effort to get to know the family
Managing the relationship with the promoter (seller) can be of paramount importance for a successful
deal. Promoters are also typically involved in direct management of the business, and selling would
mean losing regular income, personal status and an important family asset. Furthermore, promoter-
led businesses often have more than one decision maker and depending on family history, internal
politics often become part of the M&A process. For International Companies looking to acquire in
India, it means spending considerable months to get to know and understand the promoters and the
family well, before starting a transaction conversation.
The process can seem long and complicated (because it often is)
The deal process in India can initially seem long even when there is no competitive bidding process.
Finding issues with compliance, tax or historical financial performance is common during diligence
and these may seem like deal breakers at first.
To manage these challenges, acquirers preferred to implement transaction structures that allow
buyers to leave liabilities behind with the sellers where possible, while ensuring sufficient
engagement from promoters to ensure a smooth transition post deal. Participants also highlighted the
need to build a business forecast bottom up, seeking independent verification of future contract
commitments and an assessment of the dependence on promoter relationships for continuity of
business
Respondents to this study also highlighted the fact that sellers in India are often inexperienced in the
M&A process and can start the process without adequate preparation. Where possible, buyers should
request involvement of professional advisors on the sell side and ask for a well managed process
including electronic data rooms, verified financial information, explanation of discrepancies with
published results, etc., at the start of the process.
The hard work begins once the deal is done
Most participants had a small base in India prior to the acquisition and hence integration of local
domestic operations with the target was not really a big challenge. Key focus during the integration
revolved around navigating cultural differences, managing employee expectations from an
international acquirer and alignment of management styles. Their approach was cautious, with over
half the respondents spending between 1-3 years to complete the integration activities. In almost all
the cases, integration was a distinct project led by teams based locally and with significant senior
management involvement.

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Reflecting on the overall success of the transaction, most respondents felt that they were by and large
happy with the overall outcome of the deal and with the quality of management that they had
acquired as a result of the transaction.
PLANNING, FORMULATION AND EXECUTION OF VARIOUS RESTRUCTURING
STRATEGIES
Corporate restructuring strategies depends on the nature of business, type of diversification required
and results in profit maximization through pooling of resources in effective manner, utilization of idle
resources, effective management of competition etc.,.
Planning the type of restructuring requires detailed business study, expected business demand,
available resources, utilized/idle portion of resources, competitor analysis, environmental impact etc.,
The bottom line is that the right restructuring strategy provides optimum synergy for the
organizations involved in the restructuring process.
It involves examination of various aspects before and after the restructuring process.
IMPORTANT ASPECTS TO BE CONSIDERED WHILE PLANNING OR IMPLEMENTING
CORPORATE RESTRUCTURING STRATEGIES
The restructuring process requires various aspects to be considered before, during and after the
restructuring. They are
• Valuation & Funding
• Legal and procedural issues
• Taxation and Stamp duty aspects
• Accounting aspects
• Competition aspects etc.
• Human and Cultural synergies
Based on the analysis of various aspects, a right type of strategy is chosen

Types of Corporate Restructuring Strategies

Various types of corporate restructuring strategies include:
1. Merger
2. Demerger
3. Reverse Mergers
4. Disinvestment
5. Takeovers
6. Joint venture
7. Strategic alliance

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8. Slump Sale
9. Franchising
1. Merger
Merger is the combination of two or more companies which can be merged together either by way of
amalgamation or absorption. The combining of two or more companies, is generally by offering the
stockholders of one company securities in the acquiring company in exchange for the surrender of
their stock.
Mergers may be
(i) Horizontal Merger:
It is a merger of two or more companies that compete in the same industry. It is a merger with a
direct competitor and hence expands as the firm's operations in the same industry. Horizontal mergers
are designed to achieve economies of scale and result in reduce the number of competitors in the
industry.
(ii) Vertical Merger:
It is a merger which takes place upon the combination of two companies which are operating in the
same industry but at different stages of production or distribution system. If a company takes over its
supplier/producers of raw material, then it may result in backward integration of its activities. On the
other hand, Forward integration may result if a company decides to take over the retailer or Customer
Company. Vertical merger provides a way for total integration to those firms which are striving for
owning of all phases of the production schedule together with the marketing network
(iii) Co generic Merger:
It is the type of merger, where two companies are in the same or related industries but do not
offer the same products, but related products and may share similar distribution channels,
providing synergies for the merger. The potential benefit from these mergers is high because
these transactions offer opportunities to diversify around a common case of strategic resources.
(iv)Conglomerate Merger: These mergers involve firms engaged in unrelated type of activities
i.e. the business of two companies are not related to each other horizontally nor vertically. In
a pure conglomerate, there are no important common factors between the companies in
production, marketing, research and development and technology. Conglomerate mergers are
merger of different kinds of businesses under one flagship company. The purpose of merger
remains utilization of financial resources enlarged debt capacity and also synergy of
managerial functions. It does not have direct impact on acquisition of monopoly power and is
thus favoured throughout the world as a means of diversification.
2. Demerger
It is a form of corporate restructuring in which the entity's business operations are segregated into one
or more components. A demerger is often done to help each of the segments operate more smoothly,
as they can focus on a more specific task after demerger.
Examples:

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  Reliance Industries demerged to Reliance Industries and Reliance Communications Ventures
Ltd, Reliance Energy Ventures Ltd, Reliance Capital Ventures Ltd, Reliance Natural
Resources Ltd.
 In April 2018, Whitbread plc. announced to de-merge Costa Coffee from their stable of
businesses.
 Pfizer sold their infant nutrition business to Nestle.

Types of Demerger
a. Divestiture
Divestiture means selling or disposal of assets of the company or any of its business
undertakings/divisions, usually for cash (or for a combination of cash and debt). It is explained in
detail in further.
b) Spin-offs
The shares of the new entity are distributed to the shareholders of the parent company on a pro-rata
basis. The parent company also retains ownership in the spun-off entity. Spin-offs have two
approaches that can be followed. In the first approach, the company distributes all the shares of the
new entity to its existing shareholders on a pro rata basis. This leads to the creation of two different
companies holding the same
proportions of equity as compared to the single company existing previously. The second approach is
the floatation of a new entity with its equity being held by the parent company. The parent company
later sells the assets of the spun off company to another company.
c) Splits/divisions
Splits involve dividing the company into two or more parts with an aim to maximize profitability by
removing stagnant units from the mainstream business. Splits can be of two types, Split-ups and
Split-offs.
Split-ups: It is a process of reorganizing a corporate structure whereby all the capital stock and assets
are exchanged for those of two or more newly established companies resulting in the liquidation of
the parent corporation.
Split-offs: It is a process of reorganizing a corporate structure whereby the capital stock of a division
or subsidiary of corporation or of a newly affiliated company is transferred to the stakeholders of the
parent corporation in exchange for part of the stock of the latter. Some of the shareholders in the
parent company are given shares in a division of the parent company which is split off in exchange
for their shares in the parent company.
d) Equity Carve-Outs
Equity carve-outs are referred to a percentage of shares of the subsidiary company being issued to the
public. This method leads to a separation of the assets of the parent company and the subsidiary
entity. Equity carve outs result in publicly trading the shares of the subsidiary entity.

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Examples:
1. India’s largest engineering and construction company Larsen and Toubro Ltd (L&T) adopted
“asset- light strategy” by separating business units into independent subsidiaries by selling a
stake in businesses. The company, which is considered a corporate proxy for the broader
economy, divested its assets as a way to generate capital for investing in fresh projects.
2. In January 2017, the Government of India divested 10 per cent stake in Coal India Limited
through the offer-for-sale (OFS) route at Rs.358 per share and brought its holding down to
79.65 per cent.
3. Reverse Merger
Reverse merger is the opportunity for the unlisted companies to become public listed company,
without opting for Initial Public offer (IPO).In this process the private company acquires the majority
shares of public company, with its own name.
4. Disinvestment
Disinvestment means the action of an organization or government selling or liquidating an asset or
subsidiary. It is also known as "divestiture".
5. Takeover/Acquisition
Takeover means an acquirer takes over the control of the target company. It is also known as
acquisition. Normally this type of acquisition is undertaken to achieve market supremacy. It may be
friendly or hostile takeover.
Friendly takeover: In this type, one company takes over the management of the target company
with
the permission of the board.
Hostile takeover: In this type, one company takes over the management of the target company
without its knowledge and against the wish of their management.
6. Joint Venture (JV)
A joint venture is an entity formed by two or more companies to undertake financial activity together.
The parties agree to contribute equity to form a new entity and share the revenues, expenses, and
control of the company. It may be Project based joint venture or Functional based joint venture.
Project based Joint venture: The joint venture entered into by the companies in order to achieve a
specific task is known as project based JV.
Functional based Joint venture: The joint venture entered into by the companies in order to achieve
mutual benefit is known as functional based JV.
7. Strategic Alliance
Any agreement between two or more parties to collaborate with each other, in order to achieve
certain objectives while continuing to remain independent organizations is called strategic alliance.
8. Franchising

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Franchising may be defined as an arrangement where one party (franchiser) grants another party
(franchisee) the right to use trade name as well as certain business systems and process, to produce
and market goods or services according to certain specifications.
The franchisee usually pays a one-time franchisee fee plus a percentage of sales revenue as royalty
and gains.
9. Slump sale
Slump sale means the transfer of one or more undertaking as a result of the sale of lump sum
consideration without values being assigned to the individual assets and liabilities in such sales. If a
company sells or disposes of the whole or substantially the whole of its undertaking for a
predetermined lump sum consideration, then it results in a slump sale.
MERGERS AND ACQUISITIONS
Examples of Mergers
 TATA-CORUS-$13 Billion
 Daimler- Benz & Chrysler -> Daimler Chrysler.
 JP Morgan /Chase Manhattan becomes JP Morgan Chase
 Exxon and Mobil becomes Exxon-Mobil
 Sometimes target firms name disappears and combined firms are known by acquired
 name or sometimes, by a completely new name.
Ex: Burroughs/ Sperry Rand became Unisys.
 It is also called as Amalgamation
Categories of Merger
A merger is said to occur when two or more companies combine into one company. Mergers may take any one
of the following forms.

 Amalgamation
 Absorption
 Combinations
 Acquisitions
 Takeover
 Demergers

1. Amalgamation
Ordinarily amalgamation means merger.
Amalgamation: is used when two or more companies’ carries on similar business go into liquidation and a
new company is formed to take over their business.
Ex: the merger of Brooke Bond India Ltd., with Lipton India Ltd., resulted in the formation of a new
company Brooke Bond Lipton India Ltd.
2. Absorption

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 Absorption is a combination of 2 or more companies into an existing co. All co’s except one lose their
identity in a merger through absorption.
Ex: Absorption of Tata Fertilizer Ltd (TFL) by Tata Chemicals LTd (TCL)
 TCL an acquiring co (buyer); survived after merger while TFL an acquired co ( a seller) ceased to
exist.
 TFL transferred its assets, liabilities and shares to TCL under the scheme of merger.
3. Combinations/ Consolidation
Consolidation: two or more companies combine to form a new company. In this form of merger all
companies are legally dissolved and a new entity is created.
In a consolidation, the acquired company transfers its assets, liabilities and shares to the new
company for cash or exchange of share.
Ex : Merger or amalgamation of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian
software co Ltd and Indian Reprographics ltd in 1986 to an entirely new co, called HCL ltd.
4. Acquisitions

 Acquisition means acquiring the ownership in the company. When 2 companies become one , but
with the name and control of the acquirer, and the control goes automatically into the hands of the
acquirer.
 A classic example in this context is the acquisition of TOMCO by HLL.
5. Takeover
 A takeover generally involves the acquisition of a certain stake in the equity capital of a company
which enables the acquirer to exercise control over the affairs of the company.
Takeover implies acquisition of controlling interest in a company by another company. Itdoesn’t lead
to the dissolution of the company whose shares are being / have been acquired. It simply means a
change of controlling interest in a company through the acquisition of its shares by another group.
 Ex: HINDALCO took over INDAL by acquiring a 54% stake in INDAL from its overseas parent,
Alcan. However, INDAL was merged into HINDALCO.
6. Demergers

 Demerger or split or division of a company is opposite of mergers and amalgamations

 Ex: Hero Honda demerged from Honda and became Hero.
TYPES OF MERGER
1. Horizontal Mergers
2. Vertical Mergers
3. Conglomerate Mergers
4. Concentric Mergers
5. Circular Combination

1. Horizontal Merger

Horizontal Merger is a merger between companies selling similar products in the same market
and in direct competition and share the same product lines and markets. It decreases
competition in the market.The main objectives of horizontal merger are to benefit from
economies of scale, reduce competition, achieving monopoly status and control of the
market.

Examples:

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 Facebook's acquisition of Instagram in 2012 for a reported $1 billion. Both Facebook and
Instagram operated in the same industry and were in similar production stages in regard to
their photo-sharing services. Facebook, looking to strengthen its position in the social media
and social sharing space, saw the acquisition of Instagram as an opportunity to grow its
market share, increase its product line, reduce competition and access potential new markets.
 Ex: combining of book publishers or two mufgco’s to gain dominant mkt share. (Mittal’s Strategy)
 The acquisition of American Motors by Chrysler in 1987 represents a horizontal combination or
merger.
 Bank of Madura was merged with ICICI Bank.
 Horizontal merger increase monopoly power of the combined firm.
 VIJAYA BANK+ DENA BANK= BANK OF BARODA
 BHUSHAN STEEL+ TATA STEEL
 AIRTEL+TATA TELE SERVICE
 ZOMOTO AQUIRED UBER EATS
 TATA+ MARUTHI

2. Vertical Merger

 This occurs between firms in different stages of production and operation.

 Expands the espousing backward integration to assimilate sources of supply and forward integration
towards market outlets.
 Vertical merger occurs when a firm acquires firms ‘Upstream’ from it or firms ‘downstream’ from it.
 In case of an ‘Upstream’ merger it extends to the firms supplying raw materials and to those firms that
sell eventually to the consumer in the event of a ‘down-stream’ merger.  When co combines with the
supplier of materials it is called backward merger and when it combines with the customer it is known
forward merger.
 EX: Vertical Forward Integration – Buying a customer
 Indian Rayon’s acquisition of Madura Garments along with brand rights
 Vertical Backward Integration – Buying a supplier
 IBM’s acquisition of Daksh
 Merits:  Low buying cost of materials  Lower distribution costs  Assured supplies and market 
Increasing or creating barriers to entry for potential competitors  Placing them at a cost disadvantage.
Control over product specification  Technological Economies Carnegie Steel

Repair , Maintance & Customer Relationship Mgt Forward

Integration
Distributing fiber connection Eg: JIO

contracts to install fiber cable across city

Backward
another manufacturer who manufactures electronics to provide integration
internet connection
manufacture of fiber cables

FIBER INTERNET

 One of the earliest, largest and most famous examples of vertical integration was the Carnegie Steel
company. The company controlled not only the mills where the steel was manufactured but also the
mines where the iron ore was extracted, the coal mines that supplied the coal, the ships that transported

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 the iron ore and the railroads that transported the coal to the factory, the coke ovens where the coal was
coked, etc. The company also focused heavily on developing talent internally from the bottom up, rather
than importing it from other companies. American Apparel
 American Apparel is a fashion retailer and manufacturer that actually advertises itself as vertically
integrated industrial company. The brand is based in downtown Los Angeles, where from a single
building they control the dyeing, finishing, designing, sewing, cutting, marketing and distribution of the
company's product. The company shoots and distributes its own advertisements, often using its own
employees as subjects. It also owns and operates each of its retail locations as opposed to franchising.
According to the management, the vertically integrated model allows the company to design, cut,
distribute and sell an item globally in the span of a week. [9] Since the company controls both the
production and distribution of its product, it is an example of a balanced vertically integrated corporation.
Oil industry
 Oil companies, both multinational (such as ExxonMobil, Royal Dutch Shell, or BP) and national (e.g.
Petronas) often adopt a vertically integrated structure. This means that they are active all the way along
the supply chain from locating crude oil deposits, drilling and extracting crude, transporting it around the
world, refining it into petroleum products such as petrol/gasoline, to distributing the fuel to company-
owned retail stations, where it is sold to consumers

3. Conglomerate Merger

 This occurs between companies engaged into two unrelated industries.

 Conglomerate merger represents a merger of firms engaged in unrelated lines of business.
 Rationale for such merger:Diversification of risk
 3 types of Conglomerate merger:
A) PRODUCT-EXTENSION MERGERS broaden the product lines of firms. These are mergers
between firms in related business activities and may also be called concentric mergers. These mergers
broden the product lines.
 PRODUCT EXTENSION: New product in Present territory
 P&G acquires Gillette to expand its product offering in the household sector and smooth out
fluctuations in earning.
B)GEOGRAPHIC MARKET-EXTENSION merger involves two firms whose operations have been
conducted in non overlapping geographic areas.
 Ex: Pizza Hut a fast food chain restaurant centered in USA, sought to wow Indian customers by opening
their restaurant in all most all major urban centers of India.
 C) PURE CONGLOMERATE MERGERS involves unrelated business activities. These would not
qualify as either product-extension or market extension.
 New product& New territories
 Indian Rayon’s acquisition of PSI Data Systems.
 Mohta Steels with Vardhaman Spinning Mills Ltd.

4. Concentric Mergers:

A merger in which there is carry –over in specific mgt functions (ex: mktg) or complementarily in
relative strengths among specific mgt functions rather than carry-over/complementarities in only generic
mgt functions (eg: planning).
Therefore, if the activities of the segments brought together are so related that there is carryover of
specific mgt functions (mufg, finance, mktg, personnel, & so on) or
complementarily in relative strengths among these specific mgt functions, the merger should be termed
concentric rather than conglomerate.

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 Ex: if one co., has competence in research, mufg., or mktg that can be applied to the pdt problems of
another co., that lacks that particular competence, a merger will provide the opportunity to lower cost
function.
Firms seeking to diversify from advanced technology industries my be strong on research but weaker on
pdtn., and mktg., capabilities firms in industries with less advanced technology.
5.Circular Combination/circular merger

 This happens among companies producing distinct products to share common research and
distribution facilities to obtain economies by elimination of cost on duplication and promoting
market enlargement.
 Acquiring company has the benefit in form of economies of resource sharing and
diversification
 When the firms belonging to the different industries and producing altogether different
products combine together under the banner of central agency, it is referred as mixed or
circular mergers.
 Ex: Merger of Sony (camera provider for mobiles)Erricson(cell phone producer)
 Circular Merger involves bringing together of products or services that are unrelated but
marketed through the same channels, allowing shared dealerships.
 Ex: McLeod Russell (a tea company) with Eveready Industries (batteries).

MOTIVES OF MERGERS

 Procurement of Supplies
 Market Expansion
 Financial Strength
 Diversification
 Taxation Benefits
 Managerial Motives
 Acquisitions of specific Assets
 Growth Advantage
 Revamping Production Facilities
1. Procurement of Supplies
 To safeguard the source of supplies of raw materials or intermediary products.
 To obtain economies of scale of purchase in the form of discount, saving in transportation costs,
overhead cost in buying department, etc.
 To share the benefits of supplies economies by standardizing the material.
2. Market expansion & strategy
 To eliminate competition & protect existing market.
 To obtain new market outlets in possession of the offeree.
 To obtain new product for diversification or substitution of existing products & to enhance the
product range.
 Strengthening retail outlets & sales depots to rationalize distribution.
 To reduce advertising cost & improve public image of the offeree company.
3. Financial Strength
 To improve liquidity & have direct access to cash resource
 To dispose of surplus & outdated assets for cash out of combined enterprise.
 To avail tax benefits.

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  To improve EPS
4. Diversification
Mergers and acquisitions are motivated with objective to diversify the activities so as to avoid putting all the
eggs in one basket & obtain advantage of joining the resource for enhanced debt financing & better
serviceability to shareholders. Such amalgamations result in creating conglomerate undertakings.

5. Taxation benefits

Mergers take place to have benefits of tax laws &company having accumulated losses merge with profit
earning company that will shield the income from taxation. Section 72 A of I.T act 1961 provides this
incentive from reverse mergers for the survival of sick units.

6. Managerial motives
Managers benefit in rank, status and perquisites as the enterprise grows and expands because their salaries,
perquisites & status often increase with the size of the enterprise. The acquirer may motivate managerial
support by assuring benefits of larger size of the company to the managerial staff
7. Acquisition of specific assets
Surviving company may purchase only the assets of the other company in merger. Sometimes vertical
mergers are done with the motive to secure source of raw material but acquiree rather than acquiring the whole
undertaking with assets and liabilities.
8. Growth Advantage
Mergers & Acquisitions are motivated with a view to sustain growth or to acquire growth. To develop new
areas becomes costly, risky & difficult than to acquire a company in a growth sector even though the
acquisition is on premium rather than investing in new assets or new establishments.
9. Revamping production facilities
 To achieve economies of scale by amalgamating production facilities through more intensive
utilization of plant & resources.
 To standardize product specifications, improvement of quality of product, expanding market &
aiming at customer satisfaction.
 To obtain improved production technology & know how from the offeree company to reduce cost,
improve quality & produce competitive products to retain & improve market share.

Acquisition
In an acquisition the negotiation process does not necessarily take place. In an acquisition company
A buys company B. Company B becomes wholly owned by company A. Company B might be totally
absorbed and cease to exist as a separate entity, or company A might retain company B in its pre-
acquired form. This limited absorption is often practised where it is the intention of company A to
sell off company B at a profit at some later date. In acquisitions the dominant company is usually
referred to as the acquirer and the lesser company is known as the acquired. The lesser company is
often referred to as the target up to the point where it becomes acquired.
In most cases the acquirer acquires the target by buying its shares. The acquirer buys shares from the
target’s shareholders up to a point where it becomes the owner. Achieving ownership may require

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purchase of all of the target shares or a majority of them. Different countries have different laws and
regulations on what defines target ownership.
Acquisitions can be friendly or hostile. In the case of a friendly acquisition the target is willing to be
acquired. The target may view the acquisition as an opportunity to develop into new areas and use the
resources offered by the acquirer. This happens particularly in the case of small successful companies
that wish to develop and expand but are held back by a lack of capital. The smaller company may
actively seek out a larger partner willing to provide the necessary investment. In this scenario the
acquisition is sometimes referred to as a friendly or agreed acquisition. Alternatively, the acquisition
may be hostile. In this case the target is opposed to the acquisition. Hostile acquisitions are
sometimes referred to as hostile takeovers.
One tactic for avoiding a hostile takeover is for the target to seek another company with which it
would rather merge or be acquired by. This third company, if it agrees, is sometimes referred to as a
white knight, as it ‘comes to the rescue’ of the threatened target.
An acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target’) by
another.
When an acquisition is ‘forced’ or ‘unwilling’, it is called a takeover.

Recent Acquisitions
Snapdeal and Freecharge ($400 million)
• Flipkart and Myntra ($300 to 330 million)
• Ola and TaxiForSure ($200 million)

DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

Although often used synonymously, the terms merger and acquisition mean slightly different things.

Difference between a Merger and an Acquisition:

Merger Acquisition

A merger occurs when two separate entities, An acquisition refers to the purchase of one entity by
usually of comparable size, combine forces to another (usually, a smaller firm by a larger one)
create a new, joint organization in which both are
equal partners

Old company cease to exist and a new company A new company does not emerge
emerges

It requires two companies to consolidate into a new It occurs when one company takes over all of the
entity with a new ownership and management operational management decisions of another
structure

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 It the takeover is friendly, it is called merger If the takeover is hostile, it is called as an acquisition

When one company takes over another and clearly establishes itself as the new owner, the purchase is
called an acquisition. From a legal point of view, the target company ceases to exist, the buyer
"swallows" the business and the buyer's stock continues to be traded.
In the pure sense of the term, a merger happens when two firms agree to go forward as a single new
company rather than remain separately owned and operated. This kind of action is more precisely
referred to as a "merger of equals". The firms are often of about the same size. Both companies'
stocks are surrendered and new company stock is issued in its place. For example, in the 1999 merger
of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a
new company, GlaxoSmithKline, was created.
In practice, however, actual mergers of equals don't happen very often. Usually, one company will
buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action
is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative
connotations, therefore, by describing the deal euphemistically as a merger, deal makers and top
managers try to make the takeover more palatable. An example of this would be the takeover of
Chrysler by Daimler-Benz in 1999 which was widely referred to in the time.
A purchase deal will also be called a merger when both CEOs agree that joining together is in the
best interest of both of their companies. But when the deal is unfriendly - that is, when the target
company does not want to be purchased - it is always regarded as an acquisition.
Recent Mergers and Acquisitions

Acquirer Target Company Deal Size Comments

Flipkart Myntra USD300 mn Acquisition led to scripting of largest ecommerce
stories
Asian Paints Ess Ess Bathroom Undisclosed To be one stop provider in home décor space
products
RIL Network 18 Media `4000 Cr. 78% shares were taken over by RIL
& Investments
Merck Sigma USD17 bn Acquisition to boost lab supply business of Merck

Sun Pharma Ranbaxy USD4 bn Increased presence in global and domestic markets

TCS CMC Merger to consolidate IT business

Tata Power PT Arutmin Indonesia `47.4 bn Purchase 30% stake
Groupe Tirumala Milk USD275 mn Lactalis entry into India
Lactalis
CSP CX Aditya Birla Minacs USD260 mn Aditya Birla’s exit from IT industry
Thomas Sterling India ` 870cr Entry into hospitality business
Cook
Yahoo Bookpad USD15mn First acquisition made by Yahoo
Kotak Bank ING Vyasa USD2.4bn All shares deal
Ola Cabs Taxi for sure USD 200mn Acquisition of competitor

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Reasons for Mergers and Acquisitions:
• Financial synergy for lower cost of capital
• Improving company’s performance and accelerate growth
• Economies of scale
• Diversification for higher growth products or markets
• To increase market share and positioning giving broader market access
• Strategic realignment and technological change
• Tax considerations
• Under valued target
• Diversification of risk

Motives of M and A:
a)Strategic Motives
 Expansion and growth
 Dealing with entry of MNC’s
 Economies of scale
 Synergy
 Market penetration
 Market leadership
 Backward/ Forward Integration
 New product entry
 New market entry
 Surplus resources
 Minimize size
 Risk reduction
 Balancing product cycle
 Growth and diversification strategy
 Re-fashioning
b) Financial Motives
 Deployment of surplus funds
 Fund raising capacity
 Market capitalization
 Tax planning
 Creation of shareholders value
 Tax benefits
 Revival of sick units
 Asset stripping(Selling assets for profit as it is not productive for the company)
 Undervaluation of target company

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  Increasing EPS
c) Organizational Motives
 Superior management
 Ego satisfaction
 Retention of managerial talent
 Removal of inefficient management

PROCESS IN MERGER AND ACQUISITION

STEP 1: Develop an acquisition strategy

STEP 2: Set the Merger and Acquisition criteria
STEP 3: Search for potential acquisition targets
STEP 4: Begin acquisition planning
STEP 5: Perform valuation analysis
STEP 6: Negotiations
STEP 7: Merger and Acquisition Due diligence
STEP 8: Purchase and sale contracts
STEP 9: Financing Strategy for the Acquisition
STEP 10: closing and integration of the Acquisition
STEPS IN MERGER OR MERGER PROCESS
1. Screening and investigation of merger proposal
2. Negotiation stage
3. Approval of proposal by Board of Directors
4. Approval of shareholders
5. Approval of creditors/financial institutions/banks
6. Tribunal’s approval
7. Approval of central government
8. Integration stage

1. Screening and investigation of merger proposal

When there is an intention of acquisition or merger, the primary step is that of screening. The motives
and the needs are to be adjudged against three strategic criteria i.e. business fit, management and

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financial strength. If the proposal is viable after thorough analysis from all angles, then the matter
will be carried further.
2. Negotiation stage
In this stage the bargain is made in order to secure the highest price by the seller and the acquirer
keen to limit the price of the bid. The seller needs to decide the minimum price acceptable and the
buyer needs to decide the maximum he is prepared to pay. After the consideration is decided then the
payment terms and exchange ratio of shares between the companies will be decided. The exchange
ratio is an important factor in the process of amalgamation.
3. Approval of proposal by Board of Directors
Deciding upon the consideration of the deal and terms of payments, then the proposal will be put for
the Board of Director’s approval
4. Approval of shareholders
As per the provisions of the Companies Act 1956, the shareholders of both seller and acquirer
companies hold meeting under the directions of the National Company Law Tribunal and they
consider the scheme of amalgamation. A separate meeting for both preference and equity
shareholders is convened for this purpose.
5. Approval of creditors/financial institutions/banks
Approvals from the constituents for the scheme of merger and acquisition are required to be sought
for as per the respective agreement with each of them and their interest is considered in drawing up
the scheme of merger.
6. Tribunal’s approval
The tribunal shall issue orders for winding up of the amalgamating company without dissolution on
receipt of the reports from the Official Liquidator and the Regional Director that the affairs of the
amalgamating company have not been conducted in a manner prejudicial to the interest of its
members or to public interest.
7. Approval of central government
It is required to obtain declaration of the Central Government on the recommendation made by the
Specified Authority under section 72 A of the Income Tax Act, if applicable.
8. Integration stage
The structural and cultural aspects of the two organization, will lead to successful merger and ensure
that expected benefits of the merger are realized.
DYNAMICS OF M&A PROCESS –
 identification of targets
 negotiation
 closing the deal.
PROBLEMS OF MERGER AND ACQUISITIONS
1. Integration difficulties

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 2. Large or extra debt
3. Managers overly focused on Acquisition
4. Overly Diversified
REASONS FOR SUCCESS IN MERGERS AND ACQUISITIONS
1. Trust between the parties
2. Due diligence and good valuation
3. Experience from previous mergers and Acquisitions
4. Communication before the execution of the merger or Acquisition (Non- Disclosure
Agreement)
5. Quality of the plan
6. Cultural fit
7. State of Economy

Successful Mergers
1. Reliance communications
2. Sony Pictures Network India Acquired Zee Entertainment
3. Unilever Plc acquired Blue Air
4. Nokia acquired Alcatel- Lucent
5. Dell acquired EMC Corporation

REASONS FOR FAILURE IN MERGERS AND ACQUISITIONS

1. Lack of planning
2. Limited synergies
3. Difference between mgt or organisation structure
4. Wrong implementation of strategy
5. Lack of knowledge by management
6. Too high expectations

Failure mergers
1. E Bay and skype
2. Daimler- Benz and Chrysler
3. Volvo and Renault

WHAT IS TAKEOVER?

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A takeover usually occurs when one company makes a bid to take control of or acquire another, often
by buying a majority stake in the target company. The company making the bid is called acquirer in
the acquisition process. In contrast, the company that it wishes to take ownership of is called the aim.

A larger corporation usually conducts takeovers for a smaller one. They could be voluntary by a joint
agreement between the two companies. In other situations, they can be rejected, in which case,
without indicating, the larger organisation goes after the target.

If one company bids for the purchase of shares in another company for the purpose of controlling the
company if the bid is successful. Once the bidding company controls the other company it becomes a
holding company of that other company.
The purchase of shares in the company by the bidding company need to be up to the value of shares
that would allow the bidding company to control the other company (above 51%).

What is a Takeover Bid?

A takeover bid refers to the purchase of a company (the target) by another company (the acquirer).
With a takeover bid, the acquirer typically offers cash, stock, or a mix of both, “bidding” a specific
price to purchase the target company for.

“Takeover bid” is an offer to the shareholders of a company, whose shares are not closely held, to
buy their shares in the company at the offered price within the stipulated period of time. It is
addressed to the shareholders with a view to acquiring sufficient number of shares to give the offeror
company, voting control of the target company. A takeover bid is a technique, which is adopted by a
company for taking over control of the management and affairs of another company by acquiring its
controlling shares.

Reasons of takeover:
Takeover happens mostly due to business expansion, companies may seek to horizontally or
vertically integrate or diversify production.
The reasons behind the takeover include: access to raw materials (seeking takeover with one of its
suppliers), access to retail (seeking merger with one of its distributors), access to different field (eg.
Retail bank acquiring digital bank), …
There are certain reasons why the company would want to be part of a takeover. These Include:

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Financial and market reasons-
If the company wants to grow, acquire higher market share or reach new potential customer base,
the takeover could be a great opportunity to do that
In order to facilitate the efficiency with which they produce, the effectiveness with which they
market their products and services, and to increase their sales and turnovers-in certain situations
companies want to get access to higher volume of sales or different products thus it acquires another
company
There is no legal requirement that a company must grow/ expand thus the goals for expanding are
purely financial, market or business oriented.

Types of Takeover Bids

The four different types of takeover bids include:

1. Friendly Takeover

A friendly takeover bid occurs when the board of directors from both companies (the target and
acquirer) negotiate and approve the bid. The board from the target company will approve the buyout
terms and shareholders will get the opportunity to vote in favor of, or against, the takeover.

Example: Aetna and CVS Health Corporation

An example of a friendly takeover bid is the takeover of Aetna by CVS Health Corp. in December
2017. The resulting company benefited from significant synergies, as noted by Chief Executive
Officer Larry Merlo in a press release: “By delivering the combined capabilities of our two leading
organizations, we will transform the consumer health experience and build healthier communities
through a new innovative health care model that is local, easier to use, less expensive, and puts
consumers at the center of their care.”

2. Hostile Takeover

A hostile takeover bid occurs when an acquiring company seeks to acquire another company – the
target company – but the board of directors from the target company has no desire to be acquired by,
or merged with, another company – or they find the bid price offered unacceptable. The target
company may reject a bid if it believes that the offer undermines the company’s prospects and
potential. The two most common strategies used by acquirers in a hostile takeover are a tender offer
or a proxy vote.

 Tender offer: Offering to purchase shares of the target company at a premium to the market
price.
 Proxy vote: Persuading shareholders of the target company to vote out the existing
management.

Example: Aphria and Green Growth Brands

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An example of a hostile takeover bid was Green Growth Brands’ takeover attempt of Aphria in
December 2018. Green Growth Brands submitted an all-stock offer for Aphia, valuing the company
at $2.35 billion. However, Aphria’s board and shareholders rejected the offer, citing that the offer
significantly undervalued the company.

3. Reverse Takeover Bid

A reverse takeover bid occurs when a private company purchases a public company. The main
rationale behind reverse takeovers is to achieve listing status without going through an initial public
offering (IPO). In other words, in a reverse takeover offer, the private acquiring company becomes a
public company by taking over an already-listed company.

The acquirer can choose to conduct a reverse takeover bid if it concludes that is a better option than
applying for an IPO. The process of being listed requires large amounts of paperwork and is a tedious
and costly process.

To begin, a private company buys enough shares to control a publicly-traded company. The private
company's shareholder then exchanges its shares in the private company for shares in the public
company. At this point, the private company has effectively become a publicly-traded company.

An RTO is also sometimes referred to as a reverse merger or a reverse IPO.

J. Michaels and Muriel Siebert

An example of a reverse takeover bid is the reverse takeover of J. Michaels (a furniture company) by
Muriel Siebert’s brokerage firm in 1996, to form Siebert Financial Corp. Today, Siebert Financial
Corp is a holding company for Muriel Siebert & Co. and is one of the largest discount brokerage
firms in the United States.

4. Backflip Takeover Bid

A backflip takeover bid occurs when the acquirer becomes the subsidiary of the target company. The
takeover is termed a “backflip” due to the fact that the target company is the surviving entity and the
acquiring company becomes the subsidiary of the merged company. A common motive behind a
backflip takeover offer is for the acquiring company to take advantage of the target’s stronger brand
recognition or some other significant marketplace edge.

Example: AT&T and SBC

An example of a backflip takeover bid is the takeover of AT&T by SBC in 2005. In the transaction,
SBC purchased AT&T for $16 billion and named the merged company AT&T because of AT&T’s
stronger brand image.

Benefits of takeover:
Even unsuccessful takeover bid might be a motivational factor to the current management to make
most of the resources at their use.
Despite above mentioned advantage there are some of main advantages:

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 1. It positively impacts shareholder’s wealth
There are certain benefits for shareholders. The takeover would result in increasing of shareholder’s
wealth. Shareholders would be making gains from agreed takeovers/mergers.
This has a positive effect on shareholder wealth (particularly the target shareholders).
Business synergies arising from the deal result in efficiency gains and lower costs as the new
management extracts higher value from the company’s assets. Takeovers enable less efficient or
productive management to be replaced by efficient and productive one.
If the company is not doing well but then it is taken over by another company, the shares of each
shareholder increase in value on the market. This puts them into a profitable situation as now, they
could sell shares for far more as they would be able to before when the company was not doing well.
However, if the shareholders of the company are also in charge of the company, they would lose its
decision powers in relation to the management issues of the company post-merger.

2. Corporate governance
The corporate governance a technique/way how to discipline corporate managers. The managers
could be displaced by the takeover thus loose power over the company. This consequently brings
value for the shareholders as if the ill performing management is displaced, and replaced by better
performing management, the share value increases.
Inefficient managers, if not responsible to, and subject to displacement by, owners directly, can be
removed by shareholders’ acceptance of takeover bids induced by poor performance and a
consequent reduction in shareholder value.

Disadvantages of a takeover process:

 The takeovers are costly and if the takeover is hostile there is no evidence to support that the
management of company would be motivated to perform better. The management might on the
other hand opt for unsupportive approach towards takeover thus become even less efficient
which consequently results in decreasing share value. Instead of takeovers, the corporate
governance methods could be used to address the underperforming management in a less
expensive and disruptive way.
 There has been a fear that takeovers do not lead to productive way of using assets, they compel
management to concentrate on a short-term profitability to boost profits of new shareholders
while avoiding long-term investment and innovation.
 There is a controversy as to the motivation of the offeror company’s management pursuing bid
and the cost of the bid to the offeror’s company shareholders (these shareholders may be the
losers in any takeover bid). Offeror shareholders do have an opportunity to have their say on
acquisition where the offeror company is a premium listed company, as the Listing Rules require
shareholder approval of major transactions (including a takeover), and the need to seek
shareholder approval can act as a constraint on acquisitive boards.
 Takeovers present an occasion for the insider dealing illegal activity, as information before or
during the bid is highly price-sensitive inside information which can have a dramatic effect on
the share price of companies involved.

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 Bidding can be used a market manipulation tactic, making the target company seem desirable
thus increasing its share price on the stock exchange.
 From the competition law perspective there, might be issues with competition either nationally
or at the EU level.

An overview of the takeover process:

Buyer co. Negotiation &

identifies target agreement on Shareholders Completion of
co. & makes terms including approval takeover
offer to board price

1. Approach
The first step for the bidding company is to identify a target company, ahd approach it with a
bid (thus making an offer for buying shares to the board).

Before the announcement of an offer or a possible offer to the company, it is necessary that all
concerned treat information as secret, these information is highly price-sensitive and provides
significant opportunities for insider dealing. Offeror must state whether he will make bid or will
refrain from bidding within ff8 days of doing research into company.
The offer is made of purchase of shares in the target company, the purchase might be offered in cash
or for exchange of shares in the bidding company, or both.
2. Negotiations
The announcement of the offer needs to be made firstly to the board of directors.
Once the offer has been submitted to the board of directors, the boards of companies will
conduct negotiations relating to specifics of the takeover (terms, price,…). After negotiations,
the agreement is reached.

*the power of the board is irrelevant in this situation, unless it is willing to negotiate. This is
because the shareholders can step in and approve the agreement by resolution. The board has
no saying in not approving the agreement.

3. shareholder approval

Once the agreements with all specifics is reached, it will be presented to shareholders at a
shareholder meeting. The agreement needs to pass by a resolution voting.

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 4. Completion of takeover

If shareholders approve the bidding agreement, the takeover process is complete.

Directors & takeovers

Directors are supposed to act to the best of the interests of the company. However, in real life
cases, directors will want to put themselves in the best possible position in the process. They
may want to discourage a bid or may want to win the ‘take over battle”.

However, remember that they must exercise their powers for proper purpose & act in the best
interest of the company! This is because Directors owe certain duties in takeovers to
Shareholders.

WHAT IS DIVESTMENT OR DISINVESTMENT

Disinvestment refers to an action by a Government or an organisation liquidating (selling) its stake in

the company or its subsidiary or general sale of assets. It can also imply a reduction in capital
expenditure. Which facilitates a re-allocation of resources into other productive areas within a
Government-funded project or an organisation. Regardless of its results, the primary objective of
disinvestment is maximising its return on investment or ROI.

Divestment or disinvestment means selling a stake in a company, subsidiary or other investments.

Businesses and governments resort to divestment generally as a way to pare losses from a non-
performing asset, exit a particular industry, or raise money.

Governments often sell stakes in public sector companies to raise revenues. In recent times, the
central government has used this route to exit loss-making ventures and increase non-tax revenues.

The Indian government started divesting its stake in public-sector companies in the wake of a change
of stance in economic policy in the early 1990s — commonly known as 'Liberalisation, Privatisation,
Globalisation'. This has helped the Centre pare its fiscal deficits.

The Bharatiya Janata Party-led National Democratic Alliance (NDA) government in its first term
under Prime Minister Atal Bihari Vajpayee made strategic disinvestment in key PSBs like Bharat
Aluminium Company (Balco) and Hindustan Zinc (both to Sterlite Industries), Indian Petrochemicals
Corporation Limited (to Reliance Industries) and VSNL (to the Tata group).

During the second term of the NDA, the first Narendra Modi-led government tried to exit debt laden
Air India, without success. Even so, it exceeded its divestment target of Rs 72,500 crore in 2017-18.
This was mainly achieved by the method of strategic cross-divestment — where one PSU buys a
stake in another, helping the government raise revenues but keep the company's control with itself all
the same. Other routes were listing of insurance companies, mergers of public sector companies,
CPSE exchange-traded funds (ETFs) and numerous buybacks.

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Future divestment strategy

The much-anticipated sale of Air India, and its subsidiaries did not attract a single bid in 2018-19. It
has still not happened. The government also issued an Expression on Interest for the strategic
disinvestment of Pawan Hans, Bharat Petroleum Corporation Limited, and Bharat Earth Movers
Limited in the current financial year.

What are the Objectives Of Disinvestment?

The Government opts for disinvestment to raise wealth for meeting particular needs or lower its fiscal
burden. It may also undertake disinvestment with an aim to encourage investments from private
players.
As it allows an entity to reduce its debt, disinvestment can pave the way for the long-term growth and
development of a country. Moreover, it enables the open market to have a larger share of PSU
ownership, thereby facilitating the development of a stronger capital market.
In simple words, the main objectives of disinvestment in India can be summed up as follows:

I. Improving public finances

II. Lowering Government’s fiscal burden

III. Allowing higher private ownerships

IV. Promoting and maintaining competition in the market

V. Funding programmes for growth and development

VI. Depoliticising non-essential activities

What is the Importance of Disinvestment?

Introduction of the New Economic Policy in 1991 aptly highlights the importance of disinvestment in
India.
Public sector undertakings (PSUs) had indicated a negative return rate on capital employed, thus
becoming more of a liability to the Government than an asset. Further, low returns from PSUs had an
adverse effect on the country’s gross national savings and national gross domestic product.

A Disinvestment Policy allowed the Government to eliminate these units and focus on core activities
instead. As a result, it moved out from non-core enterprises, especially those wherein the private
sector has now emerged as a prominent player.
Since the 1990s, all successive governments in India have set a disinvestment target in order to raise
funds by selling their stake in PSUs.

The importance of disinvestment in India includes:

I. Financing the surged fiscal deficit
II. Raising funds to enable large-scale infrastructural development
III. Investing in the economy to boost consumer spending
IV. Initiating social programmes pertaining to education and health

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 V. Reducing government debt (as about 40% of the Centre’s revenue receipts are spent on
repaying public debt/interest)
At this point, it is critical to note that disinvestment is often confused with privatisation. However,
there lies a distinction between these two, which we will now delve into.

What is the Difference between Disinvestment and Privatisation?

The Government of India, whenever the need arises, may decide to sell its majority stake or a whole
enterprise to private investors. In such a circumstance, it can be called privatisation. Therefore, in
case of privatisation, the Government does not hold the resulting control and ownership. That said,
this is seldom the case as Governments generally avoid taking this step.
Disinvestment Plan in India for 2021

In 1999, the Government set up a separate Department of Disinvestment. It is now known as the
Department of Investment and Public Asset Management or DIPAM. It operates under the Ministry
of Finance and deals with disinvestment-related tasks.
The disinvestment targets of this department are announced in each Union Budget. It varies every
year, with the Central Government taking the final call on whether it will increase its disinvestment
target or not.

In FY 2021, the Indian Government set up a target of Rs. 2.1 lakh crore. However, considering the
aftermath of Covid-19, it raised just 10% of the desired sum. In fact, it recorded the lowest sum
raised in the preceding seven financial years. The target for this fiscal year was three times more than
that of the previous year.
Keeping that in mind, this year, GOI has set a target of gathering Rs. 1.75 lakh crore from
disinvestments. This plan includes various banks, LIC, Shipping Corporation of India, and many
other PSUs.

Types of Disinvestment Methods in India

There are primarily three different approaches to disinvestments (from the sellers’ i.e. Government’s
perspective)

Minority Disinvestment

A minority disinvestment is one such that, at the end of it, the government retains a majority stake in
the company, typically greater than 51%, thus ensuring management control.
Historically, minority stakes have been either auctioned off to institutions (financial) or offloaded to
the public by way of an Offer for Sale. The present government has made a policy statement that all
disinvestments would only be minority disinvestments via Public Offers.
Examples of minority sales via auctioning to institutions go back into the early and mid 90s. Some of
them were Andrew Yule & Co. Ltd., CMC Ltd. etc. Examples of minority sales via Offer for Sale
include recent issues of Power Grid Corp. of India Ltd., Rural Electrification Corp. Ltd., NTPC Ltd.,
NHPC Ltd. etc.

Majority Disinvestment

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A majority disinvestment is one in which the government, post disinvestment, retains a minority
stake in the company i.e. it sells off a majority stake.
Historically, majority disinvestments have been typically made to strategic partners. These partners
could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to IOC, and KRL to
BPCL. Alternatively, these can be private entities, like the sale of Modern Foods to Hindustan Lever,
BALCO to Sterlite, CMC to TCS etc.
Again, like in the case of minority disinvestment, the stake can also be offloaded by way of an Offer
for Sale, separately or in conjunction with a sale to a strategic partner.

Complete Privatisation

Complete privatisation is a form of majority disinvestment wherein 100% control of the company is
passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of
HCI.

Disinvestment and Privatisation are often loosely used interchangeably. There is, however, a vital
difference between the two. Disinvestment may or may not result in Privatisation. When the
Government retains 26% of the shares carrying voting powers while selling the remaining to a
strategic buyer, it would have disinvested, but would not have ‘privatised’, because with 26%, it can
still stall vital decisions for which generally a special resolution (three-fourths majority) is required.

STRATEGIC ALLIANCES

Strategic alliances are common in business world. They are significant to achieve synergy. Strategic
alliance leads to synergy due to sharing of resources and combined efforts of various parties.
However, due to involvement of various parties, certain problems or difficulties can occur such as
conflicts between parties, government interferon, delay in decision making, difference in values &
culture, loss, unfair terms and conditions and so on.
 Is a flexible arrangement between firms whereby they agree to work together to achieve a
specific goal. Such arrangements are looser in nature than the JV and can be disbanded easily.
 A partnership with another business in which you combine efforts in a business effort
involving anything from getting a better price for goods by buying in bulk together, to seeking
business together, with each of you providing part of the product. The basic idea behind
alliances is to minimize risk while maximizing the leverage.
 Normally, a strategic alliance does not result in the creation of new entity unlike a JV. The
major advantage of a strategic alliance is that it can be created easily as and when there is a
need

MEANING OF STRATEGIC ALLIANCES

The term alliance can be derived from the word ‘ally’ or the old French word aligre which mean to
associate with or to bind or to co-operate with another with some common cause or interest. An
alliance therefore is an association that involves co-operation and collaboration and merging of
complementary interests to achieve individual and mutual goals and objectives.

Strategic alliance is a relationship between corporations that is characterized by merging of

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complementary interests, the sharing of privileged information and meaningful collaboration and co-
operation to achieve strategic goals and objectives. The strategic alliance may provide technical,
operational and / or financial benefits to the corporations.
Strategic alliances include non-equity agreements, and joint ventures which undertake joint R & D,
joint product - development, knowledge sharing, marketing and distribution sharing and joint quality
control and research

Types / Structure of Strategic Alliances :

Structure of a strategic Alliance refers to the formal arrangement by which work is co-ordinate between
firms who are parties to the alliance. This structure defines the framework within which the activities
take place.

The structure of strategic Alliances can be of different forms based on different criteria as given below.

a) Based on the parties to alliance :

i) Horizontal Strategic Alliance - In this type, two or more firms in the same industry,
collaborate with each other.
ii) Vertical Strategic Alliance - In this type, the firms integrate backward or forward with either
supplier or marketing firm.
iii) Intersectoral Strategic Alliance - In this type, the firms belonging from different
industries collaborate with each other.

b) Based on financial involvement :

i) Non - Equity Strategic Alliance - Non - Equity Strategic Alliances can range from close
working relations with suppliers, outsourcing of activities or licensing of technology, sharing
of R & D, industry clusters and innovation networks. Informal alliances without any
agreements, or based on ‘Gentlemen’s agreement are common among smaller companies and
within university research groups.

ii) Equity Strategic Alliance - In this type, the companies invest in each other’s equity, making
the parties shareholders as well as stakeholders in each other. The cross shareholding of
companies may result in a complex network where company. A owns equity in Company B
that owns equity in C, creating direct and indirect ownership.

iii) Joint - Venture Strategic Alliance - Joint ventures are distinguished from other types in that
the participating companies usually form a new and separate legal entity in which they
contribute equity and other resources such as brands, technology or intellectual property. The
parties agree to share revenues, expenses and control of the new company for one specific
project only or a continuing business relationship.

c) Based on Participation of the Government :

i) Host - Country’s Government - It acts as local partner in strategic alliance. Such strategic

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 alliances are effective in socialist - countries.

ii) Public - Private Venture - This involves partnership between a government and a private
company This type of Strategic Alliance is created under the following circumstances –

a) When a country allows entry of foreign companies only through Strategic Alliances with the
government.

b) When the priority of the Government for development matches with the competence of a
private company.

c) Firms can enter centrally controlled economies like China and Sweden only through Strategic
Alliances with the Government.

iii) Private Partners - In this case private companies enter into Strategic Alliance agreement.

PROBLEMS IN INDIAN STRATEGIC ALLIANCES

Strategic Alliances are common in business world. They are significant to achieve synergy.
Synergy means increased effectiveness or achievement gained by combined action or co- operation.
Strategic Alliances provide synergy due to sharing of resources and combined efforts of different
parties.

However problems or difficulties in the operations of Strategic Alliances can occur due to
the following reasons.

1. Conflict between Partners - Joint ownership can result into conflict between Partners. Conflict is
more common when management is shared equally. In such case, neither partner’s managers have
the final say on decisions. This problem can be solved by establishing unequal ownership whereby
one partner maintains 51% ownership and has the final say on decisions.

2. Government Interference - The loss of control over a joint venture’s operations can result when
the local government is a partner in the Strategic Alliance. This situation occurs in industries
considered important to national security such as broadcasting, infrastructure and defense. The
profitability of the Strategic Alliance could suffer because the local Government would have
motives that are based on national interest, which may compel them to interfere in the operations of
the Strategic Alliances.

3. Delay in Decision Making - Decision making is normally slowed down due to involvement of a
number of parties. This may lead to inefficient - operations. Opportunities may be lost which may
affect the growth of the business.
4. Differences in Work Culture - The work culture of the companies forming Strategic Alliances are
different. MNCs who generally are parties to the Strategic Alliances are profit centered. All
decisions are taken from economic angle. This may conflict with the culture of the local company
it’s decisions may be socially oriented. This may make functioning of the Strategic Alliances
difficult.

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5. Losing of Secrecy - There is a risk of losing control over proprietary information, especially
regarding complex transactions requiring extensive coordination and intensive information sharing.

6. Expensive and Time Consuming - The procedure for formation of Strategic Alliances is lengthy,
complicated and time consuming. The formation of Strategic Alliance can increase costs because of
the absence of a formal hierarchy and administration within the strategic alliance. Even costs can
rise due to the element of hidden costs and activities outside the scope of original agreement and
inefficiency in management.

7. Problems Due to Changes in Government Policies - The changes in government policies relating
to foreign exchange and technology transfer may create problems in the formation of Strategic
Alliances.

8. Unfair Terms and Conditions - The terms and conditions laid down in the agreement may not be
fair and reasonable to both partners.

Thus, there are several risks and limitations associated with Strategic Alliances. Failures are often
caused due to lack of mutual trust and confidence, unrealistic expectations, lack of commitment,
cultural differences, and so on.

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