FM3
UNIT IIICorporate Restructuring and Takeovers Q1) What is the meaning of corporate restructuring? Explain the need and importance of same.A1) Corporate restructuring is an action taken by the corporate entity to modify its capital structure or its operations significantly. Generally, corporate restructuring happens when a corporate entity is experiencing significant problems and is in financial jeopardy.The process of corporate restructuring is considered very important to eliminate the entire financial crisis and enhance the company’s performance. The management of concerned corporate entity facing the financial crunches hires a financial and legal expert for advisory and assistance in the negotiation and the transaction deals. Usually, the concerned entity may look at debt financing, operations reduction, any portion of the company to interested investors. In addition to this, the need for a corporate restructuring arises due to the change in the ownership structure of a company. Such change in the ownership structure of the company might be due to the takeover, merger, adverse economic conditions, adverse changes in business such as buyouts, bankruptcy, lack of integration between the divisions, over employed personnel, etc. Need:Corporate restructuring can be driven by a need for change in the organizational structure or business model of a company, or it can be driven by the necessity to make financial adjustments to its assets and liabilities. Frequently, it involves both. Companies restructure for a variety of reasons:To reduce costs To concentrate on key products or accounts To incorporate new technology To make better use of talent To improve competitive advantage To spin off a subsidiary company To merge with another company To decrease or consolidate debt Importance:Companies may choose to restructure their finances and/or their organization for the following reasons:Improvement of profits: If a company isn’t properly deploying its assets to maximize profit, restructuring may be pursued to get the company on a more solid financial footing. The direction the company takes in its restructuring will be determined by the corporate strategy that best employs the resources available. Change in business strategy: A company may choose to eliminate subsidiaries or divisions that do not align with its core strategy and long-term vision and raise capital to support advancing the core strategy. Additionally, corporate strategy can be to maximize tax opportunities or improve flexibility. Reverse synergy: Just as companies sometimes seek mergers and acquisitions to create business synergies, the reverse is also true. Sometimes, the value of a merged or conglomerate unit is less than the value of its individual parts. Some divisions or subsidiaries may have more value in a sale than they do as a part of the larger corporate entity. Cash flow requirements: Divestment of underperforming or unprofitable divisions or subsidiaries can provide liquidity that the corporate entity cannot access otherwise. The sale of some assets can provide both an influx of cash and reduction of debt, giving the corporate entity easier access to financing and/or more favorable terms. Q2) Explain the Forms of Restructuring.A2) 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 structure refers to the allocation of the corporate flow of funds cash 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. (c) Organizational Restructuring - 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 layoffs 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 Q3) What are the Advantages and disadvantages of restructuring? A3) AdvantagesTo reduce costs. To concentrate on key products or accounts. To incorporate new technology. To make better use of talent. To improve competitive advantage. To spin off a subsidiary company. To merge with another company. To decrease or consolidate debt Disadvantages:During the restructuring process, the administrator approves the debtor's legal actions (with the exception of common legal actions) In case the restructuring plan is not approved, the company is declared bankrupt (There is a possibility to replace a group disapproval with the restructuring plan with a court decree) In case the plan towards the creditor is not being fulfilled (even after additional appeal) the plan becomes legally unenforceable towards this creditor Q4) Explain the Regulations of Takeovers by SEBI. A4) The restructuring of companies through takeover is governed by SEBI (Substantial Acquisition of shares and Takeover) Regulations, 1997. These regulations were formulated so that the process of acquisition and takeovers is carried out in a well-defined and orderly manner following the fairness and transparency.In context of this regulation ‘acquirer’ is defined as a person who directly or indirectly acquires or agrees to acquire shares or voting rights in the target company or acquires or agrees to acquires ‘control’ over the target company, either by himself or with any person acting in concert with the acquirer. The term ‘control’ includes right to appoint majority of the directors or to control the management or policy decisions exercisable by any person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.This implies that where there are two or more persons in control over the target company, the cesser of any one of such persons from such control should not be deemed to be in control of management. Certain categories of persons are required to disclose their shareholding and/or control in a listed company to that company. Such companies, in turn, are required to disclose such details to the stock exchanges where shares of the company are listed.In case of acquisition of 5 percent and more share or voting rights of a company, an acquirer would have to disclose at every stage the aggregate of his shareholding or voting rights in that company to the company and to the stock exchange where shares of the target company are listed. No acquirer either by himself or through/with persons acting in concert with him should acquire additional shares or voting rights unless such acquirer makes a public announcement to acquire shares in accordance with the regulations. As per the regulations, the mandatory public offer is triggered on:i) Limit of 15 percent or more but less than 55 percent of the shares or voting rights in a company.ii) Limit of 55 percent or more but less than 75 percent of the shares. In a case where the target company had obtained listing of its shares by making an offer of at least ten percent of issue size to the public in terms of the relevant clause mentioned in the Securities Contracts (Regulations) Rules 1957 or in terms of any relaxation granted from strict enforcement of the said rule.Then the limit would be 90 percent instead of 75 percent. Further, if the acquire (holding 55 % more but less than 75 percent) is desirous of consolidating his holding while ensuring that the public shareholding in the target company does not fall below the minimum level permitted in the listing agreement, he may do so only by making a public announcement in accordance with these regulations.Irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer should acquire control over the target company, unless such person makes a public announcement to acquire shares and acquires such shares in accordance with the regulations.The regulations give enough scope for existing shareholders to consolidate and also cover the scenario of indirect acquisition of control. The applications for takeovers are scrutinized by the Takeover Panel constituted by the SEBI. Q5) Write the types of Hostile Takeovers.A5)The acquirers usually employ the following hostile takeover techniques:Toehold acquisition – a purchase of the target’s shares on an open market. They allow the acquirer to become a shareholder of the target and provide an opportunity to sue the target later on if the takeover attempt turns out unsuccessful. Tender offer – an acquirer’s offer to the target’s shareholders to buy their shares at a premium over the market price. A partial, two-tier, front-end loaded tender offer usually involves a back-end merger. The takeover literature generally treats tender offer as a hostile takeover technique. It should not be treated as hostile, however, if it favors the interests of the majority of shareholders. Such a majority should be adequate to approve the relevant merger or acquisition. To claim that any tender offer is hostile would make virtually any merger or acquisition hostile. Proxy fight – a solicitation of the shareholders’ proxies to vote for insurgent directors. Proxy fights can run along with “board packing,” where the number of board members increases and the acquirer intends to fill this increase with his slate of directors. Q6) What is Asset Restructuring?A6) Asset Restructuring is the process of buying or selling of a company’s assets that comprise of far more significant than half of the target company’s consolidated assets. It’s usually a one-time expense that needs to be funded by any company when the restructuring takes place. Asset restructuring is a cost that may occur during the entire process of strategically writing off its assets or sometimes shifting the entire production facility to any new location, shutting down the manufacturing facilities, and uniquely laying off all the non-strategic employees. Normally, people take a loan from banks while purchasing any immobile property. Several banks lend money to them without making proper background verification of the customers whether they would repay the loan amount with interest within the stipulated period or their creditworthiness. Hence, the chances of the loan going bad increases significantly and thus might harm these financial institutions by increasing their fiscal debts. Therefore, the concept of asset restructuring developed for checking such frauds and provide appropriate repair if sudden fiscal loss appears. By such actions, several frauds were successfully prevented and uniquely addressed with a significant fall in fraudulent and criminal activities was noticed. Also, multiple lending frauds could even be prevented by a robust asset restructuring mechanism. Several companies are operational on the key project, and the same concept has successfully been implemented across several countries. Asset restructuring could be implemented due to a variety of reasons including, targeting the organization to become more competitive, successfully survive and emerge stronger from the existing hostile economic environment, or position the company to move towards an entirely new direction.During a key transition, a bankruptcy or a buyout, the management might consider strategic asset restructuring of the company. Asset restructuring might include several measures for eliminating diseconomies of scale, like streamlining and reorganizing the core operations and the management, consolidating new owners or buyers management teams.Asset Restructuring might involve new capital, new management, and any new prospect for rethinking the business plan and organization. Fruitful asset restructuring would usually lead to a higher company’s valuation. Q7) Write a note on Liability Restructuring.A7) Debt restructuring is a process used by companies to avoid the risk of default on existing debt or lower available interest rates. Individuals on the brink of insolvency also restructure their debt as do countries that are heading for a default on sovereign debt.Some companies seek to restructure their debt when they are facing bankruptcy. A company might restructure several loans so that some are subordinate in priority to other loans. Senior debt holders are paid before the lenders of subordinated debts if the company files for bankruptcy. Creditors are sometimes willing to alter debt terms to avoid potential bankruptcy or default.The debt restructuring process typically involves reducing the interest rates on loans, extending the dates when the company’s liabilities are due to be paid, or both. These steps improve the firm’s chances of paying back the obligations. Creditors understand that they would receive even less should the company be forced into bankruptcy or liquidation. Debt restructuring can be a win-win for both entities because the business avoids bankruptcy, and the lenders typically receive more than what they would through a bankruptcy proceeding.A debt restructure might also include a debt-for-equity swap. This occurs when creditors agree to cancel a portion or all of their outstanding debts in exchange for equity. The swap is usually a preferred option when the debt and assets are significant and forcing it into bankruptcy would not be ideal. The creditors would rather take control of the distressed company as a going concern. A company seeking to restructure its debt might also renegotiate with its bondholders to "take a haircut," in which a portion of the outstanding interest payments would be written off, or a portion of the principal will not be repaid.A company will often issue callable bonds to protect itself from a situation in which interest payments cannot be made. A bond with a callable feature can be redeemed early by the issuer in times of decreasing interest rates. This allows the issuer to restructure debt in the future because the existing debt can be replaced with new debt at a lower interest rate.
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