CORPORATE RESTRUCTURING After mergers & acquisitions to expand their operations, in certain situations companies may need to downsize their operations. This could be due to following reasons. 1, M& A may not have been successful. 2. Some divisions may be performing poorly and may not fit into company’s plans, 3. Economic fluctuations may bring pressure to downsize the operations. The above is a global phenomena and not peculiar to any specific region. ‘The restructuring that takes place can take several forms. 1. Dive: re: Sale of a portion of the firm to an outside party,the selling firm is paid in cash, marketable securities or a combination of the two. 2. Equity-carve out: Itis a variation ofa divestiture in that it involves the sale of an equity interest in a subsidiary to others. It gives ownership in the portion of the selling company that is being divested. Thus a new tegal entity is created. It will have a different management team and run as a separate firm.3. Spin-off: In this case there is a creation of a new entity. New shares are issued, but are distributed to stock holders on a pro-rata basis, resulting in the same proportional distribution of shares as in the old company. In spin-off, there is no cash infusion in the parent company. 4, Exchange offer: New shares in the subsidiary are issued, share holders ate given the option to either hold on to their shares or exchange for the shares of the new company, that would mean shareholders have to part with their parent company shares. 5. Split-up: “The entire firm is broken into a number of spin-offs. In the process, the parent company no longer exists. But only a series of newly formed companies. DIVESTITURE In India, motives for divestiture could be for the following reasons, 1. Focus on core businesses for the divesting firm. Bg, Sale of TOMCO by Tatas to HILL. 2, Declining profitability of business in which the firm is operating. 3. Getting rid of unprofitable business. Eg. Grasim industries divested its loss-making fabric manufacturing operations in Gwalior to Melodeon Exports Ltd and its Associates (Swastik Group of Bhilwara) » ‘Need for funds for other activities. Eg. Sale of Lupin Agro by Lupin group.Ballarshah Plywoods by Indian plywood Mf. co. Ltd., to Bakelite Hylam. While M & A lead to synergy, divestures, can result in reversesgnergy. Somebody may find a business more profitable to generate cash flows, and may willingly pay higher price for its business than its present value. Over a period of time, the competitive advantages a company has, may change due to changing market conditions. Result. The company may have to divest that business (Postal Dept has decided to close Telegraph wing due to the Advent of Internet) depends How the investors view divestituréjttpon circumstances: » Wealth Transfers ‘© Divestiture results in the transfer of wealth from debt holders to stock- holders. © Asa result there is less likelihood of repayment of debt and it will have lesser value. © When a company divests a particular division and distributes the proceeds among stockholders, the transfer takes place. + Equity value may rise, if the total value of the firm remains unchanged. Tax Reasons « As in the case of mergers, divestiture also provide substantial tax advantages. © When a company is losing money, it is better to divest wholly or in part to realize a tax benefit.© When there is increased leverage due to restructuring a firm can have a tax shield. * Advantage due to interest payments being tax deductible. Spin-offs ‘The business unit is not sold for cash or securities. Common stock is distributed to the shareholders on a pro-rata basis, This is normally done through a special dividend. ‘The assets of this entity are transferred to a new subsidiary with the intention of a spin-off. Ag a result of the spin-off two publicly held independent companies emerge. Fg, Indian Rayon & Industries Ltd (A.V. Birla Group Enterprises) (iil. * The company decided to spin off its insulator business under Jayashree Insulator division in favor of a new company Vikram Insulators Pvt. Ltd., (VIL) Rs. 92.98 cr of the division would be transferred to VIPL. + VIPL would form a 50:50 Joint-Venture with the Japanese Insulator Giant NGK-Insulators Ltd, N.G.K,$2.6 Billion company has over 60% share in the global insulators market. + VIPL, in turn, would get the requisite technology & know-how from NGK, in addition, total marketing support world-wide. + In consideration of the transfer of the insulators business, VIPL would allot 1.25 or equity shares of Rs. 10 each @ par and debentures worth $25 Million to IRIL.* On completion of the demerger NGK would subscribe to 1.25 Cr equity shares of Rs. 10 each of VIPL for cash at a premium, © This would result in equal shareholding for both IRIL and NGK and equal board representation in VIPLyBubject to approval;the J.V. would be named Birla NGK. Advantages of Spin-offs 1. Spin offs are often tax-free to the parent company and to the share holders who receive the stock, 2. It can minimise the execution risk of a divestiture whether due to third party negotiations or market conditions. 3. Compared to carve-outs, spin-offs have low underwriting discounts and fees. 4, Shareholders may get a better benefit through stocks. Compared to the benefits received by the company through negotiated settlements. vantages of Spin-offs: 1, As shares are distributed primarily to the existing shareholders, spin-offs lack liquidity. 2. The parent does not make monetary gains. 3. A spin-off is often perceived as a way to get rid of sub-par asset by the parent, 4, Incur expenses for issuing new shares, 5. Shateholder-servicing will be duplicated by the parent as well as spin-off company. 6. Institutions & index fund would off load shares in the market leading to downward pressure on stock-pricing in the short-term,Equity Carve-outs The subsidiaries may tend to retain 80% of voting rights to gain the benefit of tax consolidation. Disadyantages ‘The biggest disadvantage is the scope of conflict between the two companies at operation level. The new financial stakeholders will have different requirements. The conflict can affect the performance of both the firms,