UNIT-1 Corporate Restructuring/ Reorganization

It is the re-organization of assets and liabilities of the organization through management actions to improve cash flow, profitability and efficiency

Expansions
Sell Offs (Split-ups) Corporate Control Changes in ownership structure

Merger/ Amalgamation
Absorption of one company by another. The absorbed

company is dissolved Involves transfer of assets and liabilities

Acquisition/ Takeover
Involves integration at shareholders level by transfer of

part or full shareholding No transfer of assets and liabilities, balance sheet remains unchanged

Joint Venture
A combination of assets from two or more businesses

to form a new independent company

Set up a subsidiary through transfer of equity

Held 100% by parent company Subsidiary sets up a new business

Spin-off
Parent companys holding in subsidiary is distributed

pro-rata to share holders of parent

Hive-off
An existing business segment or division is transferred

off to another company. Involves transfer of assets and liabilities Usually done to induct a new partner

Divestiture
Complete sale of a business and assets Seller has no future claims or interest It could be a direct sale or a two stage process

involving a hive off

De-merger
It is a combination of hive-off and Spin-off in

which the shareholders of parent are given prorata representation in the de-merged business

Greenmail
Process of purchasing enough shares in a

company to threaten a takeover

Buy-back of shares
A corporate action in which a company buys back

its shares from existing shareholders at a price higher than the market This is done to change its corporate control structure

Share Re-purchase
Buy back of shares from the market at higher than

market rates Increases the promoters ownership in the company

Going Public
Process of selling shares formerly privately held to

new investors for the first time. IPOs Dilution in the promoters ownership in the company

 To

create long term holding structures To grow at a rate faster than organic growth rate To enter a new market or grow beyond a saturated market To capture forward and backward linkages in the value chain To gain control of a larger manufacturing base

 To

better utilize tax covers To facilitate distribution of assets and family settlements To achieve synergies of operation To exit non-core businesses Bail-out mergers and acquisitions , when company is in financial distress To facilitate entry/ exit of business partners

Valuation of companies

 Valuation

is the process of estimating what something is worth are needed for investment analysis, capital budgeting and merger / acquisition transactions

Valuations

The various Principles of Valuation are

1. Money has time value. A rupee in hand is
worth more than a rupee promised some time in future

2. Future value (FV) of money can be

calculated and compounded based on interest rate. FV = P(1+r)t where P is

principal amount and r rate of interest and t time period.

3. Present value of a future cash flow can be calculated by discounting at a discount factor. FV= PV(1+r)t where r is the
discount factor and t time period.

4. Present and Future values of multiple cash flows can be calculated by summing individual discounted or compounded cash flows. FV= FV1 + FV2
+ FV3 PV = PV1 + PV2 + PV3

The common business valuation methods are

Discounted cash flow method Comparable companies method Adjusted book value method

 This

method estimates the value of an asset based on its expected future cash flows, which are discounted to the present (i.e., the present value) The size of the discount is based on the estimate of risk involved and is expressed as a percentage. This percentage is also called discount rate. There are two methods, FCFE and FCFF

Valuation using FCFE (Free cash flow to equity) The valuation of the equity under this method is the sum of:
The present value of the FCFE arrived at for each

year during a discrete growth period The present value of the terminal FCFE at the end of the period

What is FCFE (Free Cash Flow to Equity) FCFE = Net profit + Depreciation Future additional Capital Expense Future additional Working Capital requirement Repayment of Debt + additional expected future borrowings

Value of Equity = PV of FCFE1 + PV of FCFE2

Value of Share = FCFE1 + FCFE 2 / No. of

Valuation using FCFF (Free Cash Flow to Firm) The valuation under this method is the sum of
The present value of FCFF arrived at for each

year during the discrete growth period The present value of the terminal FCFF at the end of that period

 What

is FCFF (Free Cash Flow to Firm) FCFF = FCFE + interest on long term borrowings (1-t) + Repayment of debt additional expected future borrowings + Preference dividend ( t is the tax rate)
Value

FCFF2 Value of Equity = FCFF1 + FCFF 2 market value of outstanding debt Value of Share = Value of Equity/ No. of shares

of Company = PV of FCFF1 + PV of

ABC Ltd has the following information at the end of the current year
Equity Capital

10,000 shares of Rs 10 Rs 100,00,000 Rs 50,00,000

each PV of free cash flow during discrete period (FCFE1) PV of terminal cash flow (FCFE2) What is the value per share?

The value per share = FCFE1 + FCFE2 / No of shares = 150,00,000/10,000 = R 1500

In this method the share is valued a its book value A company's book value is its total assets minus intangible assets and liabilities The limitation of this method is that it considers the historical value of assets while liabilities are at market value It does not attach any significance to the going concern concept as it does not consider future earning potential

 ABC

ltd has following figures at the year

10,000 shares of Rs 10 each Rs Rs Rs

end
Equity capital

100,000 Reserves and Surplus 10,000,000 Miss exp not w/o 1,000,000
So Net worth = Rs 9,100,000
Book value per share = 9100000/10000 = Rs 910

 The

adjusted book value method of valuation is most often used to assign value to
distressed companies facing potential liquidation or companies that hold tangible assets such as property

or securities. for companys when anticipating bankruptcy or sale due to financial distress

A comparable companies analysis is a relative valuation method. The method indicates the value of similar companies in relation to different key ratios that is compared to the business being valued. Common key ratios are: EV/EBITDA and EV/SALES

Enterprise value = market cap + plus debt - total cash and cash equivalents. Comparable company analysis is especially useful when valuing the minority, non-controlling interest of a company. After identifying the list of comparable companies, the comparable valuation multiples are applied to the company being valued to establish a relative valuation

The mean or media of multiple ratios of the comparable companies would be multiplied by the earnings of the company being valued to establish a relative valuation

Benefit
A key benefit of comparable companies analysis is that the methodology is based on the current market stock price.

Drawbacks
Finding true comparable companies that closely resemble the company being valued can be difficult. In addition, comparable multiples are based on small companies that are less liquid in public markets provide less reliable valuation metrics. It only values a minority, non-controlling interest in a company, which is less useful for acquisition valuations