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Corporate Restructuring

• Restructuring of business is an integral part of the new economic paradigm.

• As controls and restrictions give way to competition and free trade, restructuring and reorganization become essential.

• Restructuring usually involves major organizational change such as shift in corporate strategies to meet increased competition or changed market conditions.

• This restructuring process has been mergers, acquisitions, takeovers, collaborations, consolidation, diversification etc.

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Merger

• Merger refers to a situation when two or more existing firms combine together and form a new entity. Either a new company may be incorporated for this purpose or one existing company (generally a bigger one) survives and another existing company (which is smaller) is merged into it. Laws in India use the term amalgamation for merger.

• Merger through absorption• Merger through consolidation

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Absorption

• Absorption is a combination of two or more companies into an existing company. All companies except one lose their identity in a merger through absorption. An example of this type of merger is the absorption of Tata Fertilizers Ltd. (TFL) TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired company ( a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

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Consolidation

• A consolidation is a combination of two or more companies into a new company .In this type 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 acquiring company for cash or exchange of shares. An example of consolidation is the merger of Hindustan Computers Ltd., Hindustan Instruments Ltd., and Indian Reprographics Ltd., to an entirely new company called HCL Ltd.

• The merger of Bank of Punjab and Centurian Bank Resulting in the formation of Centurian Bank of Punjab

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Types of Merger

• Horizontal merger

• Vertical merger

• Co generic Merger

• Conglomerate merger

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Horizontal merger

• A takeover or merger is horizontal if it involves the joining together of two companies which are producing essentially the same products or services or products or services which compete directly with each other

• Ex: Merger of Tata Industrial finance Ltd with Tata Finance Ltd

• TOMCO with HLL

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Vertical merger

• 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

• Ex: Merger of Reliance Petro Chemicals Ltd with Rliance Industries Ltd is a Back ward Integration

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Co generic Merger

• In these, mergers the acquirer and target companies are related through basic technologies, production processes or markets. The acquired company represents an extension of product line, market participants or technologies of the acquiring companies.

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Conglomerate merger

• These mergers involve firms engaged in unrelated type of business activities i.e. the business of two companies are not related to each other horizontally ( in the sense of producing the same or competing products), nor vertically

• Ex:The torrent group has identified power as one of the growing field and acquired Ahmedabad Electric Company and Surat Electric Company in order to diversify the risk of its existing line of pharmaceuticals business.

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Acquisition

• Acquisition refers to the acquiring of ownership right in the property and asset without any combination of companies. Thus in acquisition two or more companies may remain independent, separate legal entity, but there may be change in control of companies

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• Business combination, corporate restructuring and corporate reorganizations are terms used to cover mergers, acquisitions, amalgamations and takeovers. M & A are very important tools of corporate growth and thus used worldwide.

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Motives behind mergers and Aquisitions :

• Quicker way to growth.• Accessing new markets.• Taking on the global competition.• Improving operating margins and efficiencies,

and• Acquiring visibility and international brands.• Buying cutting-edge technology rather than

importing it• Developing new product mixes

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• Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins

• Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products.

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• Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.

• Synergy: For example, managerial economies such as the increased opportunity of managerial specialization. Another example are purchasing economies due to increased order size and associated bulk-buying discounts.

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• Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.

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Mergers and Acquisitions in India: the Latest Trends

• Till recent past, the incidence of Indian entrepreneurs acquiring foreign enterprises was not so common. The situation has undergone a sea change in the last couple of years. Acquisition of foreign companies by the Indian businesses has been the latest trend in the Indian corporate sector.

There are different factors that played their parts in facilitating the mergers and acquisitions in India. Favorable government policies, buoyancy in economy, additional liquidity in the corporate sector, and dynamic attitudes of the Indian entrepreneurs are the key factors behind the changing trends of mergers and acquisitions in India.