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MEANING, TYPES Divestitures result in contraction of assets or
relinquishment of control
I. Partialsell-off involves the sale of business divisionor plant of one company to another
II. Demerger involves the transfer of its businessdivisions of one company to another newly setup co.
the company whose business division is transferredis called the Demerged company
The company to which the business division istransferred is called the Resultant company
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TYPES OF DEMERGER Spin-off the type of demerger by satisfying these
conditions :
1. The resultant company is a new company2. The purchase consideration is paid only in the form
of shares in the resultant company
Split-up is a method of demerger through breaking
up of the firm in a series of spin-offs, the parentcompany no longer exists
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Equity carve out:
A parent company sells a portion of its equity in a
wholly owned subsidiary for strategic reasons Importance or benefits of Demerger
Sharper focus
Improved incentives and accountability
Division of a business empire
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TAX ASPECTS OF DEMERGER Following conditions to avail tax benefits are :
1. All assets and liabilities of demerged co. should
become the assets and liabilities of resulting co. attheir same book values
2. The shareholders of demerged co. would become theshareholders of resulting co. on proportionate basis
3. The of shareholders of demerged co. become theshareholders of resulting co.
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DEMERGER BAJAJ AUTO LTD BAL demerged into
i. BAL (Auto business)
ii. BFSL Bajaj Finance Services Ltd (wind energygeneration, insurance, consumer finance)
iii. BHIL Bajaj Holding & Investment Ltd ( invests innew business opportunities)
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OTHER TYPES OF MERGER Congenericmergers mergers between entities
engaged in the same general industry and some whatinter-related, but having no common customer-supplier relationship
Use the same sales and distribution channels to reachthe customers of both businesses
Cashmerger 1. the shareholders of one entity receivecash in place of shares in the merged entity
2. Where the shareholders of one of the merging entitiesdo not want to be a part of the merged entity
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OTHER TYPES OF MERGER. Triangular merger:
Often resorted to for regulatory and tax reasons
It is a tripartite agreement in which the target co.merges with a subsidiary of the acquirer
A triangular merger may be forward ( when the targetco merges into the subsidiary and the subsidiary
survives), or Reverse ( when the subsidiary merges into the target
co. and the target survives)
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CORPORATE RESTRUCTURING -IOWNERSHIP
Mergers &
acquisitions Leveraged
buyouts
Buy-back ofshares
Spin-offs Joint-ventures
Strategicalliances
BUSINESS
Diversifications
Out-sourcing divestment
Brandacquisitions
ASSETS
Lease back of
assets Securitization of
debt
Receivablefactoring
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CORPORATE RESTRUCTURING - II
ACQUISITIONS
Mergers
Purchase of aplant / unit
takeovers
DIVESTITURES
Sell offs
Demergers
Equity carveout
OTHER FORMS
Going private
Leveragedbuyouts
privatization
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OTHER FORMS OF
RESTRUCTURING Purchase of a unit/plant:
The acquiring co. acquires the assets and liabilities of
the division and pays cash compensation Going private:
Converting a publicly held co. into a private co.
Privatization :
Transfer of equity shares of public enterprises fromgovernment to individuals
commanding heights
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PRIVATIZATION Rationale:
I. Improvement in efficiency lower agency costs,sharper focus on profitability
II. Generation of resources
III. Promotion of popular capitalism
Drawbacks
I. Confusion in objectivesII. Lack of transparency in the sale of PSU
III. Make up of budgetary deficits
IV. Lack of political consensus
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HOLDING COMPANYA co. owns the stocks of other co. to exercise control
over them
Advantages1. Control with financial ownership
2. Isolation of risk
3. Enormous financial leverage
Disadvantages
1. partial multiple taxation Dividend of subsidiarytaxed holding company shareholders pay tax
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2.Default of debt subsidiary companies ( not legallybinding , reputation is at stake)
3. Magnified risk of debt
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LEVERAGED BUYOUTACQUIRER- SPV-TARGET
SPV 100% subsidiary
Minimum capital Highly leveraged highly debt company
TATA TEA SPV (TATA Tea) Tetley
SPV Tata Tea (Great Britain)
Equity 1. Tata Tea $ 15 mn
2. GDR - $ 45 mn
3. Equity by subsidiary of US Tata Tea - $ 10mn
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TATA- TETLEY.. $235 mn FIIs Mezzaine Financials
Benefits
I. Improve the performance of unitII. Reduce business risk
III. Cost controls
IV. Sell off disposable assets
Best LBO
1.Good management team
2.Stable cash flows
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ACCOUNTING ASPECT OF
AMALGATION3. Potential for operational improvement
4. Easy to exit
Accounting for Amalgamations (AS -14)1. Amalgamation in the nature of merger
2. Amalgamation in the nature of purchase
Amalgamation in the nature of merger (conditions)
1. All assets and liabilities of the transferor companybefore amalgamation should become the assets andliabilities of the transferee company
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ACCOUNTING..2. Not less than 90% of the face value of the equity
shareholders of the transferor company shouldbecome the shareholder of transferor company
3. Payment of purchase consideration in the form ofequity shares only
4. The business of the transferor company is carried on
by the transferee company5. Book value of assets & liabilities of transferor
company as the same in books of transferee company
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ACCOUNTING. Any of the conditions not satisfied amalgamation in
the nature of acquisition
Accounting treatment for merger pooling of interest
method Accounting treatment of acquisition purchase
method
Pooling of interest method
1. Aggregating of book values of assets and liabilities ofboth the companies
2. The adjustment of swap ratio is done in the reserves
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POOLING OF INTEREST METHOD -
FEATURES1. The same value of assets, liabilities and reserves of
the transferor co. are recorded by the transferee co.
2. Purchase consideration is valued at the par value ofthe shares issued
3. Effect of changes in accounting policies as per AS-14
4. Balance of P&L A/c of both transferor and transferee
company need to be aggregated5. The identity of the reserves is preserved
transferors books
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FEATURES.6. The difference between the amount recorded as
purchase consideration and the share capital oftransferor co. should be adjusted in the reserves
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ACCOUNTING.Amalgamation in nature of acquisition/purchase
I. The assets and liabilities are transferred at fairmarket values
II. The excess of the purchase consideration over thenet book values of assets and liabilities is treated asgoodwill
III. The deficit of purchase consideration over the netbook value of assets and liabilities is treated ascapital reserve
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PURCHASE METHOD
(ACQUISITION)1. Assets and liabilities are entered at existing carrying
amounts OR
2. Purchase consideration should be allocated toindividual identifiable assets and liabilities on thebasis of fair value at the date of amalgamation
3. Purchase consideration is valued at the market price
of the shares issued by the transferee company4. All statutory reserves should appear in transferee
companys balance sheet
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PURCHASE METHOD .5. Amalgamation Adjustment A/c Dr. .
To Statutory Reserves A/c ..
6. Statutory reserves Liabilities side7. Amalgamation Adjustment Assets side
8. Good will amortized over 5 years / useful life
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POOLING OF INTEREST METHOD Vs
PURCHASE METHODPOOLING OF INTEREST PURCHASE METHOD
Purchase consideration basis at par value of shares
Assets & liabilities at bookvalue in the transfereecompanys books
Reserves of transferorcompany appear( as adjusted
with difference between sharecapital and p.c ) in transfereecompanys books
Purchase consideration basis of market value of
shares Assets & liabilities at fair
value in the transfereecompanys books
Only statutory reserves of
transferor company appear inthe books of transfereecompany ( Dr. amalgamationadj a/c , Cr. Statutory reserve)
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Pooling of Interest Purchase method
No good will or capitalreserve appears in transfereecompanys books
Goodwill or capital reserveappears in transfereecompanys books
- G.W when P.C> Net assets
- Capital Reserve when P.C