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PRESENTED BY:-PRITPAL SINGH BHULLAR
B.TECH(MECHANICAL), MBA (FINANCE)
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A group can sell the assets of an entire company or business
unit such as subsidiary, a smaller unit or a product line.
Two types of sell off A) Spin Off
B) Divestiture
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Create new separate legal entity.`
Shares are distributed among existing shareholders on parent
company on pro-rata basis.
New entity has power to make independent decisions.
Types of Spin Off
A) Split offs
B) Split ups
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1) Tax free to company and shareholders receiving shares in spin
off
2) Smaller underwriting discounts and fees
3) Effective method for minimizing the execution risk ofdivestiture ( Third party negotiations , Market conditions)
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Lack of Liquidity
No monetarily gain to parent company
New company has to incur expenses for issuing new shares
Selling pressure from institutions and index funds immediatelyafter spin off. This leads to downward pressure on the stock
price in the short term.
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Sun Pharma demerged its R&D business as a separate entity
Sun Pharma Advance research company(SPARC) to reduce
R&D cost. Dr. Reddys formed new drug development company Perlecan
Pharma, in may 2006.
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Acquisition of all the stocks or assets by a small group of
investors, primarily financed by borrowing.
STEPS OF LBO Arrangement of finance
Taking the company private
Restructuring
Reverse LBO
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10% of financing is undertaken by LBO specialist
Rest comes from Merchant Bankers, Venture capitalists and
commercial banks
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Shares and assets of target company is purchased by Buy-out
specialist
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Consolidation and reorganizing the existing production
facilities
Changing the product mix
Reducing excess employment Reducing R&D costs and costs related to purchasing new
plants and equipments
Getting better terms from suppliers
Selling of parts of corporation to reduce debts
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Investors may take the company public again if the goals set by
the LBO groups have already been achieved.
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Major funds for financial restructuring is borrowed from
market. Cost of debt increase.
Many employees lose their jobs
New management concentrates on short term goals(reductionof debt burden). It hampers firms growth in long run.
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EXPENDITURE AMOUNT ( in mn pounds)
Tetley Acquisition Cost 271
Banks and legal services 9
Tetleys working capital
requirement
25
Total 305
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Total Amount 305
Through Debt 235
Through Equity 70
Total Debt 235
Rabo bank 185
Schroders 10
Prudential MezzanineCapital
10
Intermediate Capital Group 30
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Sale of portion of business to third party
Assets, Product lines or subsidiaries
No new legal entity is created
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Focus on core business for the divesting firm
Declining profitability of business
Getting rid of unprofitable business
Need for funds for other activities
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Grasim Industries divested its loss making fabric
manufacturing in Gwalior to Melodeon exports ltd. And its
associates. Now company decided to manufacture its both
brands (Grasim and Graviera) at single location at Bhiwani.
ITC group divested its ITC classic Finance which was loss
making company. ITC finance then merged with ICICI
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Tool used against hostile takeover
Shares are undervalue in the market
Company has surplus funds
METHODS
A) From existing shareholders on a proportionate basis through
tender offer
B) From Odd-Lot holders
C) From open market through:- Stock exchange
Book building process
Through Dutch auctions
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Company inform its shareholders of the price at which it
wishes to buy back its shares.
Company makes public its intention to buy back its shares
through leading newspapers. Company specifies the date by which the name of shareholders
has to be determined.
Offer remains open to shareholders for not less than 15 days
and not more than 30 days.
The date of opening the offer should not be earlier than 7 daysafter or later than 30 days after the date specified for the
determination of the name of shareholders.
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Company fixes the maximum price for the buy back through a
special resolution.
Appoints a Merchant Banker
Public the details of the brokers and stock exchanges throughwhich the purchases would be made by making public
announcement
Stock exchanges should have electronic trading facilities
Company and merchant banker have to inform the stock
exchanges about shares purchased.
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A special resolution needs to be passed specifying the
maximum price of the buy back.
The company announces the merchant banker and makes a
public announcement regarding this at least 7 days prior to thecommencement of buy back
Company should submit a copy of process to SEBI within two
days with specified fees
Company should arrange bidding centers minimum number 30
Company explains the method of book building process. Buy back price is decided jointly by merchant bankers and
company.
Highest price accepted becomes the buy back price.
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The goal of a Dutch auction is the find the optimal price at
which to sell a security.
Price is set by the shareholders by specifying the volume of
shares they would like to sell. Shareholders are asked to inform the company about the
number of shares and price at which they would like to sell
their shares.
Offer is open for minimum 15 days and maximum 30 days.
Maximum price is few percentage points higher than marketprice.
The price a shareholder gets in a Dutch auction is usually less
than what he would get in a tender offer.
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If the number of shares tendered exceeds than expected, then
the company purchases less than all shares tendered at or
below the purchase price on a pro rata basis to all who tendered
at or below the purchase price.
If too few shares are tendered, then the firm either cancels the
offer or it buys back all tendered shares at the maximum price.
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Reliance energy buy back its shares for a maximum price of
Rs. 525 per share to reduce volatility its share price.
Bajaj Auto ltd. Buy Back its shares up to15
% of its paid upshare capital at a maximum price of Rs.450 per share.
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A special resolution has to be passed in general meeting of the
shareholders
Buyback should not exceed 25% of the total paid-up capital
and free reserves A declaration of solvency has to be filed with SEBI and
Registrar Of Companies
The shares bought back should be extinguished and physically
destroyed
The company should not make any further issue of securitieswithin 2 years, except bonus, conversion of warrants, etc.
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Unused Cash
Tax Gains:- Dividends are taxed at higher rate thancapital gains companies prefer buyback to reward
their investors instead of distributing cash dividends,as capital gains tax is generally lower.
Market Perception :- In October1987 stock prices in USstarted crashing. Expecting further fall many companies like
Citigroup, IBM et al have come out with buyback offers worthbillions of dollars at prices higher than the prevailing rates.
Increased promoters stake Exit option