Types of Corporate Restructuring – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions
Question 1.
It is generally accepted that all mergers and acquisitions have one common goal regardless of their category or structure. Give your opinion; indicating the benefits that companies can derive upon by merging.
OR
Question 2.
“Circumstances or reasons that prompt or motivate the Management to resort to Corporate Restructuring” – Briefly analyze the phrase giving or (citing certain noted mergers or demergers during the last couple of years.
Answer:
Mergers, amalgamations and acquisitions are forms of inorganic growth strategy. Such corporate restructuring strategies have one common – goal viz. to create synergy. Such synergy effect makes the value of the combined companies greater than the sum of the two parts.
Basically, synergy may be in the form of increased revenues and/or cost savings. Corporate Restructuring aims at improving the competitive position of an individual business and maximizing its contribution to corporate objectives.
Through mergers and acquisitions, companies hope to benefit from the following:
1. Increase in Market Share – Merger facilitates increase in market share of the merged company. Such rise in market share is achieved j by providing an additional goods and services as needed by clients. Horizontal merger is the. key to increasing market share. (E.g. Idea and Vodafone)
2. Reduced Competition – Horizontal merger results in reduction in competition. Competition is one of the most common and strong reasons for mergers and acquisitions. (HP and Compaq)
3. Large size – Companies use mergers and acquisitions to grow in size and become a dominant force, as compared to its competitors. Generally, organic growth strategy takes years to achieve large size. However, mergers and acquisitions (Le. inorganic growth) can achieve this within few months. (E.g. Sun Pharmaceutical and Ranbaxy Pharmaceutical).
4. Economies of scale – Mergers result in enhanced economies of scale, due to which there is reduction in cost per unit. An increase in total output of a product reduces the fixed cost per unit.
5. Tax benefits – Companies also use mergers and amalgamations for tax purposes. Especially, where there is merger between profit-making and loss-making company. Major income tax benefit arises from set off and carry forward provision u/s 72A of the Income-tax Act, 1961.
6. New Technology – Companies need to focus on technological devel¬opments and their business applications. Acquisition of smaller companies helps enterprises to control unique technologies and develop a competitive edge. (E.g. Dell and EMC)
7. Strong brand – Creation of a brand is a long process; hence companies prefer to acquire an established brand and capitalize on it to earn huge profits. (E.g. Tata Motors and Jaguar)
8. Domination – Companies engage in mergers and acquisitions to become a dominant players or market leaders in their respective sectors. However, such dominance shall be subject to regulations of the Competition Act, 2002. (E.g. Oracle and I-Flex Technologies)
9. Diversification – Amalgamation with companies involved into unrelated business areas leads to diversification. It facilitates the smoothening of business cycles effect on the company due to multiplicity of businesses, thereby reducing risk. (E.g. Reliance Industries & Network TV 18)
10. Revival of Sick Company – Today, the Insolvency and Bankruptcy Code, 2016 has created additional avenue of acquisition through the Corporate Insolvency Resolution Process.
Notable mergers/demergers/acquisitions that took place are Myntra acquiring Jabong, RIL acquiring Network TV 18, Sun Pharma absorbing Ranbaxy; Wirpo demerger, Reliance Industries demerger.
Question 3.
Mergers and acquisitions have one common goal of creating synergy that makes the value of the combined companies greater than the sum of the parts – Analyse briefly to focus on the visible benefits of such combinations.
Answer:
All mergers and acquisitions have one common goal, Le., to create a synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved or not. Synergy may be in the form of higher revenue streams and cost savings.
By merger, the companies expect to reap the following benefits:
1. Synergy – Synergy implies that combined result of two enterprises is better that simple addition of each of them, ie. 1+1 > 2. It means that merger leads to operational efficiencies. The combination of operations creates integration, which in turn increases earnings potential and reduces cost.
Synergies can be expected to flow from highly focused operational efforts, rationalization and simplification of processes, rise in productivity, better procurements, and eliminate duplication.
It leads to combining their resources, such as production facilities, marketing channels, managerial skills etc. Synergy is based on an ability of an enterprise to utilize its resources for better results in combination with another enterprise. E.g. HLL and TOMCO, Flipkart and Myntra.
2. Better utilization of capacities – Companies are able to use their spare capacities to better effect through mergers and amalgamations. They may use the spare capacities/resources of each other and increase their scale of operations. (E.g. HDFC Bank and Centurion Bank)
3. Reduction of gestation period -Starting a new business would take a long time to sustain and grow in the competition. However, merger provides a well-settled platform for quick growth. Taking over an existing profitable business will reduce the efforts of starting from scratch.
4. Improving debt-equity position – Companies with high debt (leverage) prefer to merge with equity-oriented companies to balance their debt-equity position. This reduces risk and creates stability. This will allow better tax shield and improving shareholders wealth.
5. Globalization – Deregulation, de-licensing, globalization have forced most companies to consolidate their operations. Globally, there are huge demand-supply gaps and these are tapped through mergers and amalgamations.
6. Improved market reach- and Industry Visibility – Companies acquire other companies to reach new markets and increase their earnings. A merger may expand two companies’ marketing and distribution channels thereby giving new sales opportunities. A merger can also improve a company’s position in the industry.
7. Large size – Companies use mergers and acquisitions to grow in size and become a dominant force, as compared to its competitors. Generally, organic growth strategy takes years to achieve large size. However, mergers and acquisitions ie. inorganic growth can achieve this within few months. (E.g. Sun Pharmaceutical and Ranbaxy Pharmaceutical)
8. Economies of scale – Mergers result in enhanced economies of scale, due to which there is reduction in cost per unit. An increase in total output of a product reduces the fixed cost per unit.
9. Tax benefits – Companies also use mergers and amalgamations for tax purposes. Especially, where there is merger between profit-making and loss-making company. Major income tax benefit arises from setoff and carries forward provision u/s 72A of the Income-tax Act, 1961.
10. New Technology – Companies need to focus on technological developments and their business applications. Acquisition of smaller companies helps enterprises to control unique technologies and develop a competitive edge. (E.g. Dell and EMC)
Question 4.
“Corporate Restructuring is an inorganic growth strategy that significantly changes a company’s business model, management team or financial structure to address challenges and increase shareholders’ value”. Elucidate the statement with different options of Corporate Restructuring.
OR
Question 5.
“Inorganic growth provides an organisation with an avenue for at¬taining accelerated growth as compared to the organic growth in general”. Comment on the statement.
Answer:
Liberalization, Privatization and Globalization of Indian economy led to relaxation of licensing, inflow of foreign investments, boost to private section, Govt, disinvestments etc. Due to these changes, traditional businesses became dynamic, rise in cut-throat competition etc.
Aligning business activities in line with the prime objective of maximizing shareholders’ wealth has driven large corporate entities into taking various strategic decisions.
Basically, organic growth strategy relates to business or financial restructuring within the organization that results in higher customer base, increased sales, better revenue etc. Organic growth does not result in any change of corporate entity.
Inorganic growth strategy includes change in the corporate identity through involvement/alliance/association with other entities.
In an organic growth strategy, there is change in the business model, along with management styles, financial structure etc.
Mergers, demergers, disinvestments, takeovers, joint ventures, franchising, strategic alliances, slump sale are some options that are adopted as a measure to achieve an organic growth strategy.
Rationale for inorganic growth strategy:
- Orderly redirection of activities,
- redeployment of surplus cash in other enterprises,
- utilizing inter-dependence among businesses,
- risk reduction through diversification
- development of core competencies
- economies of scale through vertical, horizontal integration etc.
Question 6.
Distinguish between merger and acquisition (any three points)
Answer:
| Merger | Acquisition |
| 1. Merger occurs when two separate entities, come together to create a new joint organization in which both are partners. | Acquisition refers to the purchase of one entity by another entity. |
| 2. One or more companies are dissolved and new company may be created | No company is dissolved and no new company is created, i.e. both continue |
| 3. In merger, two companies consolidate into a single entity with a new ownership and management structure. | In acquisition, one company takes over all total operational management control of another company. |
Question 7.
“Corporate restructuring aims at different things at different times for different companies but the single common objective in every restructuring exercise is to eliminate the disadvantages and combine the advantages.” Comment on the statement highlighting various needs for undertaking corporate restructuring.
Answer:
Corporate Restructuring means re-arranging business of a company for increasing its efficiency and profitability. Restructuring is a method of changing the organizational structure in order to achieve the strategic goals of the organization. It involves dramatic changes in an j organization.
The strategy adopted shall depend on the purpose or organizational goals and hence a different strategy shall apply to different companies. Corporate Restructuring aims at different things at different times for different companies and the single common objective in every restructuring exercise is to eliminate the disadvantages and combine the advantages.
The above statement is true in every sense. The various needs for undertaking a Corporate Restructuring exercise are as follows –
- focus on core competence, operational synergy, cost reduction and efficient allocation of managerial capabilities
- balance utilization of available infrastructure and resources
- economies of scale by expansion to exploit domestic and international markets;
- revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a healthy company;
- acquiring constant supply of raw materials and access to scientific research and technological developments
- capital restructuring by appropriate mix of loan and equity funds to reduce the cost of servicing and improve return on capital employed
- improve corporate performance to achieve competitive advan¬tage by adopting the radical changes brought out by information technology.
Question 8.
“Corporate Restructuring aims at significant change in a Company’s business model, management team or financial structure to address challenges and Increase shareholders’ value.” Elucidate the statement with relevance to business strategy.
Answer:
Corporate Restructuring means re-arranging business of a company for increasing its efficiency and profitability. It involves dramatic changes in a company to achieve its objectives.
It is the process of significantly changing a company’s business model, management team or financial structure to meet the challenges and increase shareholders’ value.
Restructuring may involve major retrenchments and sale of non-value adding activities. It may involve outsourcing of activities for cost reduction.
In fact, restructuring may also involve the company’s sale or a merger with another company.
Companies use restructuring as a business strategy to ensure their long-term viability.
The common reasons for restructuring involve loss of market share, the reduction of profit margins or declines in the power of their corporate brand.
Other factors responsible of restructuring include the inability to retain talented manpower and major changes to the marketplace that directly impact the corporation’s business model.
Corporate Restructuring is concerned with arranging the business activities of the company as a whole so as to achieve certain pre-determined objectives at corporate level.
Thus, the factors demanding corporate restructuring are –
- To focus on core strengths,
- To have access to better technology,
- To improve debt-equity ratio,
- To have better market share,
- Proper redirecting firm’s activities,
- Employing surplus cash generated from one business to finance growth of other business,
- Risk reduction through diversification etc.
Question 9.
“Restructuring is resorted to in various forms with objectives such as profitability improvement, augmenting more resources, relief from competition and methods take the forms like acquisition, merger, takeover, leveraged buy outs, slump sale, overseas acquisitions etc.” Illustrate certain instances that have happened in India setting examples of benefits in Corporate Restructuring.
Answer:
Corporate restructuring is a process in which a company changes the organizational structure and processes of the business.
The most common form of corporate restructuring are mergers/ amalgamations, acquisitions/takeovers, financial restructuring, di-vestitures/demergers and buyouts.
Corporate Restructuring can also be resorted in any of the forms like slump sale, leveraged buyout, management buyouts, spin-off etc.
L&T Ltd. demerged its cement division into a separate company Ultratech Cement Co. Ltd. Later, the resulting company was transferred to Grasim Industries (Aditya Birla Group). Post deal, L&T benefited from realized value of its cement division and focus on their core businesses such as engineering and construction. Grasim Ind. was benefited through economies of scale, increased capacity, overall competitiveness, multifunctional synergies and combined resource pool.
Tata Steel Ltd. acquired overseas Corus Group Pic. that drastically improved the production synergies for Tata Steel Ltd. Through the acquisition, Tata Steel Ltd. could combine its low-cost production with the high quality of Corus. It resulted utilization of wide retail and distribution network, technology transfer and enhanced R&D capabilities.
Dr. Reddy’s Laboratory Ltd. is known for their inorganic growth strategies. Since its formation in 1984, it has acquired many companies such as Benzex Lab (1984), Meridian Healthcare (2002), Falcon (2005), Betapharm (2006), DowPharma Small Molecules Business (2008), BASF (2008), Alliance with GlaxoSmithKline (2009).
Piramal Healthcare transferred its undertaking (Formulation business) to Abbot Healthcare on a slump sale basis. The deal was finalized for a lumpsum consideration. The deal also contained a non-compete clause, which prohibited Primal group from entering in similar for¬mulation business. As per Section 50B of the Income Tax Act, capital gains arising from the deal were taxed, without any indexation benefit (applicable for long term assets)
Bharti Airtel Ltd. acquired Zain Telecom (Africa business) through a leveraged buyout strategy. The acquisition of Zain Africa Internation¬al BV was majorly financed through borrowed funds. Bharati Airtel formed a Special Purpose Vehicle (SPV) and the deal was structured through the SPV. Hence, the Balance Sheet of Bharati Airtel was untouched. However, as a guarantor for special purpose vehicles, Bharti Airtel assumes full responsibility.
Question 10.
“Smaller is manageable but Bigger is Beautiful” are not the only reasons for indulging Corporate Restructuring exercise by a Management in managing the establishments. Elucidate the statement indicating need, scope and modes of corporate restructuring.
Answer:
Corporate Restructuring means rearranging the business of a company for increasing its efficiency and profitability. Today, restructuring is not an option but a conscious choice made by companies.
Every corporate restructuring exercise aims at eliminating disadvantages and to combine advantages. It plans to achieve synergy benefits through a well-planned restructuring strategy.
It is said that ‘small is manageable, but bigger is beautiful.’ This statement is true due to the varied advantages of a bigger enterprise.
A large organization provides benefits of synergy and economies of scale. Further, a company may also choose to reduce its size for better management, via demerger.
A well-structured capital restructuring exercise targets the following benefits –
- focus on core strengths, operational synergy and efficient allo¬cation of scarce resources
- augmenting effectiveness of managerial capabilities and available infrastructure.
- economies of scale by expansion and diversification to tap global markets.
- rehabilitation of sick units by adjusting its losses with the profits of a healthy company.
- ensuring regular supply of scarce raw materials
- access to scientific research and technological developments.
- achieving a good balance between borrowed funds and equity funds, i.e. reduce cost of capital.
- improve corporate performance through competitive advantage.
Strategies adopted by companies include mergers, demergers, take overs, joint ventures, strategic alliances, franchising, slump sale.
However, any corporate restructuring strategies needs considerations of various factors such as valuation, funding, legal, procedural, taxation, stamp duty, accounting, and competition etc.
Question 11.
Discuss “Strategic Alliance” and “Joint Venture” as corporate re-structuring strategies.
Answer:
Corporate restructuring is the process of significantly changing a company’s business model, management team or financial structure to address challenges and increase shareholder value.
Strategic Alliance:
Strategic Alliance is an agreement between two or more parties to collaborate/cooperate with each other in order to achieve certain commercial objectives.
In a strategic alliance, all participating companies retain their independent existence. In other words, no separate entity is created.
Strategic alliance is a partnership between enterprises for common benefits such as cost reduction, technology sharing, product development, market access etc. ’
The basic idea is to pool resources and facilitate innovative ideas and techniques with the common objective of sharing benefits. Eg. Flipkart and OLX.
Strategic alliances allow organizations to pursue opportunities at a faster pace. It provides access to additional knowledge and resources that are held by the other party.
Joint Venture:
Joint Venture is a separate entity formed by two or more companies to undertake commercial activities together. In a joint venture, a new enterprise is formed with participation in ownership, control and management of two or more parties.
The parties agree to contribute equity to form a new entity and shares the revenues, expenses and capital of the company. E.g. Vistara Airlines is a JV between Tata and Singapore Airlines.
A joint venture may be of two types:
- Project-based JV entered into by the companies in order to achieve specific tasks.
- Functional based JV is entered into by companies in order to achieve mutual benefit.
A joint venture provides access to assets, knowledge and funds from both of its partners it can combine the best features of those companies without altering the parent companies.
Question 12.
“Global competition drives enterprises to become globally fit to : face global challenges prompting them for corporate restructuring”. Elucidate.
Answer:
Industrial Policy of 1991, introduces liberalization, privatization and globalization in the Indian economy. This led to relaxation of licensing, inflow of foreign investments, foreign technology, boost to private section, Govt, disinvestments etc.
Due to these changes, traditional businesses became dynamic, Govt. protection to private sector reduced, entry of multinationals in Indian markets etc. Hence, there was considerable rise in number of suppliers and cut-throat competition.
In view of such cut-throat competition, there is a need to align business activities with a focus on maximizing shareholders’ wealth. This gives rise to various strategic decisions.
Competition is an important driver for change, and hence corporate restructuring becomes vital. Competition drives technological development, cost cutting and value addition. Innovations and inventions happen out of necessity to meet challenges of competition.
Globalization leads to increased competition. Such competition can be related to product and service cost and price, target market, technological adaptation, quick response, quick production by companies, etc. Such competition drives people to change and adapt and face global challenges.
Thus, to be globally competitive and survive in the business with surplus, an enterprise needs to restructure with inventions and innovations.
Question 13.
Corporate restructuring is one of the means employed by the company to achieve strategic and financial synergies. It is a process undertaken by corporates for arranging the business for increased efficiency and profitability. In context of the above statement, briefly discuss the scope and modes of corporate restructuring.
Answer:
Corporate Restructuring focuses on cost reduction and improving efficiency and profitability.
When a company wants to grow or survive in a competitive environment, it needs to restructure itself and focus on its competitive advantage.
A larger company can achieve economies of scale. A bigger size also enjoys a higher corporate status. Such status allows it to take advantage of raising funds at lower cost. Such reduction in the cost of capital results into higher profits.
Synergy implies that combined result of two enterprises is better that simple addition of each of them, i.e. 1+1 > 2. The combination of operations creates integration, which increases earnings potential and reduces cost. Synergies flow from focused operational efforts, standardization and simplification of processes, rise in productivity, better procurements, and eliminate duplication. It leads to combining resources, such as production facilities, marketing channels, managerial skills.
- To achieve strategic and financial synergies, following types of restructuring can be performed:
- Merging of two or more companies.
- Purchasing assets of another company
- Acquisition of equity shares of another firm resulting in change of ownership
- Financial re-engineering
- Buying-back of shares
- Issuing different types of debts to meet the need for fixed and working capital
- Infusing foreign debts and equity
Further, to achieve internal reorganizing, following strategies –
- Reducing the manpower
- Closing uneconomical/non-value-adding units
- Cost reduction programs
- Disposing off obsolete assets
- Reorganizing the business processes
Different modes of Corporate Restructuring are as under:
- Merger
- Demerger
- Reverse Merger
- Disinvestment
- Takeovers
- Joint Venture
- Strategic alliance
- Franchising
- Slump Sale.
Question 14.
The unpalatable or inevitable recession can also be a key factor to trigger Mergers/Takeovers-how far is it proved true?
Answer:
Corporate restructuring is the process of significantly changing a company’s business model, management team or financial structure to address challenges and increase shareholder value.
The most common form of corporate restructuring are mergers/ amalgamations, acquisitions/takeovers, financial restructuring, di-vestitures/demergers and buyouts.
The primary factors that necessitate mergers, amalgamations and takeovers are –
- synergy benefits, economies of scale;
- reducing competition, diversification;
- cost reduction; tax advantages;
- technology benefits, globalization etc.
However, another important reason for entering into merger and takeover deals is the periodical, cyclical and yet inevitable slowdown and recession.
The world has seen recessionary conditions during the year 2008-09 due to the sub-prime crisis in USA and its effects spread across Europe, Later, in 2020, the world economy is badly affected by the covid-19 pandemic.
Mergers, acquisitions and strategic alliances take centre-stage in such slowdown phases to overcome economic recession and to strengthen, re-focus and position the company for increased growth and profit-ability.
Companies make acquisitions to gain access to new markets, products, technologies, customers and talent at a faster pace. There were the examples of organizations that have adopted, survived and prospered during recessionary periods.
Studies have shown that companies that adopted such inorganic growth strategies achieved radical boost and profitability in better times following the recession.
Question 15.
“Mergers, Demergers or Reverse Mergers are resorted to enhance, utilise or protect the brand value already earned by an enterprise”. Ex-plain how the reputation and goodwill associated with a brand name of the Company could be advantageously exploited.
Answer:
Corporate Restructuring is a comprehensive process where a com¬pany consolidates its business operations and strengthens its position in the market. The most common form of corporate restructuring are mergers, amalgamations, acquisitions, takeovers, demergers and buyouts.
Often, companies use merger and acquisition strategy to control a brand belonging to another company. But, acquiring a new product is different from acquiring a brand name.
A brand is a distinguishing symbol, mark, logo, name, word, sentence or a combination of these items that companies use to distinguish their product from others in the market.
Brand is an intangible asset, which contributes to the profit earning of a company. Following is the importance of brand value –
- brand connects the customers’ mind to the manufacturer;
- associated with better quality of product and service;
- allows premium pricing etc.
Thus, merger and takeover deals focus on strong brand acquisition and capitalize on it to earn huge profits. Companies want to take advantage of the goodwill and brand value
For example – Tata Motors acquired Jaguar and Land Rover, Proctor & Gamble acquired Gillette, Facebook acquired WhatsApp etc.
Question 16.
What are the various types of restructuring?
Answer:
Restructuring is the process of significantly changing a company’s business model, management team or financial structure to address challenges and increase shareholder value. Basically, restructuring maybe an organic or inorganic growth strategy.
img
Financial Restructuring of a company involves restructuring of capital structure of a company, including raising funds for new projects. It is a rearrangement of the financial structure to make the company’s finances more balanced. In other words, it is an adjustment of the debt-equity ratio. Financial restructuring includes mergers, acquisitions, joint ventures etc.
Technological Restructuring involves alliances with other companies to get better technology. Patents and other IPR are vital for techno-logical restructuring.
Market Restructuring includes decision-making regarding the product or service market segments. It is a rearrangement of the market segments, on the basis of core competency of a company.
Organizational Restructuring means to setup internal structures, procedures, systems etc. to improve employee capability in an organization. A strong organizational structure ensures positive responses of employees towards change. It involves employee participation, co-operation arid integrity towards enterprise goals. It shall be noted that organizational restructuring is a prerequisite for above three kinds of restructuring.
Question 17.
Corporate restructuring is a matter of great importance and a com-pany shall leave no stone unturned. Comment with reference to factors to be considered.
Answer:
Corporate restructuring is a comprehensive process involving detailed study, research and analysis of various factors, across multiple disciplines. Given below are few important aspects to be considered before and after the restructuring:
- Legal and procedural – compliance of various laws
- Economic – general economic condition, market share, global presence etc.
- Taxation – set-off of losses, capital gains tax, and expenses admissible for tax purposes etc.
- Accounting – method of accounting, compliance of AS-14, Ind AS 103
- Valuation – method of valuation adopted, deciding share-exchange ratio etc.
- Financial – deciding purchase consideration, modes of discharge, cost-benefit analysis etc.
- Stamp Duty – computation of stamp duty liability on various transfers of assets etc.
- Due Diligence – careful investigation, risk assessment, cautious ap-proach
- Competition – effect on competition, compliance of Competition Act, creation of monopolies.
- Human and Cultural – job security, integration of employees, harmo-nization of cultures etc.
Intangible assets – utilization of licenses and permissions issued to a transferor company by the transferee company for example: pollution control, SEBI permission, stock exchange listing.
Question 18.
Profess s play a vital role in the entire process of corporate restructuring.cuss the statement with reference to role of professionals.
Answer:
Corporate Restructuring is a comprehensive process where a company consolidates its business operations and strengthens its position in the market.
Corporate restructuring process involves strategic decision making based on market study, competitor analysis, forecasting of various synergies as well as social impact.
It involves professionals like business experts, Company Secretaries, Chartered Accountants etc., who are involved in restructuring process.
Following are the areas, where professionals play a vital role –
- Technical aspects such as valuation, and swap ratio are involved,
- Legal and procedural aspects with ROC, NCLT etc.,
- Tax benefits, stamp duty etc.
- Evaluation of human-cultural integration.
- A Company Secretary is a vital link between management and stakeholders and involved as coordinator, in addition to their responsibility for legal and regulatory compliances.
- The restructuring deals are becoming complex and hence it necessitates the extended role of professionals in terms of quality and within time-frame.