1. CORPORATE RESTRUCTURING MODULE 4

2. SWAP RATIO (SHARE EXCHAGE RATIO) In this method, an acquirer co issues its shares to the share holders of the target co in exchange of shares of the target co in a specified ratio known as swap ratio or share exchange ratio. Swap ratio or exchange ratio is simply the ratio of the price offered for acquiring one equity share of the target co divided by the valuation of one equity share of the acquirer co.

3. In practice, in a no. of deals, the current market values of the acquiring and acquired firms are taken as the basis for exchange of shares. Swap Ratio = Share price of acquired firm Share price of acquiring firm The Exchange Ratio in terms of the market value of shares will keep the position of the shareholders in value terms unchanged after the merger since their proportionate wealth would remain at the pre-merger level.

4. Case Study ABC Co XYZ Co Profit after Tax (Rs.) 40,0008,000 No. of shares 10,0004,000 EPS (Rs) 4 2 Market value per share(Rs) 60 15 Price Earning ratio (times) 15 7.5 Total Market Capitalization (Rs.)6,00,00060,000

5. ABC co is thinking of acquiring XYZ Co. thro exchange of shares in proportion to the market value per share. Given the P/E Ratio as 15 and 7.5 respectively, what would be the impact on the EPS after merger? Swap Ratio = 15 = 0.25 60 The total no. of shares offered by ABC Co to XYZ Co. = Swap ratio x pre-merger no. of shares of XYZ co = 0.25 x 4000 = 1,000

6. The total no. of shares after the merger would be 10,000 + 1,000 = 11,000 The combined earnings (PAT) after the merger would be : 40,000 + 8,000 = 48,000 EPS after merger = Post merger combined PAT Post merger combined shares = 48,000/ 11,000 = Rs. 4.36 The EPS of ABC co (acquiring firm) increased from Rs.4 to Rs.4.36 but for XYZ Co (the acquired firm) shareholders, it declined from Rs.2 to Rs.1.09 (Rs.4.36 x 0.25 = Rs.1.09)

7. Strategic Alliances May be defined as a co-operation between two or more organizations with a common objectives, shared control an contributions (in terms of resources, skills and capabilities) by the partners for mutual benefit. Strategic alliances are non-equity based ie, none of the partners invest in any equity capital in such alliances. But funding is involved and it can be done by any of the parties or all of them.

8. Objectives/purposes/reasons for strategic alliances (a)Development of a new product: In pharmaceutical co and research laboratories for R&D. Boeing has Japanese partners for an R&D project. (b)Development of a new technology: Alliance leverages the resources and technical expertise of two or more co. for long term. (c)Reducing manufacturing cost : Co-production, common in the pharma industry, is a good form of strategic alliance to reduce manufacturing cost thro economies of scale.

9. (d)Entering the new markets : this is often the objective in international business. Many foreign co enter into strategic alliances with some local co (host country) to enter into and establish in that country. (e)Marketing and sales : many manufacturers in India have marketing and sales arrangements with co like MMTC and Tata Exports for both domestic and international marketing. (f)Distribution : where distribution represents high fixed cost, potential competitors swap their products for distribution in the respective markets where they have well established distribution system

10. A good example of synergistic benefits from a strategic alliance is that of Taj Hotels and British Airways. Both create mutual advantages thro complementary of hotel and airline service. In the field of agriculture, Hindustan Lever and ICICI have entered in to a partnership project for contract farming of wheat and rice in MP and Haryana. In banking, Indian bank, Corporation bank and Oriental bank of commerce have entered into and alliance.

11. Joint Ventures A JV may be defined as a business venture in which two or more independent cos join together, contribute to equity capital in equal or agreed proportion and establish a new co. Long term ventures formed for an indefinite period. Some can be contractual, that is, formed for a fixed period of time and dissolved at a specified date. Contractual JVs are non-equity based.

12. Reasons for JVs The new business is uneconomical for a single org to undertake. To share/ distribute risk there is need for more than one participating co. The technology for the new business can be shared only thro a JV. Competence or capabilities of two or three co can be brought together to produce synergy for better market impact, competitiveness and success of business ( Eg, Maruti-Suzuki)

13. A JV is the only way to gain entry into a foreign market particularly, if the foreign govt requires that a local partner has to be chosen ( OTIS and Mitsubishi elevators in China) Common Characteristics of JV An agreement between the parties for common long- term business objectives such as production, marketing/sales, research co-operation, financing etc. Pooling of assets and resources like plant, machinery, equipment, finance, management know-how, intellectual property rights etc. by parties for achievement of the agreed objectives. Characteristics of the pooled assets and resources.

14. Pursuance of objectives thro a new management system. Sharing of profits from the joint ventures between the parties in proportion to their capital (equity) contributions. Liabilities are also shared in the same way. JVs are normally formed within the same industry.

15. Reasons for failure of JVs The expected technology never developed Inadequate pre-planning Agreements could not be reached on alternative approaches to solve the basic objectives of the joint venture. Management difficulties may be compounded because of inability of parent co to control or compromise on difficult issues.

16. Cultural differences Profitability of foreign operations Taxability characteristics of joint-venture products. Importance of financial and other conflicts. Eg, break up of TVS with Suzuki and Kinetic with Honda.

17. Sell offs and divestitures Sell-offs and divestitures are an integral part of corporate restructuring. Large companies with diversified business interests may divest some of their business to focus on a few core business. Firms can sell assets of an entire co or of some business unit, such as a subsidiary, a smaller business unit or a product line.

18. Reasons for divestiture The assets are worth more as part of the buyer’s organization than as part of the seller’s. The assets are actively interfering with other profitable operations of the seller. Efficiency gains Refocus Tax reasons

19. A divestiture is a sale of portion of the firm to an outside party. The sale finalized is usually in cash, marketable securities or combination of both. An equity carve-out is the variation of the divestiture that involves the sale of the equity interest in a subsidiary to outsiders. In this, a new entity is created with stock holders that may be different from that of the parent selling co.

20. Spin off involves a creation of a new legal entity. New shares are issued but they are distributed to the existing stock holders on pro rata basis. In splits-offs, some of the stockholders in the parent co are given shares in a subsidiary. In splits-ups the entire firm is broken up in to a series of spin-offs. As a result the parent co no longer exists.