Ashutosh Corporate Restructuring Presentation.pptx

What are the financial alternatives in corporate restructuring.

1. Financial Alternatives for Mergers and Acquisitions The selection of a financial package for a merger or acquisition depends on several crucial factors. It must align with the financial structures of both the acquiring and acquired companies, offering a desirable gearing level for the acquirer. The package should be acceptable to the sellers and economically beneficial for the acquirer. By:- Ashutosh Kumar Prasad Roll No.-07

2. Funding Sources for Mergers and Acquisitions 1 Internal Funds Companies can utilize their own funds, including increased paid-up equity and preference share capital, by issuing equity and preference shares to shareholders. 2 Borrowed Funds Mergers and acquisitions can be financed through borrowed funds raised by issuing various financial instruments, such as debentures, bonds, and deposits from directors, relatives, business associates, shareholders, and the public in the form of fixed deposits. 3 External Sources Companies can also secure funding through external commercial borrowings, issuing securities, obtaining loans from central or state financial institutions and banks, and accessing rehabilitation finance provided to struggling industrial companies under the Sick Industrial Companies (Special Provisions) Act.

3. Funding Through Equity Shares 1 Permanent Capital Equity share capital is considered the permanent capital of a company, requiring no servicing as there is no obligation to pay fixed returns to equity shareholders in the form of interest. 2 Dividend Commitment The commitment to equity shareholders is to declare dividends consistently if profits permit. 3 Time-Consuming Process Raising funds from the public through share issuance is a time-consuming and costly process, involving multiple stages of discussion and legal compliance.

4. Example: Facebook's Acquisition of Instagram Highlights Facebook acquired Instagram for approximately $1 billion. The deal was primarily funded through Facebook stock, preserving liquidity and avoiding debt. The acquisition strengthened Facebook's position in social media by integrating Instagram's photo-sharing capabilities. Funding Details A significant portion of the acquisition cost was covered by issuing Facebook shares to Instagram shareholders. This method avoided immediate cash outflow and helped Facebook retain cash reserves for other operations and investments.

5. Funding Through Preference Shares Fixed Dividend Obligation Unlike equity capital, issuing preference shares as purchase consideration to shareholders of the merging company involves the payment of a fixed preference dividend at a fixed rate. Profitability Assessment Before deciding to raise funds through preference shares, the company's board of directors must ensure that the merged or target company will generate sufficient profits to cover the additional liability of paying preference dividends. Example: Disney's Acquisition of Pixar Disney acquired Pixar for $7.4 billion in an all-stock deal, revitalizing Disney's animation division and leading to a series of successful animated films.

6. Funding Through Swaps or Stock-to-Stock Mergers Stock Swap Mergers In stock swap mergers, holders of the target company's stock receive shares of the acquiring company's stock. This method avoids cash outflow and allows for strategic alignment. Event Risk Stock swap mergers involve event risk associated with fluctuations in the stock prices of both companies. Drastic changes in share prices can cause the deal to be reevaluated. Merger Arbitrage Merger arbitrageurs derive returns from stock swap mergers when the potential return justifies the perceived risk of the deal failing. Example: GlaxoSmithKline and Novartis' Asset Swap GlaxoSmithKline (GSK) and Novartis engaged in a major asset swap, with GSK acquiring Novartis' vaccine business, while Novartis took over GSK's oncology products.

7. Funding Through Employees Stock Option Scheme 1 Employee Incentive Employees' stock option schemes are a voluntary method for companies to encourage employee participation and ownership. This scheme grants employees the right, but not the obligation, to purchase company shares at a predetermined price. 2 Share Reservation Companies can reserve a suitable percentage of shares for employees, including those of the promoter company or its subsidiaries. Equitable distribution among employees is crucial for the scheme's smooth operation. 3 Eligibility and Misuse Only bona-fide employees are eligible for shares under the scheme. Some companies have misused this by allotting shares to non-employees or in joint names, highlighting the need for strict adherence to SEBI guidelines. 4 Unsubscribed Shares Shares not subscribed by employees can be offered to the general public through a prospectus, ensuring transparency and compliance with regulations. The option granted to any employee is non-transferable.

8. Infosys: ESOPs for Acquisition 1 Panaya Acquisition (2015) Infosys used ESOPs to incentivize and retain employees, particularly during the acquisition of Panaya in 2015. This strategy aligned employee interests with company performance, crucial for post-acquisition integration. 2 Employee Ownership ESOPs granted to employees created a sense of ownership and ensured retention after the acquisition. This method allowed Infosys to preserve cash and align the workforce with long-term company goals. 3 Strategic Benefits The use of ESOPs in the Panaya acquisition demonstrated Infosys' commitment to employee engagement and its ability to leverage this strategy for successful acquisitions.

9. Funding Through External Commercial Borrowings (ECBs) External Commercial Borrowings (ECBs) ECBs refer to commercial loans from non-resident lenders, including bank loans, buyers' credit, suppliers' credit, and securitized instruments. These loans typically have a minimum average maturity of 3 years. Foreign Currency Convertible Bonds (FCCBs) FCCBs are bonds issued by Indian companies in foreign currency, convertible into ordinary shares. They are subject to the "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993." Preference Shares Preference shares issued after May 1, 2007, are considered debt and must conform to ECB policy. All ECB norms, including eligible borrowers, lenders, amount, maturity, and end use stipulations, apply.

10. Bharti Airtel: Zain Africa Acquisition (2010) Acquisition of Zain Africa Bharti Airtel acquired Zain's African operations for $10.7 billion, marking one of the largest cross-border acquisitions by an Indian company. This deal significantly expanded Airtel's footprint across Africa, adding millions of subscribers. External Commercial Borrowings (ECBs) A large portion of the acquisition was financed through ECBs. This allowed Airtel to access foreign debt markets at competitive rates, providing the necessary funds for this substantial acquisition. Strategic Expansion The use of ECBs in the Zain Africa acquisition demonstrated Bharti Airtel's ability to leverage international financial markets for strategic expansion and growth.

11. Depository Receipts (DRs) Foreign Currency Denomination A DR is a foreign currency denominated instrument traded on stock exchanges, typically in Europe or the USA. The major benefit for investors is the collection of issue proceeds in foreign currency, which can be used for various purposes. Exchange Risk Mitigation DRs are denominated in US dollars, mitigating exchange risk for investors. They also reserve the right to convert the DR and hold the underlying equity shares. Market-Related Pricing DRs facilitate fundraising at market-related prices, minimizing costs compared to domestic issues. They also allow for future equity raising for projects like expansion or diversification. Investor Base Expansion DRs expand the investor base, improve marketability, enhance company prestige, and increase credibility with international investors.

12. Standard Chartered: IDR Issue IDR Issue Standard Chartered became the first foreign company to issue IDRs in India, raising $530 million. This innovative approach allowed the bank to tap into the Indian capital market without listing equity shares. Strategic Acquisitions The funds raised were partially used for expansion and strategic acquisitions in the Asian and African markets, demonstrating the bank's commitment to growth in emerging markets. International Expansion The successful IDR issue highlighted Standard Chartered's ability to leverage diverse funding sources for international expansion and strategic initiatives.