Corporate Restructuring through Merger Acquisition enhancing shareholders value: A Study of some Selected Indian Companies


By

Rakesh Kumar Sharma
Senior Lecturer of Management
Ansal Institute of Technology
Gurgaon

Dr. Vijay Kumar Sharma
Associate Professor
Department of Commerce
Himachal Pradesh University
Shimla
 


Corporate Restructuring

The corporate restructuring, often compared to medical surgery, is a process of treatment for ailing companies based on the professional diagnosis. Just as the goal of medical surgery lies in the recovery of a patient, the aim of a corporate restructuring is the rehabilitation of a distressed company. As the patient needs a hospital to be recovered, the ailing company requires a restructuring vehicle to be rehabilitated.

Corporate restructuring means the series of process to restructure asset structure, financial structure, and corporate governance, helping the survival and the growth of a corporation. Although the extent of corporate restructuring includes a distressed company as a target in a narrow term, it includes an inefficient company as a target in a broader term.

Mergers and Acquisitions:

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.

Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. There are 15 different types of actions that a company can take when deciding to move forward using M&A.. Usually mergers occur in a consensual (occurring by mutual consent) setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties. Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target's board. In the United States, business laws vary from state to state whereby some companies have limited protection against hostile takeovers. One form of protection against a hostile takeover is the shareholder rights plan, otherwise known as the "poison pill".

Historically, mergers have often failed to add significantly to the value of the acquiring firm's shares (King, et al., 2004). Corporate mergers may be aimed at reducing market competition, cutting costs (for example, laying off employees, operating at a more technologically efficient scale, etc.), reducing taxes, removing management, "empire building" by the acquiring managers, or other purposes which may or may not be consistent with public policy or public welfare. Thus they can be heavily regulated, for example, in the U.S. requiring approval by both the Federal Trade Commission and the Department of Justice.

The U.S. began their regulation on mergers in 1890 with the implementation of the Sherman Act. It was meant to prevent any attempt to monopolize or to conspire to restrict trade. However, based on the loose interpretation of the standard "Rule of Reason", it was up to the judges in the U.S. Supreme Court whether to rule leniently (as with U.S. Steel in 1920) or strictly (as with Alcoa in 1945).

Acquisition

An acquisition, also known as a takeover, is the buying of one company (the 'target') by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover.

Takeover

A takeover in business refers to one company (the acquirer, or bidder) purchasing another (the target). In the UK the term properly refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.

Types of Acquisition

* The buyer buys the shares, and therefore control, of the target company being purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going business, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment.

* The buyer buys the assets of the target company. The cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and liabilities that it does not. This can be particularly important where foreseeable liabilities may include future, unquantified damage awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage. A disadvantage of this structure is the tax that many jurisdictions, particularly outside the United States, impose on transfers of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders.

The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where one company splits into two, generating a second company separately listed on a stock exchange.

Merger:

In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a "merger" rather than an acquisition is done purely for political or marketing reasons.

Classifications of mergers

*
Horizontal mergers take place where the two merging companies produce similar product in the same industry.
*
Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine.
*
Conglomerate mergers take place when the two firms operate in different industries.

Analysis and Interpretation:

For the analysis of results of merging company and merged company, hypothesis has been set up and has been tested by using t test. Following hypothesis have been set up for comparing the pre and post financial performance of selected companies:

(a)  Corporate restructuring through Merger and acquisition does not make any significant difference in EPS i.e. earning Per Share.
(b)  Corporate restructuring through Merger and acquisition does not make any significant difference in shareholders Book Value
(c) Corporate restructuring through Merger and acquisition does not make any significant difference in PE ratio i.e. Price Earning Ratio
(d) Corporate restructuring through Merger and acquisition does not make any significant difference in ROCE
(e) Corporate restructuring through Merger and acquisition does not make any significant difference in RONW
(f) Corporate restructuring through Merger and acquisition does not make any significant difference to the shareholders value through MARKET CAP/ SALES
(g) Corporate restructuring does not make any significant difference to the shareholders value through ENTERPRISE MULTIPLE

(a) Corporate restructuring through Merger and acquisition does not make any significant difference in EPS i.e. earning Per Share

 

COMPANY

PRE

POST

d

d * d

    1

TOMCO

0.30

9.09

8.79

77.26

    2

HLL

7.03

9.09

2.06

4.24

    3

ICICI Ltd.

13.06

18.73

5.67

32.15

    4

ICICI BANK

11.72

18.73

7.01

49.14

    5

INDO GULF

12.23

24.2

11.97

143.3

    6

BIRLA GLOBAL

11.85

24.2

12.35

152.5

    7

INDIAN RAYON

18.98

24.2

5.22

27.2

    8

TATA TEA

16.91

12.8

- 4.11

16.9

    9

L & T

16.45

40.77

24.3

591

    10

RIL

24.63

30.78

6.2

38.2

    11

RPL

3.03

30.78

27.75

770

     

TOTAL =

107.21

1901.9



The calculated value of t is more than table value. Hence we reject the hypothesis. Thus, the corporate restructuring has contributed significantly in enhancing the shareholders wealth as depicted in EPS.

(b) Corporate restructuring through Merger and acquisition does not make any significant difference in shareholders Book Value

 

COMPANY

PRE

POST

d

d * d

    1

TOMCO

29.75

34

4.25

18.06

    2

HLL

23.8

34

10.2

104.04

    3

ICICI Ltd.

107.30

113.17

5.87

34.5

    4

ICICI BANK

265

113.17

-151.9

26063

    5

INDO GULF

133.65

245

111.35

12399

    6

BIRLA GLOBAL

34.07

245

210.9

44485

    7

INDIAN RAYON

226.13

245

18.9

357.2

    8

TATA TEA

155.66

168.29

12.63

159.5

    9

L & T

141.88

220.45

78.6

6175.6

    10

RIL

113.86

235.34

121.5

14760

     

TOTAL

418

104556



The calculated value of t is more than table value. Hence we accept the hypothesis. Thus, the corporate restructuring had not contributed significantly in enhancing the shareholders wealth through Book value

(c) Corporate restructuring through Merger and acquisition does not make any significant difference in PE ratio i.e. Price Earning Ratio

 

COMPANY

PRE

POST

d

d * d

    1

TOMCO

175

63.36

-111.64

12463

    2

HLL

51.92

63.36

11.44

130.9

    3

ICICI Ltd.

4.8

7.3

2.5

6.25

    4

ICICI BANK

10.8

7.3

-3.5

12.25

    5

INDO GULF

22.5

34

11.5

132.3

    6

BIRLA GLOBAL

35.7

34

-1.7

2.9

    7

INDIAN RAYON

44.5

34

-10.5

110.25

    8

TATA TEA

13.84

13.24

-.6

.36

    9

L & T

11.22

14.09

2.87

8.2

    10

RIL

15.87

9.77

-6.1

37.2

    11

RPL

16.02

9.77

-6.25

39

       

-112

12942



The calculated value of t is less than table value. Hence we accept the hypothesis. Thus, the corporate restructuring had not contributed significantly in enhancing the shareholders wealth as depicted through PE ratio.

(d) Corporate restructuring through Merger and acquisition does not make any significant difference in ROCE

 

COMPANY

PRE

POST

d

d * d

    1

TOMCO

2.78

49.9

47.12

2220.1

    2

HLL

37.1

49.9

12.8

163.8

    3

ICICI Ltd.

12.20

13.56

1.36

1.9

    4

ICICI BANK

5.72

13.56

7.84

61.5

    5

INDO GULF

14.11

13.1

-1.01

1.02

    6

BIRLA GLOBAL

17.45

13.1

-4.35

18.9

    7

INDIAN RAYON

10.24

13.1

2.85

8.12

    8

TATA TEA

14.81

9.55

-5.26

27.7

    9

L & T

11.50

16.77

5.27

27.8

    10

RIL

17.82

18.91

1.09

1.19

    11

RPL

16.88

18.91

2.03

4.12

     

TOTAL

69.7

2536



The calculated value of t is less than table value. Hence we accept the hypothesis. Thus, the corporate restructuring has contributed significantly in enhancing the shareholders value as depicted through ROCE

(e) Corporate restructuring through Merger and acquisition does not make any significant difference in RONW

 

COMPANY

PRE

POST

d

d * d

    1

TOMCO

0.98

33

32.02

1025.9

    2

HLL

29.6

33

3.4

11.56

    3

ICICI Ltd.

16.7

17.39

.69

0.47

    4

ICICI BANK

4.41

17.39

13

169

    5

INDO GULF

9.79

9.9

0.11

0.012

    6

BIRLA GLOBAL

35.31

9.9

-25.41

645.7

    7

INDIAN RAYON

8.68

9.9

1.22

1.49

    8

TATA TEA

11.75

7.07

-4.9

22.9

    9

L & T

12.67

16.99

4.32

18.7

    10

RIL

23.05

17.63

-5.42

29.4

    11

RPL

20.36

17.63

-2.73

7.45

     

TOTAL

16.3

1932.6



The calculated value of t is less than table value. Hence we accept the hypothesis. Thus, the corporate restructuring has failed to make significant difference in enhancing the shareholders wealth as depicted through RONW

(f)  Corporate restructuring through Merger and acquisition does not make any significant difference to the shareholders value through MARKET CAP/ SALES

 

COMPANY

PRE

POST

d

d * d

    1

TOMCO

0.31

3.92

3.61

13.03

    2

HLL

2.5

3.92

1.42

2.01

    3

ICICI Ltd.

0.53

0.67

0.14

0.019

    4

ICICI BANK

1.01

0.67

-0.34

0.12

    5

INDO GULF

1.73

2.5

0.77

0.59

    6

BIRLA GLOBAL

3.33

2.5

-0.83

0.69

    7

INDIAN RAYON

1.22

2.5

1.28

1.64

    8

TATA TEA

1.60

1.25

-0.35

0.12

    9

L & T

0.46

0.72

0.26

0.07

    10

RIL

1.79

0.7

-1.09

1.19

    11

RPL

0.76

0.7

-0.06

0.0036

     

TOTAL

4.81

19.9



The calculated value of t is less than table value. Hence we accept the hypothesis. Thus, the corporate restructuring has not contributed significantly in enhancing the shareholders wealth as depicted in through valuation ratio i.e. market cap/ sales

(g) Corporate restructuring does not make any significant difference to the shareholders value through ENTERPRISE MULTIPLE


 

COMPANY

PRE

POST

d

d * d

    1

TOMCO

5.69

12.24

6.55

42.9

    2

HLL

8.5

12.24

3.74

14

    3

ICICI Ltd.

9.05

9

-.05

.0025

    4

ICICI BANK

36.98

9

-27.98

782.9

    5

INDO GULF

4.12

13.1

9

81

    6

BIRLA GLOBAL

8.35

13.1

4.65

21.6

    7

INDIAN RAYON

11.15

13.1

1.9

3.7

    8

TATA TEA

8.38

8.32

-.06

.0036

    9

L & T

7.04

2.44

-4.6

21.6

    10

RIL

9.21

5.39

-3.82

14.6

    11

RPL

9.30

5.39

-3.9

15.5

     

TOTAL

-14.6

997.8



The calculated value of t is less than table value. Hence we accept the hypothesis. Thus, the corporate restructuring failed to make significant difference in enhancing the shareholders wealth through Enterprise Multiple. Need to mention here that in long term, the companies able to improve its EM as strategy behind the corporate restructuring is long term planning so its benefits too are generated in coming years.

Conclusion and Recommendations:

Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create 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.

Mergers and Acquisitions: Why they can fail

It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry. Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete.

Flawed Intentions

For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate: somebody else has done a big merger, which prompts other top executives to follow suit.

A merger may often have more to do with glory seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later.

On the other side of the coin, mergers can be driven by generalized fear. Globalization, the arrival of new technological developments or a fast-changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world. The Obstacles to making it Work

Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal. The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity.

More insight into the failure of mergers is found in the highly acclaimed study from McKinsey, a global consultancy.

The study concludes that companies often focus too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer. Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders.

But remember, not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the promises made by deal makers demand the careful scrutiny of investors. The success of mergers depends on how realistic the deal makers are and how well they can integrate two companies while maintaining day-to-day operations.

Refrences

* Mergers & acquisitions; Centre for monitoring Indian Economy
* Brealey, Richard A. and Myers, Stewart C., Principles of Corporate Finance, Tata Mcgraw hill publications.
* Marshall, John F. and Bansal, Vipul k., Financial Engineering - A complete guide to Financial Innovation, Prentice - Hall of India Publications, 2003.
* Ramasastri,A.S., Valuation of Financial Assets, Sage Publications, 2000
* Gupta S.P., Statistical Methods, Sultan Chand & Sons Publications, 2004
* Rustagi, R.P., Investment Management Theory & Practice, Sultan Chand & Sons, 2005
* Davidow, Thomas. Family Business Resolution with Thomas Davidow, Ed.D.. M&A Today. Retrieved on 2007-08-08.
* Watson, Thomas (2001). Family Circus. Canadian Business. Retrieved on 2007-08-09.
* Whorf, John. Selling from a Position of Strength. M&A Today. Retrieved on 2007-08-08.
* Robbins, Doug. The Robbinex Three Phase Selling Process. M&A Today. Retrieved on 2007-08-07.
* King, Lori. M&A Today Now Online at nvst.com. Writenews. Retrieved on 2007-08-07.
* http://en.wikipedia.org/wiki/Mergers_and_acquisitions/10-9-07

Journals & Magazines:

* Dalal Street
* Finance India
* ICAI Capital Market
* Money outlook
* Indian Economy

Websites:

* www.bseindia.com
* www.domainb.com
* www.sebi.gov.in
* www.nseindia.com
* www.statsindia.com
* www.investopedia.com
* www.envestindia.com
* www.moneycontrol.com
 


Rakesh Kumar Sharma
Senior Lecturer of Management
Ansal Institute of Technology
Gurgaon

Dr. Vijay Kumar Sharma
Associate Professor
Department of Commerce
Himachal Pradesh University
Shimla
 

Source: E-mail January 12, 2008

          

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