Sunday, March 20, 2011

Corporate Restructuring strategies

The recent global business environment has seen a monumental change ,especially in terms of Mergers and Acquisitions.Every other day ,there is news about another company buying stakes or acquiring a big brand from the parent company.Such moves are not sudden,but are often followed by an indepth analysis and involve a strategic masterplan ,and an intricate string of calculations by the investment bankers for valuation of the firm / business .
Such actions are categorized under Corporate Restructuring strategies ,as they involve decision making on the part of management ,regarding which business to divest and where to invest,without jeopardizing the shareholders' interest .
Some of the very basic yet complex business restructuring strategies are :

Mergers : When two companies agree to combine and work as a single entity with a single identity.Eg Warner and AOL .To find the value of the merged firm ,swap ratio is calculated,which is the ratio of the stock price that the shareholders of the individual entities receive after the firms are merged.

Acquisitions : When one firm takes over the business / control over the management of the other firm .This can be either forceful acquisitions ,without the consent of the acquired company,or it could be when one company wants to sell its business arm to another ,for a price.Eg TATA acquisition of Corus .
The valuation of the target company is based on P/E ratio and DCF techniques.

Reverse Merger : When an unlisted / small company acquires a listed company which may be under poor profit situation or limited assets.This way ,the private company gets an opportunity to raise funds publicly.

A common trend seen these days is that instead of buying the entire company ,the acquirer buys stake / management control ,only in a brand or business arm .The latest to be seen is Henkel India acquired by Jyothy laboratories , acquisition of Marico's Sweekar brand by US based Cargill .
The deal may be an all cash deal or all stocks deal ,depending upon the strength and decision of the management .
Sometimes ,an ailing company or a debt ridden company may also look out for a corporate bailout ,without getting acquired or merged with another company .
The underlying objective for acquisition is Profitability ,Market expansion ,establishing a strong footlold in a given product category ,geographical expansion and economies of scale.
The target company may also benefit out of it ,as it may decide to divest its loss making business or product and focus on core competency or stronger brand ,by investing the price received from the acquirer .
The key to establishing a successful association is Synergy,that is the shortcoming of one company covered by the other in such a way that 1+1 is 3.

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