Due to the complex changing environments and business growth needs, business need to restructure in order to be more tax efficient, simplifying business structures, adding business verticals or spinning off a loss making business or various other business requirements. Brainbox team can advise on these business restructurings which can help you maximize your business profits. Common types of restructurings are as follows:

Mergers and Acquisitions:

Mergers and acquisitions (M&A) is a general term that refers to the consolidation of companies or assets through various types of financial transactions. M&A can include a number of different transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions.

Types of Mergers & Acquisitions

Here is a list of transactions that fall under the M&A umbrella:

Merger:

In a merger, the boards of directors for two companies approve the combination and seek shareholders’ approval. Post-merger, the acquired company ceases to exist and becomes part of the acquiring company. For example, in 2007 a merger deal occurred between Digital Computers and Compaq, whereby Compaq absorbed Digital Computer.

Acquisition:

In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its legal structure. An example of this transaction is Manulife Financial Corporation’s 2004 acquisition of John Hancock Financial Services, where both companies preserved their names and organizational structures.

Consolidation:

Consolidation creates a new company. Stockholders of both companies must approve the consolidation. Subsequent to the approval, they receive common equity shares in the new firm. For example, in 1998, Citicorp and Traveler’s Insurance Group announced a consolidation, which resulted in Citigroup.

Tender Offer:

In a tender offer, one company offers to purchase the outstanding stock of the other firm, at a specific price. The acquiring company communicates the offer directly to the other company’s shareholders, bypassing the management and board of directors. For example, in 2008, Johnson & Johnson made a tender offer to acquire Omrix Biopharmaceuticals for $438 million. While the acquiring company may continue to exist — especially if there are certain dissenting shareholders — most tender offers result in mergers.

Acquisition of Assets:

In an acquisition of assets, one company acquires the assets of another company. The company whose assets are being acquired must obtain approval from its shareholders. The purchase of assets is typical during bankruptcy proceedings, where other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firms.

Management Acquisition:

In a management acquisition, also known as a management-led buyout (MBO), a company’s executives purchase a controlling stake in another company, making it private. These former executives often partner with a financier or former corporate officers, in an effort to help fund a transaction. Such M&A transactions are typically financed disproportionately with debt, and the majority of shareholders must approve it. For example, in 2013, Dell Corporation announced that it was acquired by its chief executive manager, Michael Dell.

The Structure of Mergers:

Mergers may be structured in multiple different ways, based on the relationship between the two companies involved in the deal such as:

Horizontal merger: Two companies that are in direct competition and share the same product lines and markets.
Vertical merger: A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.
Congeneric mergers: Two businesses that serve the same consumer base in different ways, such as a TV manufacturer and a cable company.
Market-extension merger: Two companies that sell the same products in different markets.
Product-extension merger: Two companies selling different but related products in the same market.
Conglomeration: Two companies that have no common business areas.

Mergers may also be distinguished by following two financing methods–each with its own ramifications for investors:

Purchase Mergers:

As the name suggests, this kind of merger occurs when one company purchases another company. The purchase is made with cash or through the issue of some kind of debt instrument. The sale is taxable, which attracts the acquiring companies, who enjoy the tax benefits. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.

Consolidation Mergers:

With this merger, a brand new company is formed, and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.
Details of Acquisitions

Like some merger deals, in acquisitions, a company may buy another company with cash, stock or a combination of the two. And in smaller deals, it is common for one company to acquire all of another company’s assets. Company X buys all of Company Y’s assets for cash, which means that Company Y will have only cash (and debt, if any). Of course, Company Y becomes merely a shell and will eventually liquidate or enter other areas of business.

Another acquisition deal known as a “reverse merger” enables a private company to become publicly-listed in a relatively short time period. Reverse mergers occur when a private company that has strong prospects and is eager to acquire financing buys a publicly-listed shell company, with no legitimate business operations and limited assets. The private company reverses merges into the public company, and together they become an entirely new public corporation with tradeable shares.

Valuation Matters:

Both companies involved on either side of an M&A deal will value the target company differently. The seller will obviously value the company at the highest price as possible, while the buyer will attempt to buy it for the lowest possible price. Fortunately, a company can be objectively valued by studying comparable companies in an industry, and by relying on the following metrics:

Comparative Ratios:

The following are two examples of the many comparative metrics on which acquiring companies may base their offers:

Price-Earnings Ratio (P/E Ratio):

With the use of this ratio, an acquiring company makes an offer that is a multiple of the earnings of the target company. Examining the P/E for all the stocks within the same industry group will give the acquiring company good guidance for what the target’s P/E multiple should be.

Enterprise-Value-to-Sales Ratio (EV/Sales):

With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of the price-to-sales ratio of other companies in the industry.

Replacement Cost:

In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity’s sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and purchase the right equipment. This method of establishing a price certainly wouldn’t make much sense in a service industry where the key assets – people and ideas – are hard to value and develop.

Discounted Cash Flow (DCF):

A key valuation tool in M&A, discounted cash flow analysis determines a company’s current value, according to its estimated future cash flows. Forecasted free cash flows (net income + depreciation/amortization – capital expenditures – change in working capital) are discounted to a present value using the company’s weighted average costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method.

Demergers:

When a company splits off its existing business activities into several components, with the intent to form a new company that operates on its own or sell or dissolve the unit so separated, is called a demerger.

A demerged company is said to be one whose undertakings are transferred to the other company, and the company to which the undertakings are transferred is called the resulting company.

The demerger can take place in any of the following forms:

Spin-off:

It is the divestiture strategy wherein the company’s division or undertaking is separated as an independent company. Once the undertakings are spun-off, both the parent company and the resulting company act as a separate corporate entities.

Generally, the spin-off strategy is adopted when the company wants to dispose of the non-core assets or feels that the potential of the business unit can be well explored when operating under the independent management structure and possibly attracting more outside investments.

Wipro’s information technology division is the best example of spin-off, which got separated from its parent company long back in 1980’s.

Split-up:

A business strategy wherein a company splits-up into one or more independent companies, such that the parent company ceases to exist. Once the company is split into separate entities, the shares of the parent company is exchanged for the shares in the new company and are distributed in the same proportion as held in the original company, depending on the situation.

The company may go for a split-up if the government mandates it, in order to curtail the monopoly practices. Also, if the company has several business lines and the management is not able to control all at the same time, may separate it to focus on the core business activity.

Buyback:

A buyback, also known as a share repurchase, is when a company buys its own outstanding shares to reduce the number of shares available on the open market. Companies buy back shares for a number of reasons, such as to increase the value of remaining shares available by reducing the supply or to prevent other shareholders from taking a controlling stake.

How Does a “Buyback” Work?

A buyback allows companies to invest in themselves. Reducing the number of shares outstanding on the market increases the proportion of shares owned by investors. A company may feel its shares are undervalued and do a buyback to provide investors with a return. And because the company is bullish on its current operations, a buyback also boosts the proportion of earnings that a share is allocated. This will raise the stock price if the same price-to-earnings (P/E) ratio is maintained.

The share repurchase reduces the number of existing shares, making each worth a greater percentage of the corporation. The stock’s EPS thus increases while the price-to-earnings ratio (P/E) decreases or the stock price increases. A share repurchase demonstrates to investors that the business has sufficient cash set aside for emergencies and a low probability of economic troubles.

Another reason for a buyback is for compensation purposes. Companies often award their employees and management with stock rewards and stock options. To make due on rewards and options, companies buy back shares and issue them to employees and management. This helps avoid the dilution of existing shareholders.