CORPORATE RESTRUCTURING - FUNDING OF MERGER AND TAKEOVERS

Benefit of merger

If a company cannot grow internally due to lack of physical and managerial resources, it can grow externally by mergers and acquisition of companies engaged in same or similar industry in a convenient and inexpensive manner.

 

Benefit of merger = V = V (AB) – V (A) - V (B)

Where,

V= Present value

A& B are two firms willing to continue to form a new company called C

 

i.e. Benefit of merger = Total present value of merged firms Minus Sum of their value if they do not merge.

The combined value of the merged companies should be more than the value obtained by mere addition of the present values of each individual company.

 

 

Various types of Financial instruments used for funding

 

1.Funding through Equity Shares – Equity Share Capital can be considered as the permanent capital of a company. Equity needs no servicing as a company is not required to pay to its equity shareholders any fixed amount return in the form of interest which would be the case if the company were to borrow issue of bonds or other debt instruments. In issue of Equity shares, the commitment will be to declare dividends consistently if profit permits.

 

2.Funding through Preferential Allotment – Private placement in the form of a preferential allotment of shares is possible and such issues could be organized in a much easier way rather than an issue of shares to public.

 

3.Funding through Merger – The most common method of acquisition is a merger where the transferee company issues shares to the shareholders of Transferor Company. A merger needs no deployment of additional funds, either from internal accruals or from outside agencies like banks, financial institutions.

 

4.Funding through Preference Shares – Funding through preference share unlike Equity shares issued as purchase consideration to shareholders of merging company involves the payment of fixed preference dividend at a fixed rate. It is necessary to assure that the merged company or Target Company would be able to yield sufficient profits for covering discharging the additional liability in respect of payment of preference dividend.

 

5.Funding through Options or Securities with Differential Rights - Companies can restructure its capital through derivatives and options as a means of raising corporate funds and shares and quasi – equity instruments with different rights as to dividend and/or voting.

Company may also issue non-voting shares with differential voting rights which gives the companies an additional source of fund without interest cost and without an obligation to repay

 

6.Funding through Swaps or Stock to stock mergers – In Stock swaps the holders of the target company’s stock receive shares of the acquiring company’s stock. A merger arbitrage specialist will sell the acquiring company’s stock short, and will purchase a long position in the target company, using the same ratio as that of the proposed transaction.

 

7.Funding through Employees Stock Option Scheme – This option may be used along with other options. ESOP Scheme is a voluntary scheme on the part of a company to encourage its employees to have a higher participation in the company. Stock option is the right but not an obligation granted to an employee. Only bonafide employees of the company are eligible for shares under scheme. The option granted to any employee is not transferable to any other person.

 

8.Funding through External Commercial Borrowings – ECB refers to commercial loans in the form of bank loans, buyers’ credit, supplier’ credit, securitized instrument such as Floating Rate Notes and Fixed RATYE Bonds etc. availed from non-resident lenders .

ECB under automatic route is permitted for investment in real sector, industrial sector including small and medium enterprises and specially infrastructure sector.

 

8.Funding through Indian Deposit Receipts – Deposit receipts represent equity shares. An Indian company may be promoted by foreign nationals.  Such companies cannot issue shares in Indian Market but could only issue deposit receipts which will be known as Indian Deposit Receipts. A Depository receipt is a negotiable certificate that usually represents a company’s publicly traded equity or debt.

 

9.Funding through Global Depository Receipts (GDRs) – It is a dollar denominated instrument tradable on a stock exchange in Europe or U.SA.

 

10.Funding through American Depository Receipts (ADRs) – It represents a non - US company’s publicly traded shares or debt. ADR’s trade freely like any other US security as they are priced and quoted in US dollars. This instrument permits the foreign investor to access non- US market for investment.

 

11.Funding through Financial Institutions and banks – Funding through banks has advantage as the period of such fund is definite which is fixed at the time of taking such loans which assures the Board of the company about continued availability of such funds for the pre- determined period.

 

12.Funding through Rehabilitation Finance – Sick Industries get attached through BIFR with healthy units with financial package to the acquirer from the financial institutions and the banks having financial stakes in the acquire company to ensure rehabilitation and recovery of dues from the acquirer.

 

13.Funding through Leveraged and Management Buyouts – Options available for the revival of a ‘sick company’. One is buyout of such a company by its employees. It has distinct option over Government intervention and other conventional remedies.

Leveraged Buyout is defined as the acquisition by a small group of investors, financed largely by borrowing. The buying group forms a shell company to act as the legal entity making the acquisition. it is different from ordinary acquisition as a large fraction of purchase price is debt financed and the shares of Leveraged Buyout are not traded on open market.