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1. Corporate restructuring
Corporate restructuring is one of the most complex and fundamental phenomena that management confronts. Each
company has two opposite strategies from which to choose: to diversify or to refocus on its core business. While
diversifying represents the expansion of corporate activities, refocus characterizes a concentration on its core business.
From this perspective, corporate restructuring is reduction in diversification.
Corporate restructuring is an episodic exercise, not related to investments in new plant and machinery which involve a
significant change in one or more of the following
Pattern of ownership and control
Composition of liability
Asset mix of the firm.
It is a comprehensive process by which a company can consolidate its business operations and strengthen its position for
achieving the desired objectives:
Synergetic
Competitive
Successful
It involves significant re-orientation, re-organization or realignment of assets and liabilities of the organization through
conscious management action to improve future cash flow stream and to make more profitable and efficient.
Meaning and Need for corporate restructuring
Corporate restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing a
company may be implemented due to a number of different factors, such as positioning the company to be more
competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction.
Here are some examples of why corporate restructuring may take place and what it can mean for the company.
Restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure
can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring
may call for spinning off some departments into subsidiaries as a means of creating a more effective management model
as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production
process. In this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by
those who wish to see the corporation gain a larger market share.
Corporate restructuring may also take place as a result of the acquisition of the company by new owners. The acquisition
may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as
a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often
implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout.
What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible
before the takeover took place
In general, the idea of corporate restructuring is to allow the company to continue functioning in some manner. Even when
corporate raiders break up the company and leave behind a shell of the original structure, there is still usually a hope,
what remains can function well enough for a new buyer to purchase the diminished corporation and return it to profitability.
Purpose of Corporate Restructuring -
To enhance the share holder value, The company should continuously evaluate its:
1. Portfolio of businesses,
2. Capital mix,
3. Ownership &
4. Asset arrangements to find opportunities to increase the share holder’s value.
To focus on asset utilization and profitable investment opportunities.

2. To reorganize or divest less profitable or loss making businesses/products.
The company can also enhance value through capital Restructuring, it can innovate securities that help to reduce cost of
capital.
Characteristics of Corporate Restructuring –
1. To improve the company’s Balance sheet, (by selling unprofitable division from its core business).
2. To accomplish staff reduction ( by selling/closing of unprofitable portion).
3. Changes in corporate management.
4. Sale of underutilized assets, such as patents/brands.
5. Outsourcing of operations such as payroll and technical support to a more efficient 3rd party.
6. Moving of operations such as manufacturing to lower-cost locations.
7. Reorganization of functions such as sales, marketing, & distribution.
8. Renegotiation of labor contracts to reduce overhead.
9. Refinancing of corporate debt to reduce interest payments.
10. A major public relations campaign to reposition the company with consumers.
Examples of LBO
1. Metromedia
John W. Kluge (kloo gy), an immigrant from Germany, was for many years a food broker in
Washington, D.C. In 1959 he and some friends bought control of the Metropolitan Broadcasting
Corporation (MBC) which was a television network (far smaller than NBC, CBS, and ABC) and owned
two radio stations. Kluge changed the name to Metromedia and proceeded to build up over 25 years
its holdings to seven television stations and 14 radio stations. Metromedia also owned the Ice
Capades and the Harlem Globetrotters.
Kluge was always open to new ventures for making a profit. For example, he bought the depreciation
rights to the $100 billion of New York's buses and subways. Because of his sometimes unorthodox
ventures he felt constrained by having to report to public stockholders even though he held 25
percent of Metromedia. In 1983 he decided to take Metromedia private through a leveraged buyout.
Kluge and his backers had to raise $1.45 billion to purchase 28.6 million shares, refinance
Metromedia's existing debt, purchase employee stock options, and provide working capital for the
transition. Ten banks led by Manufacturers Hanover Trust provided an eight year loan of $1.3 billion
taking Metromedia's assets as collateral. The rate of interest was 1.5 percent above the prime rate
and there was a covenant that required Metromedia to maintain a minimum net worth of $100 million.
Kluge made a per share offer to the shareholders of Metromedia of $30 in cash and subordinated
debentures having a face value of $22.50. The market value of these fifteen year debentures which
would not pay interest until the sixth year was estimated to be $9.50 to $10.00. A threatened
stockholder suit brought an increase in the offer by $1 per share. The offer was accepted and Kluge
ended up with 93 percent of the voting stock of Metromedia.

3. Metromedia's ratio of long-term debt to equity was 3.5 and Moody's and Standard & Poors lowered
the rating of Metromedia's debentures. In June of 1984 Metromedia went private. Six months later
Kluge had Drexel Burnham Lambert sell $1.3 billion of junk bonds to replace his bank loan. It was the
biggest junk bond issue up to that point but it sold out within two hours.
In 1985 Kluge sold six of Metromedia's seven television stations to a group headed by Rupert
Murdock for $1.5 billion and the remaining station (in Boston) was sold to the Hearst Corporation for
$450 million. In 1986 he sold off a billboard operation for $710 million and the Harlem Globetrotters
and Ice Capades for $30 million. In 1986 the chain of radio stations was sold for $285 million. This left
telecommunications as the main element of Metromedia's operations. But a few months later Kluge
sold Metromedia's cellular telephone and paging operations to Southwestern Bell for $1.65 billion.
Altogether Kluge sold $4.6 billion of Metromedia's assets.
2. Gibson Greeting Cards
This company was founded in 1850 and became a corporation in 1895. In 1964 CIT Financial
Corporation acquired Gibson Greeting Cards, but in 1980 CIT Financial was acquired by RCA and
Gibson became a subsidiary of RCA. Gibson was doing well. In 1984 it was the third largest greeting
card company with sales of $304 million. RCA was however implementing a policy of concentrating
on its core business of NBC, Hertz, electronics, and communications and decided to sell Gibson
Greeting Cards. It was sold to Wesray Corporation, a creation of former Secretary of the Treasury
William Simon. The price was $81 million. Wesray gave Gibson management 20 percent of the
company. The new Gibson stockholders, including Simon, invested $1 million. The funds came in part
from loans from General Electric Credit Corporation ($40 million), Barclays American Business Credit
($13 million). The rest came from Gibson selling and leasing back its three major manufacturing and
distribution facilities. Thus the price was actually only $54 million. General Electric Credit Corporation
got warrants to purchase 2.3 million shares at 14 cents per share and additional interest in proportion
to any dividends paid by Gibson Greeting Cards. The interest rate in 1982 on Gibson's debt averaged
19 percent. Eighteen months after Wesray bought Gibson it cashed in by a public offering of 10
million shares at $27.50. William Simon realized a payoff of $66 million on an investment of about one
third of a million dollars. Later the Gibson stock price fell to $18 but rebounded to $28 when a
takeover battle developed between Walt Disney Production and Saul Steinberg.
3. Thatcher Glass
In 1981 Dart & Craft, a major consumer goods manufacturer, decided to sell off its subsidiary
Thatcher Glass. Dart & Craft felt the glass container industry had little growth potential. Thatcher
Glass was the third largest bottle manufacturer in the nation and had sales of about $350 million and
profits of about $30 million. A new company, Dominick International, was formed to buy Thatcher.
This new company included the president of Thatcher Glass. Dominick International offered $120
million in cash and $18 million in subordinated debentures and preferred stock. A group of banks,
including Manufacturers Hanover Trust and Chase Manhattan provided $110 million at an interest
rate of 22.5 percent. There was $4 million of equity and $3 million of Dominick preferred stock. The
rest was raised by other high interest loans. The buyout was completed in 1983 and Thatcher had a
debt ratio of 95 percent. This means the debt/equity ratio was about 19. By the end of 1984
Thatcher's sales had dropped sharply due to increased competition from plastic and aluminum
containers. Thatcher reacted by cutting prices and laying off 80 percent of its 4,000 employees. In

4. 1985 Thatcher filed for bankruptcy and attempted to reorganize under a new president. Dominick
International sold off three of Thatcher's six plants and realized $40 million on the sale. Thus the third
largest bottle manufacturer in the U.S. folded as a result of the leveraged buyout.
4. Federated Department Stores
Federated Department Stores was a company running a collection of relatively high end retailers. The
company had lots of stores but did not have a mass marketing strategy. Tthe hostile LBO of
Federated Department Stores became the target of a hostile leveraged buyout by Robert Campeau, a
Canadian financier. Robert Campeau believed he could realize a major gain in value for the
corporation with a change in management. He acquired Federated at a price that was nearly double
its pre-acquisition market value. This was risky enough, but he amplified the risk by using debt to
cover about 97 percent of the acquisition costs. This was a leverage ratio (debt/equity) of about 32 to
1. Leverage ratios in excess of 9 to 1 have a notably higher rate of failure. The safe levels of the
leverage ratio depends upon the nature of the business, the stability of the rate of return on capital.
American banks typically operate with leverage ratios of 15 to 1 but this is acceptable because of the
predictability and stability of their earnings. Manufacturing corporations in the U.S. operate with
leverage ratios which are typically in the range of 0.5 to 1 or 1 to 1.
Robert Campeau acquired Federated in 1989. In 1990 Federated filed for bankruptcy. While
financially the LBO of Federated was a failure Campeau was able to bring about some adjustments
before the collapse that improved the performance of the company. The improvements were just not
enough and not soon enough to cope with the financial burden of high interest payments to cover the
high acquisition price.
Baker and Smith cite some very interesting results of Steven Kaplan of the University of Chicago
whose research indicated that the reforms carried out did increase the value of the company even
though financial distress drove the company into bankruptcy.
Failures of M & A
Mergers and acquisitions may seem to be beneficial, resulting in the amalgamation of two conglomerates. They have
been found to lead to cost cuts and increased revenues. However, merger and acquisition failures are not uncommon.
These failures may harm the companies, tarnish their credibility in the market, and ruin the confidence of their
shareholders.
Studies reveal that approximately 40% to 80% of mergers and acquisitions prove to be disappointing. The reason is that
their value on the stock market deteriorates. The intentions and motivations for effecting mergers and acquisitions must
be evaluated for the process to be a success. It is believed that when two companies merge the combined output will
increase the productivity of the merged companies. This is referred to as "economies of scale." However, this increase in
productivity does not always materialize.
There are several reasons merger or an acquisition failures. Some of the prominent causes are summarized below:
If a merger or acquisition is planned depending on the (bullish) conditions prevailing in the stock market, it may be risky.

5. There are times when a merger or an acquisition may be effected for the purpose of "seeking glory," rather than viewing
it as a corporate strategy to fulfill the needs of the company. Regardless of the organizational goal, these top level
executives are more interested in satisfying their "executive ego."
In addition to the above, failure may also occur if a merger takes place as a defensive measure to neutralize the adverse
effects of globalization and a dynamic corporate environment.
Failures may result if the two unifying companies embrace different "corporate cultures."
It would not be correct to say that all mergers and acquisitions fail. There are many examples of mergers that have
boosted the performance of a company and addressed the well-being of its shareholders. The primary issue to focus on
is how realistic the goals of the prospective merger are.
Mergers and acquisitions in India
are on the rise. Volume of mergers and acquisitions in India in 2007 are expected to grow two fold from 2006 and four times compared
to 2005.
India has emerged as one of the top countries with respect to merger and acquisition deals. In 2007, the first two months alone
accounted for merger and acquisition deals worth $40 billion in India. The estimated figures for the entire year projected a total of more
than $ 100 billions worth of mergers and acquisitions in India. This is two fold growth from 2006 and a growth of almost four times from
2005.
Mergers and Acquisitions in different sectors in India
Sector wise, large volumes of mergers and mergers and acquisitions in India have occurred in finance, telecom, FMCG, construction
materials, automotives and metals. In 2005 finance topped the list with 20% of total value of mergers and acquisitions in India taking
place in this sector. Telecom accounted for 16%, while FMCG and construction materials accounted for 13% and 10% respectively.
In the banking sector, important mergers and acquisitions in India in recent years include the merger between IDBI (Industrial
Development bank of India) and its own subsidiary IDBI Bank. The deal was worth $ 174.6 million (Rs. 7.6 billion in Indian currency).
Another important merger was that between Centurion Bank and Bank of Punjab. Worth $82.1 million (Rs. 3.6 billion in Indian
currency), this merger led to the creation of the Centurion Bank of Punjab with 235 branches in different regions of India.
In the telecom sector, an increase of stakes by SingTel from 26.96 % to 32.8 % in Bharti Telecom was worth $252 million (Rs. 10.9
billion in Indian currency). In the Foods and FMCG sector a controlling stake of Shaw Wallace and Company was acquired by United
Breweries Group owned by Vijay Mallya. This deal was worth $371.6 million (Rs. 16.2 billion in Indian currency). Another important one
in this sector, worth $48.2 million (Rs 2.1 billion in Indian currency) was the acquisition of 90% stake in Williamson Tea Assam by
McLeod Russell India In construction materials 67 % stake in Ambuja Cement India Ltd was acquired by Holcim, a Swiss company for
$634.9 million (Rs 27.3 billion in Indian currency).
Mergers and Acquisitions in India in 2007
Some of the important mergers and takeovers in India in 2007 were -
Mahindra and Mahindra acquired 90% stake in the German company Schoneweiss.
Corus was taken over by Tata
RSM Ambit based at Mumbai was acquired by PricewaterhouseCoopers.
Vodafone took over Hutchison-Essar in India.

6. Every investor approaches due diligence differently. Some angel investors may request information in a detailed manner
all at once, while others may simply request information at different times or stages. Regardless of an investor’s
method to obtain information on a potential company, it is a proven fact that exercising thorough due diligence is
indicative of more profitable returns. The following documents may be requested in due diligence.
General Corporate Materials
These documents include:
The company’s
o articles of Incorporation (and all amendments)
o bylaws (and all amendments), minute book (including all minutes and resolutions of shareholders and directors,
executive committees, and other governing groups)
o organizational chart
o list of shareholders (and number of shares held by each)
Copies of
o agreements (relating to options, voting trusts, warrants, puts, calls, subscriptions, and convertible securities)
o active status reports (in the state of incorporation for the last three years)
A list of
o all states where the company is authorized to do business (and annual reports for the last three years)
o all states, provinces, or countries where the company owns or leases property, maintains employees, or conducts
business
o all of the company's assumed names and copies of registrations
A Certificate of Good Standing from the Secretary of State of the state where the company is incorporated
Financial Information
The most recent financial statements
o that have been audited for three years (including the auditor's reports)
o that have not been audited (including comparable statements of the previous year)
The auditor's letters and replies for the past five years
A schedule of
o all indebtedness and contingent liabilities
o inventory
o accounts receivable
o accounts payable
A description of depreciation and amortization methods and changes in accounting methods over the past five years
Any analysis of
o projections, capital budgets, and strategic plans
o fixed and variable expenses
o gross margins
If available
o the company's credit report
o analyst reports
The company's general ledger
A description of the company's internal control procedures
Physical Assets
A schedule of
o fixed assets and their locations
o sales and purchases of major capital equipment during the last three years
All U.C.C. (Uniform Commercial Code) filings
All leases of equipment
Real Estate
A schedule of the company's business locations
Copies of all real estate leases, deeds, mortgages, title policies, surveys, zoning approvals, variances, or use permits
Intellectual Property
A schedule of
o domestic and foreign patents and patent applications
o trademark and trade names
o copyrights
o (copies of) and copies of all consulting agreements, agreements regarding inventions, licenses, or assignments of
intellectual property to or from the company
o (summary of) any claims or threatened claims by or against the company regarding intellectual property
o
A description of

7. o important technical know-how
o methods used to protect trade secrets and know-how
Any
o "work for hire" agreements
o patent clearance documents
Employees and Employee Benefits
A list of
o employees, including positions, current salaries, salaries, and bonuses paid during last three years, and years of service
o (and description of) benefits of all employee health and welfare insurance policies or self-funded arrangements
A description of
o all employee problems within the last three years, including alleged wrongful termination, harassment, and
discrimination
o any labor disputes, requests for arbitration, or grievance procedures currently pending or settled within the last three
years
o worker's compensation claim history
o unemployment insurance claims history
Copies of
o collective bargaining agreements, if any
o all stock option and stock purchase plans and a schedule of grants
o
All employment, consulting, nondisclosure, nonsolicitation, or noncompetition agreements between the company and
any of its employees
Resumes of key employees
The company's personnel handbook and a schedule of all employee benefits including holiday, vacation, and sick leave
policies
Summary plan descriptions of qualified and nonqualified retirement plans
Licenses and Permits
Copies of any governmental licenses, permits, or consents
Any correspondence or documents relating to any proceedings of any regulatory agency
Environmental Issues
Environmental audits, if any, for each property leased by the company
A list
o of hazardous substances used in the company's operations
o of environmental permits and licenses
o identifying and describing any environmental litigation or investigations
o identifying and describing any known superfund exposure
o identifying and describing any contingent environmental liabilities or continuing indemnification obligations
o
A description of the company's disposal methods
Copies of all correspondence, notices, and files related to EPA, state, or local regulatory agencies
Tax matters
Federal, state, local, and foreign income tax returns for the last three years
States sales tax returns for the last three years
Employment tax filings for three years
Excise tax filings for three years
Any
o audit and revenue agency reports
o tax settlement documents for the last three years
o tax liens
Material Contracts
A schedule of all subsidiary, partnership, or joint venture relationships and obligations, with copies of all related
agreements
Agreements
o loan and bank financing contracts, line of credit, or promissory notes to which the company is a party
o security, mortgages, indentures, collateral pledges, and similar contracts (including guaranties to which the company is
a party)and any installment sale contracts
o distribution, sales representative, marketing, and supply contracts
o any options and stock purchase contracts involving interests in other companies
o nondisclosure or noncompetition agreements to which the company is a party
o

8. Copies of all contracts between the company and any officers, directors, five-percent shareholders, or affiliates
Any letters of intent, contracts, and closing transcripts from any mergers, acquisitions, or divestitures within the last
five years
The company's standard quote, purchase order, invoice, and warranty forms
All other material contracts
Product or Service Lines
A list of all existing products or services and products or services that are under development
Copies of all correspondence and reports related to any regulatory approvals or disapprovals of any of the
company's products or services
A summary of
o all complaints or warranty claims
o results of all tests, evaluations, studies, surveys, and other data regarding existing products or services and products or
services under development
Customer Information
A schedule of
o the company's twelve largest customers in terms of sales thereto and a description of sales thereto over a period of
two years
o unfilled orders
Any supply or service agreements
A description or copy of
o the company's purchasing policies
o the company's credit policy
o the company's major competitors
A list and explanation for any major customers lost over the last two years
All surveys and market research reports relevant to the company or its products or services
The company's current advertising programs, marketing plans, budgets, and printed marketing materials
Litigation Issues
A schedule of all pending litigation
A description of any threatened litigation
Copies of insurance policies possibly providing coverage as to pending or threatened litigation
Documents relating to any injunctions, consent decrees, or settlements to which the company is a party
A list of unsatisfied judgments
N. Insurance Coverage
A schedule of
o (and copies of) the company's general liability, personal and real property, product liability, errors and omissions, key-
man, directors and officers, worker's compensation, and other insurance
o the company's insurance claims history for past three years
Professionals
A schedule of all law firms, accounting firms, consulting firms, and similar professionals engaged by the company in the
past five years
Articles and Public Relations
Copies of all advertising and marketing articles relating to the company within the past three years
Press releases and clippings
Analyst reports