SFM - B2444 - Alan Paul Jaxon PDF

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Strategic Financial Management Assignment

Submitted to – Prof. Anto Joseph Submitted by – Alan Paul Jaxon B2444

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1. Mergers and Acquisitions The term merger talks about an agreement to unite 2 existing companies into one new company, and the term acquisition means one company purchasing a major portion or all of a companies share to gain control of cash flow and operations of the target firm. It is a part of the restructuring strategy. Restructuring usually involves major organizational changes such as the shift in corporate strategies. Mergers and Acquisitions are a restructuring technique that occurs through an external method. Mergers, acquisitions, and corporate restructuring businesses in India have grown by leaps and bounds in the last decade. Types of Restructuring

Mergers & Amalgamation s

Horizontal

Acquisitions

Management Buyout

Demerger

Take overs

Divestitures

Spin offs

Vertical

Hostile Take Over

Splits

Conglomerate

Leveraged Buyout

Equity Carve Outs

Disinvestment

1.1. TYPES OF MERGERS AND ACQUISITIONS

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Various types of mergers are – ● Horizontal Merger A horizontal merger occurs when two competitors combine E.g. – Merger of Lipton India and Brook Bond to form Brook Bond Lipton India Ltd. ● Vertical Merger It is the combination of two or more companies that have different supply chain functions for the same product or service. E.g. – Microsoft and Nokia merger ● Conglomerate It is the merging of unrelated business activities. E.g. – Merger of L&T and Voltas Various types of acquisition involve ● Management Buyout It is a form of acquisition where a company's existing managers acquire a large part or all of the company from either the parent company or from the private owners. Example - MBO in Harley Davidson ● Hostile Takeover Here the board rejects the offer, but the bidder continues to pursue it. It is hostile and not friendly. ● Leveraged Buyout It is the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Example - Tata steel LBO of Corus 2006

1.2. REASONS FOR MERGER

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● Instantaneous growth, snuffing out the competition, and increasing market share ● Acquisition of capability ● Entry to a new market or product segment ● Access to funds ● Tax benefits ● Knowledge acquisition ● To facilitate vertical integration ● Gain economy of scale ● Achieve revenue synergy 1.3. HOW

DO

FIRMS

CREATE

VALUE

THROUGH

MERGERS

AND

ACQUISITIONS? ● Increase in the market share ● Enhance in the product offerings ● Gaining access to the patents, r&d, technology 1.4. MERGERS AND ACQUISITIONS VERSUS ORGANIC GROWTH ● Organic growth – It stems naturally from the established business. ● Mergers and Acquisitions – it can help speed up the time to market with new offerings instead of developing the product. Organic growth

●

Usually slower paced

●

Fairly easy to control

●

Doesn’t typically require much extra upfront investments

●

Keeps you focused on your core

Mergers and acquisitions

● dilute or strip away their control ● it requires huge sum of money ● it can add or destroy value

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1.5. ADVANTAGES AND DISADVANTAGES OF MERGERS AND ACQUISITIONS ADVANTAGES OF MERGERS AND ACQUISITIONS ● Merging can help the companies to merge their power and control over the markets ● Synergies and economies of scale ● tax benefits ● Decrease in the Risk DISADVANTAGES OF MERGERS AND ACQUISITIONS ● Loss of experienced workers ● Exhaustive re-skilling is required ● Duplication and over capability may arise ● Increase in the prices

1.6. DEMERGERS In demerger, it is the separation of a large company into two or smaller organizations. Here the objective is to reduce the size of the operation into 2 or more. Example - Reliance Group into Reliance Industries Limited and Anil Dhirubhai Ambani Enterprises

2. Corporate Restructuring Corporate restructuring or reconstruction is a decision taken by a company to change its financial structure or its activities fundamentally. Corporate restructuring is one of the methods that can be employed to meet the challenges which business faces.

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2.1. FORMS OF CORPORATE RESTRUCTURING 1. Expansions ● Mergers & Acquisitions ● Takeovers ● Joint Ventures ● Strategic Alliances 2. Sell off ● Spin-off, ● Split-off, ● Split-up ● Divestitures 3. Corporate Control ● Premium Buy-Backs ● Standstill Agreements ● Antitakeover Amendments ● Proxy Contests 4. Change in Ownership Structure ● Equity Carve-outs ● Share Repurchases ● Going Private ● Leveraged Buy-outs

2.2. SPIN-OFF, SPLIT-OFF, SPLIT-UP, LEVERAGED BUYOUTS (LBOS) In spin-offs, an independent company is created, through the sale or distribution of new shares of an existing business or division of a parent company. Businesses wanting to streamline their activities usually go for spin-offs.

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Example - PepsiCo spin-off KFC, Pizza Hut, and Taco Bell into Tricon Global Restaurants Inc. Split-up is a corporate action. In split up a single company splits into two or more separately run companies. Shares of the original company are exchanged for shares in the new companies. After split up original company ceases to exist. This is one of the effective methods to split an individual company into independent companies Example - The Hewlett-Packard Company split up in 2015, into HP Inc. and Hewlett-Packard Enterprises. Leveraged Buyout is the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Example - Tata steel LBO of Corus 2006 2.3. TAKEOVERS An acquisition offer is a corporate activity in which an acquiring entity makes a bid for a target firm. The purchasing firm can make a bid for the outstanding stock if the target company is publicly traded. This can be achieved by gaining power by stock ownership or by buying the asset itself. 2.4. STRATEGIC ALLIANCES A strategic alliance is a relationship between two organisations that have agreed to pool resources for a particular project while remaining separate entities. When comparing strategic alliances to joint ventures, the companies' participation is limited to a single project, while in a joint venture, two companies normally combine resources to form a new company.

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2.5. DIVESTITURES Here to an outside party, a sale of a portion of the firm happens. The target firm is usually paid in cash, marketable securities, or a combination of two. Example - Private equity firm Carlyle Group announced it purchased Johnson & Johnson’s Ortho-Clinical Diagnostics unit for $4.15 billion, allowing the pharmaceutical company to divest the slow-growing business to focus on more lucrative products. 2.6. OWNERSHIP RESTRUCTURING A change of ownership of a company, whether local or international, is referred to as restructuring. When an owner sells his business or hands over control of a portion of it to another entity, a transfer of ownership occurs. 2.7. PRIVATIZATION The transfer of property or company ownership from the government to a private individual. When a publicly-traded company goes private, investors are no longer allowed to buy shares in it. 2.8. DYNAMICS OF RESTRUCTURING Corporate restructuring occurs

periodically,

Certain

conditions

or

circumstances induce corporate restructuring and how should corporate governance be reformed to make it more responsive to the needs of restructuring 2.9. BUY-BACK OF SHARES Repurchase refers to a company's acquisition of outstanding stock to minimize the number of shares on the market. Companies can buy back shares to either raise the value of remaining shares by decreasing supply or to remove any risks from shareholders seeking a majority interest.

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3. Financial Engineering and Innovative Financial Instruments 3.1. MEANING OF FINANCIAL ENGINEERING The use of mathematical methods to solve financial problems is known as financial engineering. Financial engineering utilizes computer science, analytics, economics, and applied mathematics techniques and expertise to solve current financial problems as well as create new and creative financial products. 3.2. INNOVATIVE FINANCIAL INSTRUMENTS 3.2.1. ASSET-BACKED SECURITIES Asset-backed security (ABS) is a form of financial investment that is backed by an underlying pool of assets, typically debt-generating assets like loans, leases, credit card balances, or receivables. It takes the form of a bond or a note that pays a fixed rate of interest for a certain period before maturity. Asset-backed securities allow their issuers to raise funds for lending or other investment purposes. An ABS's underlying assets are often illiquid and cannot be sold on their own. As a result, the issuer will make illiquid assets marketable to investors by pooling assets and making a financial instrument out of them, a process known as securitization. 3.2.2. HYBRID SECURITIES Hybrid securities are financial instruments that incorporate the characteristics of both stocks and bonds. These securities have a higher return than pure fixed income securities like stocks, but they have a lower return than pure variable income securities like equities.

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They are less risky than pure variable income securities like equities but riskier than pure fixed income securities like bonds. A "convertible bond" is the most common example of a hybrid security. This is a bond that can be converted into a different form of protection at a later time. Normally, the bond would turn into shares of the issuing company's stock. Convertible preferred shares, also known as convertible preference shares, are a type of security that can be converted into either common stock or cash, depending on the asset. 3.2.3. CONVERTIBLE AND NON-CONVERTIBLE DEBENTURES CONVERTIBLE DEBENTURES - A convertible debenture is a form of long-term debt that can be exchanged into equity stock after a defined period. Convertible debentures are unsecured bonds or loans that have no underlying collateral to back them up. The difference between a convertible debenture and a convertible note or bond is that debentures have longer maturities.

NON-CONVERTIBLE DEBENTURES - Non-convertible debentures are fixed-income securities with particular terms and prices. They are issued by large corporations to collect funds without the option of converting them to stock. The interest rates on NCD debentures are fixed. The investor will receive the principal sum as well as interest when the investment matures. Since NCDs are not backed by collateral and depend solely on the issuer's creditworthiness, credit rating agencies' ratings are essential.

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3.2.4. DEEP DISCOUNT BONDS A deep-discount bond sells for a much lower price than its face value. These bonds, in particular, sell at a 20 percent or greater discount to par and have a yield that is considerably higher than the current rates of fixed-income securities with comparable profiles. Owing to underlying questions about the issuer's ability to repay interest or principal on the debt, high-yield or junk bonds have low market rates. However, even if the issuer is highly rated in terms of credit quality, zero-coupon bonds frequently begin trading at a deep discount. As with zero-coupon bonds, a deep discount bond would not have to pay coupons. Some zero-coupon bonds are sold at a deep discount, and they do not pay bondholders regularly. The difference between the par value and the discounted price is the yield on these bonds. This suggests that the price of zero-coupon bonds can fluctuate more than the price of bonds that pay interest regularly. For example, an OID bond could be issued at Rs 975 with a par value of Rs 1,000, whereas a deep-discount bond could be issued at Rs 680 with a par value of Rs 1,000. 3.2.5. SECURED PREMIUM NOTES SPNs are financial instruments that are issued with detachable warrants that are redeemable after a fixed period. SPNs are a form of warranted non-convertible debenture (NCD). It can be provided by businesses with a four- to seven-year lock-in duration. This means that after the lock-in era, an investor will redeem his SPN.

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Thus, SPNs are nothing more than a share warrant that can only be issued by publicly traded firms after receiving approval from the government. SPN is a hybrid security, meaning it incorporates the advantages of both equity and debt securities. 3.2.6. CONVERTIBLE PREFERENCE SHARES These shares are corporate fixed-income securities that an investor can convert into a certain number of shares of the company's common stock after a certain period or on a set date. The fixed-income portion provides a consistent income stream as well as some capital security. The choice to turn these securities into shares, on the other hand, allows the investor to benefit from an increase in the share price. For each convertible preferred share, the exchange ratio reflects the number of common shares that shareholders may obtain. Before the issuance, management decides the conversion ratio, normally with the aid of an investment bank. 3.2.7. OPTION FINANCING Options are derivative financial contracts dependent on the valuation of underlying securities like stocks. An options contract gives the buyer the option to buy or sell the underlying asset, depending on the contract form. Unlike options, the holder of an option is not obligated to purchase or sell the commodity if they do not wish to. Put options enable the holder to sell an asset at a predetermined price within a specified timeframe. Call options allow the holder to buy the asset at a stated price within a specific timeframe.

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The holder of each option contract will have a clear deadline by which they must exercise their option. The strike price of an option is the specified price of the option. Online or discount brokers are widely used to buy and sell options. 3.2.8. WARRANTS – Warrants are a type of derivative that gives you the right but not the duty to buy or sell a security (usually equity) at a certain price before it expires. The exercise price, also known as the strike price, is the price at which the underlying security can be purchased or sold. Warrants are similar to options in several respects, but there are a few main distinctions. Warrants are usually provided by the company itself, rather than by a third party, and are traded over-thecounter rather than on an exchange. Investors are unable to write warrants in the same way as they can write options....