An organization can expand through mergers and acquisitions. In a merger a company joins with the other company to form a new organization Acquisitions occur between firms in the same basic industry.
Forms Of Corporate
The important forms of
in Ownership Structure
Mergers and Acquisitions
An organization can expand through mergers and
acquisitions. In a merger a company joins with the other company to form a new
organization Acquisitions occur between firms in the same basic industry. For
example Nestle acquired Richardson Vicks (both in Consumer Products). The
acquiring firm not only obtains new product and markets but also confronts
legal problems, structural deficiencies and diverse values.
Alternatively a public Tender Offer may be made to
the shareholders for purchase of shares. These are easy only when the
shareholding by the management and directors is comparatively very low. In
many Indian companies such shareholding is comparatively very low and, they are
easily vulnerable to hostile takeovers.
Joint ventures occur when an independent firm is
created by at least two other firms. In an era of globalization, joint ventures
have proved to be an invaluable strategy for companies looking for expansion
Divestiture strategy involves the sale or
liquidation of a portion of business, a major division profit centre of SBU.
Divestment is usually a part of restructuring plan and is adopted when an
unsuccessful turnaround has been attempted.
Spin - off refers to creation of new legal entity
by the parent company. The existing shareholder of the parent company will be
allocated shares in the new entity on a prorata basis. Unlike in a divestiture,
the parent company does not receive any payment in case of a spin-off.
Spin-offs are resorted mostly for the purpose of
better focus on different businesses. The new entity can develop its own
strategies for the development of its business. The original parent, on the
other hand, can now concentrate more on its core businesses. There are two
variations of Spin-off: Split-off and split-up.
In the case of a Split-off, a portion of existing
shareholders receives stocks in a subsidiary in exchange for parent company stock.
In the case of a Split-up, the entire firm is
broken up in a series of spin-offs, so that the parent ceases to exist.
There are several means of consolidating and
enhancing corporate control. “Premium buy-backs represent the repurchase of a
substantial stockholder’s ownership interest at a premium above the market
price (called greenmail). Often in connection with such buy-back, a standstill agreement
is written. This represents a voluntary contract in which the stockholder agrees
not to make further attempts to take over the company in the future. When a
standstill agreement is made without a buy-back, the substantial stockholder is
simply agrees not to increase his or her ownership which presumably would put
him or her in an effective control position.
Anti-takeover amendments seek to make an
acquisition of the company more difficult or expensive. These include (1)
supermajority voting provisions requiring a high percentage (for example, 80
percent) of stockholders to approve a merger, (2) staggered terms for directors
which can delay change of control for a number of years, and (3) golden
parachutes which award large termination payment to existing management if
control of the firm is changed and management is terminated.
The proxy contest is a dubious way by which the
management of a company seeks to undermine the control position of the ‘incumbents’
or existing board of directors. This is sought to be achieved by an outside
group, referred to as dissidents or insurgents obtaining representation on the
board of defectors of the company.
Changes in Ownership Structure
The ownership structure of a firm may be changed
due to various reasons. As a firm grows the ownership structure may undergo
change. For example, a sole proprietorship may be converted into a partnership,
when a partnership firm grows and when more ownership capital needs to be
brought in a private limited company may be formed.
Exchange offer may involve exchange of debt or
preferred stock for common stock, or conversely, of common stock for more
senior claims. Several cases of turnaround involve exchange of debt for equity.
For example, the government loan to a public or joint sector unit may be
converted into equity. Such a measure helps to reduce the interest burden and
reduces cash outflow by loan repayment also.
Buy-back of shares by a company help tilt the
management control. If the company buys back shares from those who hold
substantial shares it
could tilt the control in favour of the promoters, although the percentage of
shares they hold does not increase. Buy back of shares can also guard against
take-overs to some extent. It can also help stabilize the share prices. A major
objection to the buy back of shares is that it provides scope for manipulation
of share prices by the management.
Management buy-out may involve the purchase of a
division of a company or even a whole company by a new entity formed
specifically for this purpose. When such a purchase is financed by large debt
(i.e., highly leveraged) it is referred to as Leveraged buy-out(LBO). LBOs are
very risky because of the high interest burden and loan repayment obligation. A
default in repayment would aggravate the interest burden and cash flow problem.
LBOs have landed many companies is serious crisis.
Tags : Strategic Management - Strategy Formulation
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