Readers of M&A Critique are always interested in the details of a transaction may it be merger, acquisition, demerger or slump sale and exchange. One always wants to know the structuring of the deal and the reasons and long-term implications of structuring. But have we ever wondered what the moment is or what are the reasons for a business owner, top management, or for that matter the CEOs and the CFOs to decide that we shall go for structuring? We shall try to articulate a generalized view irrespective of sector or business size on what are triggers for a business owner to think about expanding or exiting their business.
Types of Restructuring
There are a lot of terms which are related to restructuring like Merger, Demerger, Slump Sale, Slump Exchange, Acquisition but broadly speaking we can tag it as internal restructuring or external restructuring.
Internal Restructuring is a type of restructuring i.e. when a transaction is between a company and its related companies i.e. their subsidiaries or group companies. Reduction of capital, buyback of shares, etc. are further types of internal re-structuring which the company does within itself are all examples of internal restructuring. You can read more on the same here.
Example – Greenply demerges MDF business to embark on growth
When restructuring is between two unrelated companies it be termed as external restructuring. Mainly to pave the way for growth, optimize resources, succession planning, etc. entities pursue external re-structuring. Any proprietor, partnership, company (private or public) looking to sell or buy another business in part of full can be categorised under external restructuring.
Example – GSK giving a boost to HUL in an all equity merger!
We shall now look at the triggers which make a business owner embark on the external restructuring journey. In next issue, we will cover the distinct reasons for perceiving the internal re-structuring
Triggers for Expansion
Optimum Utilization of Internal Resources
One of the factors of a good or growing business is the accumulation of cash year on year. This surplus cash, to the extent not distributed as dividends and not required to sustain the present business, gives freedom to business owners/management to use it judiciously for the growth of the company to generate expected risk adjusted returns by its stakeholders. It becomes a trigger for the owners to begin looking out for other companies which are a good fit for them to grow but adding on to the existing business or help in vertical or horizontal integration of their business.
Example: Mastek’s acquisition of Evosys felicitous consideration structure
Expansion of Business (Human or Machine or Product)
There are times when business is running with 100% utilization of its resources or entities want to spread their wings by increasing product portfolio or geography. For a manufacturing industry utilization would be production capacity and for the services industry, it would its workforce. Rather than trying to buy new machinery or employing new people, it is easier to buy a company in its sector which has operating machinery or workforce and integrates them with existing business.
Example: GMM Pfaudler to acquire ready-made Glass Lined Equipment manufacturing capacity at Hyderabad
Need to Diversify from Current Business
An entrepreneur is always looking at opportunity to grow their business or looking for new different businesses to venture. Many times a fantastic opportunity to diversify acts a trigger for business owners to buy businesses even though in a different sector.
Example: RIL’s e-commerce push: Will Reliance Retail be the next Jio?
Increase market share/reduce competition
The need to capture market share and reducing competition is triggering for bigger companies and the management to buy in their competitors or integrate small unorganized players. Big companies are always on a lookout for inorganic growth opportunities and we see that they undergo some transaction every few years and more often for tech companies.
Example: Future-Reliance deal: The rise and fall of India’s retail maverick Kishore Biyani
Creating a complete range of product or services — Bolt-on Acquisitions
Many companies start with one service or product and over time due to demand and knowledge of the market, it looks to add on complimentary services/products. So rather than spending resources to build it from ground up to acquire a company already supplying these add-on services/products. Basically, by doing so they can able to offer a complete solution or ecosystem to their customers.
One of the best examples of this could be Reliance Jio. In past few years, apart from entry into the telecom sector they did ample of small acquisition to offer their customer a complete solution. Now with this, they can create an edge over competitions and able to charge some premium to its customers.
Lot of technology companies are also embarking on the same path.
Great offer to buy a Business at discounted price
Any business owner would not pass a good deal on buying a running business. The trigger here although comes when the seller goes to the potential buyer with a proposal which is sometimes too good to be true for the buyers. Post initial due diligence, normally the deal does go through most of the time.
Triggers for Exiting/Selling a Business
The question in front of many first-generation entrepreneurs is to pass on their business to the next suitable person. In India most of the business are family-owned and succession issues are common. In case the next generation is not interested in running the current business it triggers a sale choice for the current business owner and search for a potential buyer begins for them. We see this more often in micro, small and medium business as the large-scale business although are largely family-owned are run by effective management which can keep on changing.
Example: Rajkumar forging Ltd was acquired by Western India Forgings due to no successors were ready to enter the business
Operational or Financial Distress
Business decisions can go wrong many times but sometimes it can lead to a major operational or financial distress of the company. The distress can sometimes force the owner’s hand to sell a business and sometimes at a discount. No entrepreneur would want to end up in a situation like this but often the best way to sell a distressed business early rather than later.
Great offer from buyer
A buyer looking for aggressive expansion then they are looking to buy business in brief time and can give a premium for the same. Sellers should be open to idea if the offer is great for them.
Focus on Core Business
Many companies start with multiple businesses or expand themselves into other businesses to pursue growth strategy but once each of the business verticals matures and able to sustain with its own cash flows, they carve out the businesses to unlock value for all stakeholders and to increate a path for independent growth of each of the business verticals.
Example: Thomas Cook to focus back on travel business post series of varied acquisitions: Unlocking potential value
Harita seating & Minda Restructuring
In India, the re-structuring perceived to be an option available for bigger companies only. However, finally one must understand that this can be used by a proprietor to a company like Reliance. The way to do it will change as per the size and requirements, however, can create a similar value to all the entities. Identifying the need for restructuring and various ways becomes the most crucial thing in any restructuring.
For management or their professionals should revisit the growth strategies and requirements for restructuring at least once in every five years.
We shall look at the reasons for internal restructuring in a different article. This article also does not look at joint ventures or strategic partnerships which are also better structuring options in certain circumstances.
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