Triggers for M&A – Internal Restructuring

We looked at the diverse types of structuring possible and the triggers when a business owner is going for external restructuring. External restructuring is the option for inorganic growth strategy for the company. Internal Restructuring as mentioned earlier pertains to type of restructuring undertaken by a company and its subsidiaries or between group companies. A typical structure of the company and its subsidiaries is as below.

The above is a simplistic representation of real life structures are much more elaborate and complex. There are quite a few reasons for restructuring of this group structure, and it is mostly to do with consolidation or segregation of business verticals for several reasons.

Streamlining Group Structure

Relevant to business owners who have quite a complicated structure of holding company and subsidiaries (direct and step-down) and or sister concerns. Here streamlining would simply mean merging of relevant business verticals under one company which can be achieved by way of demerger and merger of businesses. Below we look in brief the triggers for a Business Owner to restructure their business via one of the options of Mergers, Demergers, Acquisitions or Joint Ventures. A brief video we found explains these options.

Consolidation Business verticals

Reducing number of Entities

Business owners incorporate subsidiaries or sister firms for not only taxation, governing laws, partners etc. Over the period, the benefits of creating these subsidiaries might become redundant for several reasons.

To save on administrative & other cost, business owners may decide to merge all other companies into a single entity.

Eg.: Prism Johnson Simplifies Organisational Structure

Consolidation of similar business

The group may own two complimentary businesses in different legal entities  Over a time, due to reasons like unviable to run to separate entities, stakeholders demand, regulatory challenges, strengthen financials and most important to capture synergy benefits arising out of horizontal or backward integration etc. business owners may decide to consolidate operations into a single company.

Eg.: Lux promoters value two group cos at Rs 861 crore for merger

Streamlining Promoters Shareholding

Business owners may hold stake in operating company/ies through one or more entities. Over a time, to harmonies the shareholding, Business owners may decide to collapse the holding subsidiary relation and merge the entities.

Eg.: Voltamp Transformers Ltd streamlines promoter shareholding structure

Optimum Utilization of Resources

Business owner also decides to merge one or more group companies for optimum utilization of resources. If one business is matured and generates a lot of free cash flow, their group company’s business needs a lot of cash for expansion than to transfer funds between these two companies seamlessly and in tax efficiently. Similarly, the business owner also decides to merge for optimum utilization of other resources like marketing and distribution network, management talent, power generation, excess real estate, surplus assets etc.

Segregation of Business Verticals

Separating Mature Businesses

Business owner may start multiples operations. For optimum utilization of cash flows and to provide incubation for newly started businesses, they may start the business into one company. Over a period, each business grow & matures.  For distinct growth of unrelated businesses, the business owner may decide to separate two independent mature businesses into separate companies.

Eg.: Adani Enterprises to demerge renewable energy business

Focus on Core Business

Some entrepreneurs many a time ventures into businesses which might not be their core strength. These businesses either are the part of their main holding company or are in the form of subsidiaries, sister concerns or joint ventures. Over a period, these businesses are more of a time hog for the business owner and they would rather focus on their core business. This can lead to a trigger for the business owners to separate the non-core businesses.

Eg.: Whether serial acquisitions helped camouflage losses and diversion of funds?

Family Arrangements/Succession Planning

India like many countries have mostly family-owned business, from your neighbourhood Kirana shop to huge companies like Reliance Industries, TATA group, Jindal group to name a few. One of the biggest triggers for restructuring the business for the family-owned business would be to handing over the part or whole businesses to one family members or sometimes to do an outright sale of the business in case of no family members interest in the current business. This video walks through some of these reasons.

Eg.: Separation of the Plywood Business and the Laminate business done  Greenply Industries.

Inviting Partner in one of the business

Any good entrepreneur knows that they require multiple business verticals to keep the company growing and keep on experimenting and fine tuning the same. But many times they require help from outside in form of strategic, technical, or financial partnership who can be a part of this but not their whole business. This acts as trigger for the business owner to look for person/companies with experience in the field which he wants to grow and expand which can be achieved simply via joint venture or by creating of separate subsidiary.

Eg.: Saudi Aramco deal with Reliance and the Facebook Jio deals required some internal restructuring before the said partners could be a part of its Business.

Conclusion

Indian entrepreneur starts multiple businesses as family expands and/or also surplus generated in business Internal restructuring is normally meant for business owners who have a holding company and subsidiaries or cross-holding between various group companies. Sometimes, there are overlapping businesses and/or change in family needs. In Indian scenario, most of these structures are seen in family-owned matured businesses while MNCs also often have intricate structure and require internal restructuring frequently.

While external restructuring for small and medium sized companies might come once in a lifetime of the business owner, internal restructuring is required more frequently for all types of businesses. Many small and medium sizes business owners are afraid to do restructuring due to inexperience team or advisors, assumptions of excessive cost, major compliances etc. We shall dive into some of these reasons and inhibitions of the business owners incoming articles and try to explain the enigma behind M&A in India.