PAN African eNetwork

Project
Masters of Business Administration (IB)
Accounting and Finance
Semester - I
Dr. N N Sen Gupta
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1

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ISSUE OF SHARES
&
DEBENTURE

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SHARES

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Types of shares
1. Preference shares
Cum. Pref. Share, Non Cum. Pref. Share,
redeemable Pref. Share, Non participating pref.
Share, Participating pref. Share

2. Equity sharesCompanysamendment Act,2000- shares with

differential voting rights permissible

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ISSUE OF SHARE
Issue of prospectus
Application money at least 5% of face value of shares
Minimum subscription of 90% mandatory as per sebi ; refund to
the applicants within 42 days of the closure of issue; delayed
refund interest @ 15% p.a.
Allotment money and subsequent calls- min. 1 month period
Sebi rules- size of issue up to 500 crores- shares are fully paid
within 12 months of the date of allotment
Min. Application money paid by the applicant 25% of the issue
price
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STEPS FOR THE ISSUE OF SHARE

1. TO ISSUE PROSPECTUS
2. TO RECEIVE APPLICATIONS
3. TO MAKE ALLOTMENTS
4. TO MAKE CALLS

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Accounting entries for issue of share

Application received:
Bank A/c Dr.
To Equity Share Application A/c
Allotment :
Equity Share Application A/c Dr.
To Equity Share Capital A/c

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Contd
Amount due on allotment:
Equity Share Allotment A/c Dr.
To Equity Share Capital A/c
Allotment money received:
Bank A/c Dr.
To Equity ShareAllotment A/c

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Contd
First call due:
Equity Share First Call A/c Dr.
To Equity Share Capital A/c
Receipt of call money:
Bank A/c Dr.
To Equity Share Capital A/c

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Issue of shares :
Full subscription
Under subscription
Over subscription
- Rejection and full allotment
- Proportional (pro-rata allotment

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Over subscription
Excess application money
Adjusted against allotment money.
Any surplus still remaining is either refunded or treated as
calls in advance which is a separate item between share
capital & reserves; Interest @ 6% p.a. Paid by the Co.
Calls in advance A/c
Dr.
Bank (balance if needed) Dr.
To Call (1,2,final) A/c

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Issue of shares at premium (sec 78)

Issue price > par (face) value
Share premium receivable along with allotment
Capital reserve
Utilization of share premium

Issue of fully paid bonus shares to members

Writing off preliminary expenses of the co.
Writing off discount on the issue of shares /debentures
Providing premium on the redemption of preference shares
Buy back of shares
Share application a/c
To share capital a/c
To share premium a/c

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dr.

Issue of shares at a discount: (sec 79)

Issue price < par (face) value
Issue must be of a class of shares already issued
Issue permissible - one year since the date of
commencement of business
Max . Discount @ 10% or higher rate as CLB permits
Issue within 2 months of the sanction
Share allotment a/c
dr.
Discount a/c
dr.
To share capital a/c

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DEBENTURES

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DEBENTURE
It is a certificate which acknowledges that
the company owes to the persons a sum
of money ,promises that a stated rate of
interest will be paid periodically to the
person named in the certificate .

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KINDS OF DEBENTURES

Redeemable / Iredeemable

Secured/ Unsecured

Full convertible debenture's, Partial

Convertible debentures, Non convertible
debentures

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KEY POINTS
Debt- servicing on issue of debentures
Payment of interest
Repayment to debenture holders at
redemption including premium if any

Tax deducted at source on interest and net interest

paid to holders
Debenture Interest a/c
Dr.
To TDS payable
To bank (net receipt)

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REDEMPTION OF DEBENTURES
Expiry of fixed period
Drawing of lots
Purchase of own debentures in the
open market

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Size Structure
Organizational Growth

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Internal Growth vs. External Growth

Internal growth involves growth through

expanding market share and producing
more goods and services
External growth is growth by acquisition
(merger or takeover)

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External Growth
A merger occurs when two companies
voluntarily come together, resulting in a
new legal identity
A takeover is where one company makes
an offer of acquisition to the shareholders
of another (takeovers can be hostile)

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Types of Mergers
Horizontal merger is a combination
between firms at the same stage in the
production process (example: DaimlerBenz and Chrysler)
Vertical mergers involve firms at different
stages of the production process

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Horizontal Mergers
Many large companies achieve their size
this way
Merged firms may benefit from economies
of scale and increased market share
In some cases these mergers are used to
react to competitors

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Vertical Mergers
Vertical mergers can run backward toward the
beginning of the production process or forward
to the end
Backward integration allows control of raw
materials, and may restrict competitor access
Forward integration allows control of the outlet
for the finished product
Economies of scale may be achieved

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Advantages of External Growth

Fast
Acquiring firm has access to an established
management team
If the shares of the acquiring company have high
value compared to the shares of the acquired
company, additional cash may not be needed
Purchasing existing assets may be cheaper than
building new production facilities

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Disadvantages of External Growth

Many takeovers and mergers fail, due to

conflicts in management, corporate
culture, and overspending on purchase
price

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Finance for Growth

Internal Sources
Reinvestment of profits
There is an opportunity cost for use of
those funds, therefore, financing through
reinvestment of profits should be judged
on rate of return, just like any other source
of financing

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External Sources

Banks
Capital Markets
Money Markets
Government
Trade Credit

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Bank Financing
Short- and medium-term financing through
loans and overdrafts
Loans include lines of credit

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Capital Markets
Primary markets-the buying and selling of
new stocks and shares
Secondary markets-buying and selling of
existing stocks and shares

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Types of Shares
Preference shares
Ordinary shares
Debentures

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Preference Shares
Represents ownership in the company
Carry a fixed dividend
Holders have a preference over other
shareholders in the payment of dividends
and on liquidation
No voting rights

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Ordinary Shares (Equity)

Represents ownership in the company

No fixed dividend (Dividends are declared
and paid upon decision of management to
do so)
More risky than preference shares for the
holder
Holders are last in line upon liquidation
Holders have voting rights

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Debentures
Debentures are bonds given in exchange for a loan to
the company
Company agrees to repay the borrowed amount at some
date in the future (maturity date), and to make annual
payments of interest until maturity (coupon payments)
Debenture holders will be paid interest before dividends
are paid to shareholders
Debenture holders are NOT owners, but they are
Creditors of the company
This is a form of debt financing

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New Issue of Shares(IPO)

Company will employ an investment bank

to advise on number of shares to issue,
price, and other matters
Investment bank, acting as underwriter,
will attempt to secure commitments for the
stock from institutional investors prior to
the sale date
IPOs are expensive

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Limits to Growth

Excessive debt financing

Dysfunctional management structure
Stale or declining product market
Government policies

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Small Firms vs. Multinationals

Small Firms
What is a small firm?
Size of the firm may be based on number of
employees or amount of revenues
To promote uniformity in Europe, the EU
proposed members use less than 250
employees as the definition of small to medium
sized enterprises (SME)
Under this definition, a large percentage of
manufacturing firms and service firms in the UK
are small firms

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Reasons for Growth in Small Firm Sector

Changing pattern of industry

Changes in consumer spending habits
Flexible specialization and growth of
subcontracting
Reorganization and job reduction
Government policy
Growth in self-employment

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Advantages of a Small Firm

Clearly defined small markets

Specialist, quality and non-standardized
products
Geographically localized markets
Development of new ideas

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Networking

Subcontracting
Networking
Virtual organization
Joint ventures
Consortia

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Subcontracting
Current trend is an increase in
subcontracting, where firms delegate a
part of the production process to another
firm, or delegate business services
Examples, subcontracting out accounting
or HR functions to specialist firms
Reduces costs for large firms and creates
a larger market for small firms

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Networking
Networking-relationships that exist between
organizations and people within the
organizations
Two basic types:
1) Where firms are members of a network, but
the network has a different name from individual
firms
2) Where firms are part of a network of
independent firms, but the network does not
have a separate identity

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Virtual Organization
Virtual organization-a network-based
structure built on partnerships where a
small core operating company outsources
most of its processes
Advantages are increased flexibility,
efficiency, and responsiveness to
changing market conditions
Also minimizes costs

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Consortia
A consortium will include contractors,
suppliers, bankers and other groups who
have expertise and resources to carry out
a large product
Example: Eurofighter

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Multinationals
Very large companies with central control
but operations in many countries
Growth of multinationals is directly related
to more relaxed exchange controls and
improved communication

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Advantages of Multinationals
MNEs can locate their activities where it best
suits them
MNEs can cross-subsidize operations, meaning
profit from one market can support operations in
another
MNEs can avoid tax in some countries by
negotiating tax breaks or using transfer pricing
MNEs can take advantages of subsidies and tax
breaks offered by governments

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Effects of MNEs on Local Economy

Labor market
Balance of payments (inflows of
investment, but outflows of dividends and
profits)
Flow of goods
Exploitation of developing countries?

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Globalization
Globalization the process of integration
of markets and production world-wide
Two main reasons:
1) Decline in barriers to trade and
investment
2) Rapid advancement in communication
and IT technology

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CORPORATE RESTRUCTURING

Corporate restructuring refers to the

change in ownership, business mix, assets
mix and alliances with a view to enhance
the shareholder value. Corporate
restructuring may involve ownership
restructuring, business restructuring and
assets restructuring.

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CORPORATE RESTRUCTURINGcontd.

Ownership restructuring is affected through

m&as, lbos, buyback of shares, spin-offs, joint
ventures and strategic alliances.
Business restructuring involves the
reorganization of business units of divisions
through divestment, brand acquisitions etc.
Asset restructuring involves the acquisition or
sale of assets and their ownership
structure.eg.sale and leaseback of assets,
receivable factoring etc.

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Mergers and
Acquisitions

Expansion
Predominant reasons for expansion:
Existence
Advantages of Large Scale
Use for Higher Profits
Monopolistic Ambitions
Better Management
Natural Urge
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Forms of Expansion: Internal Expansion

It results from the gradual increase in the
activities of the business.

External Expansion/Business
Combination
It refers to business combination where two
or more concerns combine and expand their
business activities.
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Forms of Combination:1.Merger or Amalgamation

A merger is combination of two or more
companies into one company.
The income tax Act, 1961 of India uses the term
amalgamation for merger.
It may take any of the two forms:
Merger thru absorption
Merger thru consolidation
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2.Acquisition and Take-Over

When a company takes-over the control of
another company thru mutual agreement, its
called Acquisition or friendly take-over. On the
other hand, if the control is acquired thru
unwilling or when the take-over is opposed by
the target company, it is known as Take-Over

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3. Holding Companies:
Its a form of business organization which
is created for the purpose of combining
industrial units by owning a controlling
amount of their share capital.

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Reasons of Mergers:

Economies of Scale
Operating Economies
Synergy
Growth
Diversification
Utilization of Tax Shields
Increase in Value
Elimination of Competition
Better Financial Planning
Economic Necessity

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Types of Mergers:1.Horizontal Merger

When two or more companies dealing in
same product or service join together,
known as horizontal Merger.
Reason:
To avoid competition b/w the units.

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2.Vertical Merger
A merger of firms engaged at different stages
of production or distribution of the same
product or service.
Reason:
To take up two diff. stages of work to ensure
speedy production or quick service.

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3.Conglomerate merger
When two concerns dealing in totally
different activities join hands it will be a
case of conglomerate merger.
Reason:
To diversify the activities.

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LEGAL AND PROCEDURAL ASPECTS OF

MERGER

Analysis of proposal by the

companies
Determining Exchange ratio
Approval of board of directors
Approval of Shareholders
Consideration of interest of the
Creditors
Approval by the court
Clearance by Government
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Search & Screening

Search focuses on how & where to look
for suitable candidates for acquisition.
A few candidates are short listed &
detailed information about them is
obtained.
Merger objectives are the basis of search
& screening & include attaining faster
growth, improving profitability, improving
managerial effectiveness, gaining market
power & leadership, achieving cost
reduction etc.
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Valuation of Firms
Discounted Cash Flow Approach the DCF approach
relates the values of the firm to the present values of its
expected future cash flows.
First Step To estimate the Free Cash Flow for the
explicit forecast period.
Free Cash Flow Free Cash Flow from Operation +
non-operating cash flows
Free Cash Flow from operations = Gross Cash Flow Gross Investments

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Computation of Gross Cash Flow

EBIT
Less: Taxes
= Net operating Profit less Adjusted
Add: Depreciation
Add: Non-Cash Charges
= Gross Cash Flow

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Taxes (NOPLAT)

Computation of Gross Investment

Increase in Net Working Capital
Add: Capital Expenditure Incurred
Add: Increase in Other Assets
= Gross Investment
Computation of Non-Operating Cash Flows
Non-Operating Cash Flows Post Tax Cash Flows from items
other than the regular operations of the firm e.g. sale profit
realized on sale of fixed assets.

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Second Step - To compute the cost of capital

K0 =
Ke S/V + Kp P/V + Kd (1 - t) B/V
Where,
Ko = Weighted average cost of capital
Ke = Cost of equity capital
Kp = Cost of preference capital
Kd = Cost of debt capital
S = Market value of equity capital
P = Market value of preference capital
B = Market value of debt
V =S+P+B
T = Applicable tax rate to the firm.

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Third Step: Computing the continuing value of the firm. Continuing value
represents the value of the Free Cash Flows beyond the explicit forecast
period.
CVn = FCFn+1 / (K g)
Where,
CVn = Continuing value of the firm at the end of
the year n.
FCFn+1 = Expected free cash flow for the year
n+1
K = weighted average cost of capital
G = expected perpetual growth rate of the free
cash flow.

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Last step: Determination of the value of the firm.

The free cash flow projections & continuing value of the firm are
discounted by the cost of capital to get the present value of the
cash flows and value of non-operating assets like investments
one added to it. Market value of all claim are deducted to arrive
at the ownership value of the firm.

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Deal Structuring

A well structured deal is one in which risks,

rewards, resource requirement, &
responsibilities are allocated fairly among
various parties.
The key issues here areScope & duration
Legal form
Resource contributions & ownership
determination
Management & control
Performance measurement & monitoring

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Deal Structuring

contd.

Dispute resolution mechanism

Revision of the agreement
Termination of the agreement
Transfer of interest
Handling of confidential information
Allocation of tax burden & savings
Regulatory compliances

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Forms of Financing a Merger:The choice of the means depends upon

the financial position and liquidity of
the acquiring firm, its impact on capital
structure and EPS, availability of debt
and market conditions.

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Forms of financing:

1. Cash Offer
Advantage:
It will not cause any dilution in the ownership
as well as EPS of the company.

2. Equity share Financing

Ideal method in case the PE ratio of the
acquiring company is very high as
compared to acquired company.

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3.Debt and Preference Share Financing

Finance a merger thru issue of fixed interest
bearing convertible debentures and
convertible preference shares bearing a fixed
rate of dividend.
4. Deferred Payment or Earn-Out plan

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5. Leveraged Buyout
Definition
A leveraged buyout is a strategy involving
the acquisition of another company using
a significant amount of borrowed money
(bonds or loans) to meet the cost of
acquisition.

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Brief history
Leveraged buyouts have had a notorious
history, especially in the 1980s when several
prominent buyouts led to the eventual
bankruptcy of the acquired companies. This was
mainly due to the fact that the leverage ratio
was nearly 100% and the interest payments
were so large that the company's operating cash
flows were unable to meet the obligation.

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The purposes of debt financing for leveraged buyouts

are:

The use of debt increases (leverages) the

financial return to the private equity
sponsor.
Tax benefit

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Some important points regarding LBOs

In an LBO, there is usually a ratio of 90%

debt to 10% equity.
Lobs today focus more on growth and
complicated financial engineering to
achieve their returns.
Most leveraged buyout firms look to
achieve an internal rate of return in excess
of 20%.
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As of 2006, the largest LBO to date was the acquisition of HCA

Inc. in 2006 by Kohlberg Kravis Roberts & Co. (KKR), Bain &
Co., and Merrill Lynch.
It can be considered ironic that a company's success (in the
form of assets on the balance sheet) can be used against it as
collateral by a hostile company that acquires it. For this reason,
some regard LBOs as an especially ruthless, predatory tactic.

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LBO Mechanics
The first stage of operation consists of raising
the cash required for the buyout and devising a
management incentive system. About 10 per
cent of the cash is put up by investor group and
50-60 per cent is raised by borrowing against
the company's assets in secured bank
acquisition loans. The LBO represents debt
bonding activity.

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 In the second stage of operation, the

organizing sponsor group may adopt the
stock purchase format or asset purchase
format. In the stock purchase format, all
the company's outstanding shares are
purchased and a new company is formed.
A new private company purchases all the
assets of the company.

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In the third stage of operation the management strives to

increase profits and cash flows by reducing operating costs and
altering market strategies to help LBO bonds managers to meet
newly set targets.
The investor group in the fourth stage may take the company
public if the company is strong and the goals of the group are
achieved.

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Norms for leverage buyouts

The Reserve Bank of India is expected to

come out with guidelines for financing
leveraged buyouts. The norms are
expected to encourage public sector
banks to finance mergers and acquisitions
(M&A).
the RBI is expected to tell banks to put in
place transparent leveraged buyout rules
approved by their boards.
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Notable leveraged buyout firms

Apollo Management
Bain Capital
The Blackstone Group
The Carlyle Group
Goldman Sachs Capital Partners (PIA)
Hellman & Friedman
Kohlberg Kravis Roberts (KKR)
Madison Dearborn
Providence Equity Partners
Silver Lake Partners
Thomas H. Lee Partners
TPG Capital, L.P.
Warburg Pincus
Caxton-Iseman Capital, LLC

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Failures
Some LBOs in the 1980s and 1990s resulted in corporate
bankruptcy, such as Robert Campeau's 1988 buyout of
Federated Department Stores and the 1986 buyout of the
Revco drug stores. The failure of the Federated buyout
was a result of excessive debt financing, comprising
about 97% of the total consideration, which led to large
interest payments that exceeded the company's
operating cash flow. In response to the threat of LBOs,
certain companies adopted a number of techniques, such
as the poison pill to protect them against hostile
takeovers by effectively self-destructing the company if it
were to be taken over.

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Post Merger Integration

A horizontal merger or acquisition requires a

detailed planning for integration.
Integration Plan: After the merger or acquisition,
the acquiring company should prepare a detailed
strategic plan for integration based on its own and
the acquired companys strengths and weakness.
Communication: The integration plan should be
communicated to all employees.
Authority and Responsibility: The first step that the
acquiring company should take is to take all
employees into confidence and decide the
authority and responsibility relationships.
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Post Merger Integration

contd.

Cultural integration: Management should focus the culture integration of the

employees. A proper understanding of the cultures of two organisations, clear
communication and training can help to bridge the cultural gaps.
for skill and competencies up-gradation through training and implement it immediately.
Structural Adjustments: After affecting the cultural integration and skills up-gradation,
management may design the new organisation structure and redefine the roles,
authorities and responsibilities. Management should be prepared to make adjustments
to accommodate the aspirations of the employees of the acquired company.
Control system: Management must ensure that it is in control of all resources and
activities of the merged firms.

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Accounting for Mergers and Acquisitions

Amalgamation involves the absorption of

the target company by the acquiring
company, which results in the uniting of
the interests of the two companies. This
merger should be structured as pooling of
interest. In the case of acquisition, where
the acquiring company purchases the
shares of the target company, the
acquisition should be structured as a
purchase.
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Pooling of Interest Method

In the Pooling of Interests Method of
accounting, the balance sheet items and the
profit and loss items of the merged firms are
combined without recording the effects of
merger.

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Illustration

(Rs. in crore)

Firm T

Firm S

Combined

Net fixed assets

24

37

61

Current assets

13

21

32

50

82

Shareholders Fund

10

18

28

Borrowings

16

20

36

Current liabilities

12

18

32

50

82

Assets

Total
Liabilities

Total

Firm

Purchase Method
Under the purchase method, the assets &
liabilities of the acquiring firm after the
acquisition of the target firm may be stated
at their existing carrying amounts or at the
amounts adjusted for the purchase price
paid to the target company. The assets &
liabilities after merger are generally
revalued under the purchase method.

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Firm S acquired Firm T by assuming all its assets and liabilities. The fair
value of Firm Ts fixed assets and current assets is Rs. 26 crore and Rs.
7crore. Current liabilities are valued at book value while the fair value of
debt is estimated to be Rs. 15 crore. Firm S raises cash of Rs. 15 crore to
pay to Ts shareholders by issuing shares worth Rs. 15 crore to its own
shareholders. The balance sheets of the firms before acquisition and the
effect of acquisition are shown in Table. The balance sheet of firm S (the
acquirer) after acquisition is constructed after adjusting assets, liabilities and
equity.

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Illustration

(Rs. in crore)

Firm T

Firm S

Firm S after
Merger

Net fixed assets

24

37

63

Current assets

13

20

Goodwill

32

50

86

Shareholders Fund

10

18

33

Borrowings

16

20

35

Current liabilities

12

18

32

50

86

Assets

Total
Liabilities

Total

Restructuring through Privatization

Going private means converting a

company whose stock is publicly held into
a private company. The small group of
investors, with incumbent management
having a substantial stake, usually holds
the private companys stock. The
ownership change is typically brought out
by buying out the shares held by the
public.
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Several factors may prompt management to take a

company private:

A public company has to incur considerable costs in

providing investors with periodical reports, holding

shareholder meetings, communicating with financial
analysts, fulfilling various statutory obligations, and so
on. These are substantially saved by going private.
The fixation on quarterly earnings may deflect the
management of a public company from the goal of longterm value creation. Going private may bring long-term
value creation into sharper focus.

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Due diligence
Due diligence, by definition, is the verification of all
information given to a company by any prospective
business associate.

Due Diligence Process

The Due Diligence Process is likely to cover the following:
the business' past and forecast financial performance
accounts

valuation of property and other assets

legal and tax compliance
major customer contracts
intellectual property protection

Origination of the Term Due Diligence

Result of the US Securities Act of 1933.
Defense that could be used by Broker-Dealers
when accused of inadequate disclosure to
investors of material information w.r.t the
purchase of securities.
Originally the term was limited to public offerings
of equity investments, but over time it has come
to be associated with investigations of private
mergers and acquisitions as well.

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Why Due Diligence?

Unfortunately, deceptive people are a fact of doing business today. Many
people misrepresent themselves and their intentions.
For example, in order to secure a deal, a company may
overstate its capabilities,
inflate its assets,
camouflage its lack of financial stability,

or even neglect to reveal bankruptcy, civil or criminal actions.

Example
A large mortgage broker, Empire Mortgage, was planning to purchase a
smaller brokerage.
Before signing the final papers, the CEO of Empire Mortgage decided to
conduct a due diligence investigation, which revealed a trail of criminal
behavior by the smaller brokerages principal officer. Included were three
indictments for
trafficking in cocaine
possession with intent to sell
and delivering controlled substances
It also revealed a conviction for domestic violence.
Due to these unsuspected findings, Empire dropped its acquisition plan,
possibly saving itself from exposure to fraud, embezzlement, or worse.

Due diligence reduces risk by ensuring the credibility of all companies and
individuals with whom a company conducts business
Companies that are wise conduct due diligence investigations routinely to
verify information and uncover discrepancies, overstatements, and unrevealed
facts. This extra check ensures that everyone involved in a proposed
relationship is accurately presented.

Restructuring of Sick Enterprises

Widely used in both the developed and developing countries
nowadays.
achieve a higher level of performance.
To
survive when the given structure becomes dysfunctional.
To
place at different levels.
Takes
At the level of the whole economy, it is a long-term response to

market trends, technological change, and macroeconomic

policies.
At the sector level, restructuring causes change in the production
and new arrangements across enterprises.
structure
At the enterprise level, firms restructure through new business
strategies and internal reorganization in order to adapt to new
market requirements.

REASONS FOR SICKNESS

Old and obsolete plant and

machinery
Outdated technology
Resource crunch
Low capacity utilization
Excess manpower
Heavy interest burden
Weak marketing strategies
Inherent problems of sick
taken over enterprises

Ineffective Management
Financial Bungling
Stiff competition
Reluctance of financial
institutions to provide funds
for revival/rehabilitation
High input cost
Erosion of net worth due to
continuous losses

STRATEGIES FOR RESTRUCTURING

Revival of PSEs through the process of BIFR;
Financial restructuring wherever appropriate;
Formation of joint ventures by induction of
partners capable of providing technical, financial
and marketing inputs;
Infusion of fresh funds;
Organizational and business restructuring;
Manpower rationalization through approved
Voluntary Retirement Scheme (VRS);
Improved marketing strategies;
Cost control measures.

FINANCIAL RESTRUCTURING
Investment is made in the form of equity
participation, loan, non-plan assistance or
through the revival packages which involve
sustainable outgo from Government or write-off
of past losses and infusion of fresh capital, etc.
Measures such as waiver of loan/interest/ penal
interest, conversion of loan into equity,
conversion of interest including penal interest
into loan, moratorium on payment of loan/
interest, Government guarantee, etc. are also
taken to improve financial strength of the
company.

BUSINESS RESTRUCTURING

Change of management
Organizational restructuring
Hiving off viable units for formation of
separate company
Closure of unviable units
Formation of joint ventures by induction of
partners capable of providing technical,
financial and marketing inputs
Change in product mix
Improving marketing strategy.

MANPOWER RATIONALISATION
Through approved Voluntary Retirement
Scheme(VRS).
Appointment of experts/core specialists
Intra and Inter organisation transfers
Accountability
Competent, skilled& trained management
Profit sharing (ESOPs)

The Art Of Takeover Defense

Copyright Amity University

The warning signals

Suddenly minority shareholders get interested in
business affairs
Company becomes object of various inspections
by bodies of state control
Becomes target of negative publicity
Small transactions of shares have considerably
increased
Other companies in industry effected by raiders
Unsolicited offers to sell shares
Copyright Amity University

Types of Takeover Defenses

Charter amendments
supermajority: 67% or more of votes
necessary to approve control change
fair fair- -price: price: supermajority clause
can be avoided if supermajority clause can be
avoided if price is high enough (P/E or P/B)
staggered board: only 1/K of board is elected
each year
poison pills: something to kill sharks that are
eager to eat
Copyright Amity University

Types of Takeover Defenses

Litigation - if some activities of target (or bidder) firm are
regulated it may slow down successful bid
Asset Restructuring
"Crown Jewel" defense: contract to sell attractive assets to third
party bidder contingent on hostile bid
"Pac Man" defense: make competing tender
offer for
shares of bidder

Leveraged Recapitalizations: partial LBO leaving

equity holders with much riskier claim
ESOPs: employees get equity claim in the firm but
employees get equity claim in the firm, but management
votes the shares of the stock in the ESOP

Copyright Amity University

Types of Takeover Defenses

Golden Parachutes
lump sum payments to target management if fired
due to takeover due to takeover
usually small relative to size of deal, so probably not
much deterrence effect

Greenmail: (targeted share repurchases,

usually at a premium) often linked with "standstill
agreements" -- bidder will go away
White Knights

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Costs of using defenses are:

Transaction costs (lawyers, investment

bankers, etc.)
May deter some deals that would have
been profitable with weaker defenses, but
aren't now
entrenchment is easier
hard (impossible) to measure deals that never
get tried

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GREENMAIL

Copyright Amity University

Greenmail
Greenmail: Situation in which a large block of
stock is held by an unfriendly company. This
forces the target company to repurchase the
stock at a substantial premium to prevent a
takeover. It is also known as a "Bon Voyage
Bonus or a "Goodbye
Kiss".

Not unlike blackmail, this is a dirty tactic, but it's

very effective

Copyright Amity University

Greenmail
Definition: Greenmail or greenmailing is a
corporate
acquisition
strategy
for
generating large amounts of money from
the attempted hostile takeovers of large,
often undervalued or inefficient companies.

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Two divergent views of Greenmails

1. Greenmailers damage shareholders

Large block investors are corporate "raiders"

who expropriate corporate assets
Raiders' voting power used to give themselves
excessive compensation and perquisites
Raiders receive substantial premium, "looting"
corporate treasury

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2. Greenmail brings about improvements

Large block investors involved in greenmail

force improvements in corporate personnel or
in corporate strategies and policies
Large block investors have stronger incentives
and superior skills for evaluating potential
takeover targets
Managers make greenmail payments to buy
time to turn around the firm

Copyright Amity University

 Greenmail sometimes accompanied by

standstill agreement
Voluntary contract in which blockholder
agrees not to make further investments in
target company during specified period of
time
If no targeted repurchase is made, large
blockholder agrees not to further increase
ownership percentage of the firm

Copyright Amity University

 Greenmail and standstill agreement

Negative returns standstill agreement
viewed as reducing probability of subsequent
takeover
40% of firms experience subsequent control
change within three years of greenmail even
with standstill agreement

Positive market reaction if greenmail

viewed as giving directors more time to
work out better solution

Copyright Amity University

 Wealth effects of greenmail

Announcement associated with negative
return to shareholders of 2-3%.
Other studies find positive abnormal
returns, both in initial "foothold" period and
in full "purchase-to-repurchase" period

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 Anti-greenmail developments
Internal Revenue Code Section 5881 of
1986 imposes 50% excise tax on recipient of
greenmail payments

Anti-greenmail charter amendments

Require management to obtain approval of
majority or supermajority of nonparticipating
shareholders prior to targeted repurchase

Copyright Amity University

Greenmail
Example: Raider takes large stake in
company, express interest in takeover
Management resists, offers to buy him out
at large premium over market price.
Raider gets huge profits without even
bidding for firm. Managers keep jobs.
Shareholders get drop in market price of
their stock.
Copyright Amity University

Greenmail Example
Bass Bros. acquire 9.9% of Texaco stock,
expressed interest in the other 90.1%.
Texaco paid $1.3 billion ($55 per share), $137
million over market price.
Outside shareholders got $35 per share.

Copyright Amity University

Example
Disneys buyback of 11.1 percent of its stock
from Saul Steinbergs Reliance Group in 1984,
which gave Steinberg a quick $60 million profit.
The day the buyback was announced, the price
of Disneys stock dropped approximately 10
percent.
A group of stockholders sued, and Steinberg
and the Disney directors were forced to pay $45
million to Disney stockholders.
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ACCOUNTING FOR
SHARE CAPITAL

Copyright Amity University

1. An authorized capital refers to

(a)

Paid up value of all shares

allotted

(b)

Called up value of all shares

allotted

(c)

Nominal value of all shares

offered to public.

(d)

That amount which is stated in the

capital clause of the Memorandum
of Association as the Share Capital

Copyright Amity University

1. An authorized capital refers to

(a)

Paid up value of all shares

allotted

(b)

Called up value of all shares

allotted

(c)

Nominal value of all shares

offered to public.

(d)

That amount which is stated in the

capital clause of the Memorandum
of Association as the Share Capital

Copyright Amity University

2.
Under the Capital Clause of the Memorandum of
Association of
the Company, it is must to
state

(a)

The division of share capital

into shares of fixed amount.

(b)

The division of the authorized

capital into different classes of
shares.

(c)

The rights of various classes of

shareholders

(d)

None of these

Copyright Amity University

2.
Under the Capital Clause of the Memorandum of
Association of
the Company, it is must to
state

(a)

The division of share capital

into shares of fixed amount.

(b)

The division of the authorized

capital into different classes of
shares.

(c)

The rights of various classes of

shareholders

(d)

None of these

Copyright Amity University

3.

Issued Capital refers to

(a)

Paid up value of all shares allotted.

(b)

Called up value of all shares

allotted.

(c)

Nominal value of all shares

allotted.

(d)

Nominal value of all shares

offered to public

Copyright Amity University

3.

Issued Capital refers to

(a)

Paid up value of all shares allotted.

(b)

Called up value of all shares

allotted.

(c)

Nominal value of all shares

allotted.

(d)

Nominal value of all shares

offered to public

Copyright Amity University

4.

Equity Shares can be issued

(a)

With proportionate voting rights

only

(b)

With differential voting rights

only

(c)

With differential right as to

dividend and voting

(d)

None of these

Copyright Amity University

4.

Equity Shares can be issued

(a)

With proportionate voting rights

only

(b)

With differential voting rights

only

(c)

With differential right as to

dividend and voting

(d)

None of these

Copyright Amity University

5.
Participating Preference Share
carries

is one which

(a)

A right to receive arrears of dividend

(b)

A rights to participate in the surplus

profits and surplus assets

(c)

A right to participate in the surplus

profits or surplus assets or both

(d)

A right to conversion into equity

share

Copyright Amity University

5.
Participating Preference Share
carries

is one which

(a)

A right to receive arrears of dividend

(b)

A rights to participate in the surplus

profits and surplus assets

(c)

A right to participate in the surplus

profits or surplus assets or both

(d)

A right to conversion into equity

share

Copyright Amity University

6.
Unless otherwise stated, the
shares are deemed
to be

preference

(a)

Non-cumulative,Non-participating
and Non-convertible.

(b)

Cumulative, Non-participating
and Convertible.

(c)

Cumulative, Participating and

Non- convertible

(d)

None of the above

Copyright Amity University

6.
Unless otherwise stated, the
shares are deemed
to be

preference

(a)

Non-cumulative,Non-participating
and Non-convertible.

(b)

Cumulative, Non-participating
and Convertible.

(c)

Cumulative, Participating and

Non- convertible

(d)

None of the above

Copyright Amity University

Prospectus of a company is
(a)

An application for shares /

debentures

(b)

An offer by the company to the

public to sell its shares or
debentures

(c)

An invitation to make an offer to

subscribe the shares of debentures
of the company

(d)

All of above

Copyright Amity University

Prospectus of a company is
(a)

An application for shares /

debentures

(b)

An offer by the company to the

public to sell its shares or
debentures

(c)

An invitation to make an offer to

subscribe the shares of debentures
of the company

(d)

All of above

Copyright Amity University

8.

An application of shares is
(a)

An acceptance of an offer to
take shares made by the
company in its prospectus

(b)

An offer to take shares made by

an applicant

(c)

An invitation to make an offer to

take shares

(d)

None of these

Copyright Amity University

8.

An application of shares is
(a)

An acceptance of an offer to
take shares made by the
company in its prospectus

(b)

An offer to take shares made by

an applicant

(c)

An invitation to make an offer to

take shares

(d)

None of these

Copyright Amity University

9.

A company can issue shares

at premium

(a)

if the Articles authorise the

company to do so

(b)

even in the absence any

express authority in its
articles

(c)

if the Memorandum authorise the

company to do so

(d)

None of these

Copyright Amity University

9.

A company can issue shares

at premium
(a)

if the Articles authorise the

company to do so

(b)

even in the absence any

express authority in its
articles

(c)

if the Memorandum authorise the

company to do so

(d)

None of these

Copyright Amity University

10.

One of the conditions

regarding
issue of shares at a discount is
(a)

The issue must be authorised by a

special resolution of the company.

(b)

The sanction of the Court must be

obtained.

(c)

At least one year must have lapsed

since the date on which the company
was incorporated.

(d)

None of the above.

Copyright Amity University

10.

One of the conditions regarding

issue of shares at a discount is
(a)

The issue must be authorised by a

special resolution of the company.

(b)

The sanction of the Court must be

obtained.

(c)

At least one year must have lapsed

since the date on which the company
was incorporated.

(d)

None of the above.

Copyright Amity University

11.
If some shares are issued to a vendor who
supplied a fixed asset, these shares are

(a)

not required to be disclosed.

(b)

required to be disclosed
separately under sub-head
issued capital.

(c)

required to be disclosed
separately under sub-head
authorised capital.

(d)

None of these.

Copyright Amity University

11.
If some shares are issued to a vendor who
supplied a fixed asset, these shares are

(a)

not required to be disclosed.

(b)

required to be disclosed
separately under sub-head
issued capital.

(c)

required to be disclosed
separately under sub-head
authorised capital.

(d)

None of these.

Copyright Amity University

12.
Maximum amount that can be collected as
premium as a
percentage of face value = ?

(a) 5%

(b) 25%
(c) 100%
(d) Unlimited

Copyright Amity University

12.
Maximum amount that can be collected as
premium as a
percentage of face value = ?

(a) 5%

(b) 25%
(c) 100%
(d) Unlimited

Copyright Amity University

Issue of
Debentures
Copyright Amity University

1.

Which debentures are secured by a charge

(a)

Debentures which are convertible on or after 18

months
(b) Non convertible debentures which are
redeemable after
18 months
(c) None of these

Copyright Amity University

1.

Which debentures are secured by a charge

(a)

Debentures which are convertible on or after 18

months
(b) Non convertible debentures which are
redeemable after
18 months
(c) None of these

Copyright Amity University

2.

Debentures interest (a) Is payable only is case of profits

(b) Accumulates in case of losses or inadequate profits
(c) Is payable after the payment of preference dividend
but before the payment of equity dividend
(d) Is payable before the payment of any dividend on
shares

Copyright Amity University

2.

Debentures interest (a) Is payable only is case of profits

(b) Accumulates in case of losses or
inadequate profits
(c) Is payable after the payment of
preference dividend but before the
payment of equity dividend
(d) Is payable before the payment of
any dividend on shares

Copyright Amity University

3.
Convertible Debentures are
which are

those debentures

(a) Convertible into equity shares only at

the option of debenture holders
(b) Convertible into equity shares only at
the option of
company only
(c) Convertible into equity shares only at
the option of
debenture holders or
company
(d) Convertible into any securities at the option of debenture
holders or company

Copyright Amity University

3.
Convertible Debentures are
which are

those debentures

(a) Convertible into equity shares only at

the option of debenture holders
(b) Convertible into equity shares only at
the option of
company only
(c) Convertible into equity shares only at
the option of
debenture holders or
company
(d) Convertible into any securities at the option of debenture
holders or company

Copyright Amity University

4.

Which of the following is

false?

(a) A company can issue redeemable

debentures
(b)
A company can issue debentures with voting rights
(c) A company can buy its own
shares
(d)
A company can buy its own debentures.

Copyright Amity University

4.

Which of the following is

false?

(a) A company can issue redeemable

debentures
(b)
A company can issue debentures with voting rights
(c) A company can buy its own
shares
(d)
A company can buy its own debentures.

Copyright Amity University

5.
In case of an issue of a debenture
of Rs
100 at Rs 110, Rs 10 is to be
credited to:

(a)
(b)
(c)
(d)

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Securities Premium Account

Debenture Premium Account
Capital Redemption Reserve Account
Debenture Redemption Reserve
Account

5.
In case of an issue of a debenture
at Rs 110, Rs 10 is to be credited to:

(a)
(b)
(c)
(d)

Copyright Amity University

of Rs 100

Securities Premium Account

Debenture Premium Account
Capital Redemption Reserve Account
Debenture Redemption Reserve
Account

6. Debenture Redemption
Premium
Account is a
(a)
(b)
(c)
(d)

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Personal Account
Real Account
Nominal Account
None of these

6.

Debenture Redemption Premium

Account is a
(a)
(b)
(c)
(d)

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Personal Account
Real Account
Nominal Account
None of these

7.
In the Balance Sheet of a
Company
Debenture Redemption Premium Account appears
under
the head:

(a)
(b)
(c)
(d)
(e)

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Share Capital
Reserves & Surplus
Secured Loans
Miscellaneous Expenditure
Unsecured Loans

7.
In the Balance Sheet of a
Company
Debenture Redemption Premium Account appears
under
the head:

(a)
(b)
(c)
(d)
(e)

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Share Capital
Reserves & Surplus
Secured Loans
Miscellaneous Expenditure
Unsecured Loans

8.

Interest on Debentures is
calculated on
(a) Its face value
(b)
Its issue price
(c) Its book value
(d)
Its cost price
(e) Its market value

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8. Interest on Debentures is
calculated on
(a)
(b)
(c)
(d)
(e)

Copyright Amity University

Its face value

Its issue price
Its book value
Its cost price
Its market value

9.
In Balance Sheet of a Company,
Interest accrued
but not due on
debentures appears under the
head

(a) Secured Loans

(b)
Unsecured Loans
(c) Current Liabilities Provisions
(d)
Contingent Liabilities

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9.
In Balance Sheet of a Company,
Interest accrued
but not due on
debentures appears under the
head

(a) Secured Loans

(b)
Unsecured Loans
(c) Current Liabilities Provisions
(d)
Contingent Liabilities

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Thank You
Please forward your query
To: Nnsengupta@gmail.com
CC: manoj.amity@panafnet.com

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