0.11. Define business action plan. How it is different from business contingency plan?
Ans. Business Action Plan: An action plan must be developed for each line of business, both existing and proposed. It is here that the goals and objectives for the organisation are developed. They are derived from the vision and mission statements and are consistent with organisational culture, ethics and the law. In strategic planning, it is essential to concentrate on only two or three goals rather than many. The idea is that a planning team can do a better job on a few rather than on many. There should never be more than seven goals. Ideally, the team should set one, well-defined goal for each line of business.
Writing goals statements is often a tricky task. By following an easy-to-use formula, goals, will include all vital components:
1. Accomplishment/target (eg. to be number one in sales by 2005).
2. A measure (eg, sales on the north region).
3. Standards (eg. number one).
4. Time frame (e.g. long-term).
Objectives link each long-term goal with functional areas, such as operations, human resource finance etc. and to key processes such as information, leadership etc. Specifically, each objective statement must indicate what is to be done, what will be measured, the expected standards for the measure and a time frame less than one year (usually tied to budget cycle). Objectives are dynamic in nature, they can change if the measurements indicate that progress toward the accomplishment of the goal at hand is deficient in any manner. Simply, objectives spell out the step-by-step sequences of actions necessary to achieve the related goals.
With a thorough understanding of how these particular elements fit and work together, an action plan is developed. If carefully completed, it will serve as the implementation tool for each established goal and its corresponding objectives as well as a gauge for the standards of their completion.
Business Contingency Plan: The key to contingency planning is to establish a reactionary plan for high impact events that cannot necessarily be anticipated. Contingency plans should identify number of key indicators that will create awareness of the need to re-evaluate the applicability and effectiveness of the strategy currently being followed. We need a contingency plan to cover the risks or uncertainties caused by changes in market environment, changes in technology, changes in customer demand etc. When a red flag is raised, there should either be a higher level of monitoring established or immediate action should be taken, this can be done only when company has a backup plan in order.
Q.12. What is corporate reformation? What is the purpose behind conducting reformation?
Ans. Corporate Reformation: Corporate reformation also known as corporate restructuring, means taking necessary actions to expand or contract organisation’s operations well as to improve efficiency and profitability. Reformation strategy involves modification of firms financial structure and internal functionalities, removing and rebuilding of areas within an organisation that require extra focus and attention from the top management. The process of corporate reformation usually takes place after acquisitions, takeovers or failures.
Purpose of corporate reformation:
1. To enhance the shareholder’s value.
2. To evaluate firm’s portfolio, funds, ownership and assets to find out opportunities to increase the shareholder’s value.
3. To focus on asset utilisation and profitable investment prospects.
4. To reorganise less profitable businesses or products.
5. To enhance value through capital reformation.
The term ‘corporate reformation’ is like an umbrella that comprises mergers, divestitures and liquidations and various types of engagements for corporate control. The essence of corporate reformation lies in achieving the long run of wealth maximisation. This study is an attempt to highlight the impact of corporate reformation on the shareholder’s value in the Indian context. Thus, it helps us to know, if reformation generates value gains for shareholders how these value gains have been created and achieved or failed.
Further, it will also focus on issues involving ownership and controls. This leads logically to the subject of leveraged buyouts. It was during 1980s that many of the new tools which made leveraged buyouts possible, including high yield or junk bonds, found favour. Mergers and acquisitions activities were largely restricted to IT and telecom sectors. They have now spread across the economy. As business world recently reported, this is the fourth wave of corporate deal-making in India.
The first happened in the 1980s led by corporate raiders such as Swaraj Paul, Manu Chhabria and RP Goenka, in the very early days of reforms. In view of the Licence Raj prevailing then, buying a company was one of the best ways to generate growth, for ambitious companies,
In the early 1990s, in the liberalised economy, Indian business houses began to feel the heat of competition. Conglomerates that had lost focus were forced to sell non-core businesses that could not withstand competitive pressures. The Tata, for instance, sold TOMCO to Hindustan Lever. Corporate reformation, largely drove this second wave of mergers and acquisitions.
The third wave started at the dawn of twenty-first century driven by consolidation in key sectors like cement and telecommunications. Companies like Bharti Tele-Ventures and Hutch bought smaller competitors to establish a national presence.
What makes the most recent wave of mergers and acquisitions different from the three previous ones is the involvement of global players. Foreign private equity is coming into Indian companies, like Newbridges recent investment in Shriram Holdings, Multinational corporations are also entering India. Swiss cement major Holcim’s investment in ACC and Oracle’s purchase of a 41 per cent stake in i-flex solution (for $593 million) are good examples.
Meanwhile, Indian companies, sensing attractive opportunities outside the country are also venturing abroad. Tata Steel has bought Singapore-based NatSteel for $486 million. Videocon has bought the colour picture tube business to Thomson for $290 million.
Such global forays have become possibilities because foreign exchange is no longer a scarce commodity. They have also become a necessity because in globalising industries, only players with global scale and reach can survive.
At the same time, the difficulties involved in making mergers and acquisitions click must not be underestimated. A paradigm shift is likely in the coming years. Friendly deals could give way to aggressive ones. In future, we may see hostile bids and leveraged buyouts. Most mergers and acquisitions so far have been cash deals. With the Sensex crossing 9000, stock deals may become more common. As the appetite for deal making increases, the valuation is also bound to go up. In short, exciting times are ahead.
The term corporate reformation encompasses three distinct, but related groups of activities shown in figure, expansions – including mergers and consolidations, tender offers, joint ventures and acquisitions, contraction-including sell offs, spin offs, equity carve outs, abandonment of assets and liquidation. Ownership and control-including the market for corporate control, stock repurchases program, exchange offers and going private (whether by leveraged buyout or other means). Mergers and acquisitions and corporate reformation are a big part of the corporate finance world. One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies-at least, that’s the reasoning behind mergers and acquisitions.
This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost efficient company. The companie will come together hoping to gain a greater market share or to achieve greater efficiency. Becaus of these potential benefits, target companies will often agree to be purchased when they know ther. cannot survive alone. Lets briefly look at each of the three major categories of reformation in the section which follow as:
Expansions include mergers, consolidations, acquisitions and various other activities which result in an enlargement of a firm or its scope of operations. There is a lot of ambiguity in the usage of the terms associated with corporate expansions.
Merger involves a combination of two firms such that only one firm survives. Mergers tend to occur when one firm is significantly larger than the other and the survivor is usually the larger of the two. A Merger can take the form of horizontal, vertical or multinational merger.
Horizontal merger involves two firms in similar businesses. For example, the combination of w on companies or two solid waste disposal companies can be horizontal merger,
Vertical merger involves two firms having different stages of production of the same end product or related end product.
Multinational merger involves two firms engaged in the unrelated business activities such as integration and joint venture.
Integration involves the creation of an altogether new firm owning the assets of both of the first two firms and neither of the two survives. This form of combination is most common when the two firms are of approximately equal size.
Joint venture, in which two separate firms pool some of their resources, is another such form that does not ordinarily lead to the dissolution of either firm. Such ventures typically involve only a small portion of the cooperating firms overall business and usually have limited lives.
Contraction, as the term implies, results in a smaller firm rather than a larger one. If we ignore the abandonment of assets, occasionally a logical course of action, corporate contraction occurs as the result of disposition of assets. The disposition of assets, something called sell-offs, can take either of three board form:
3. Carve outs.
Spin-offs and carve outs create new legal entities while divestitures do not.
Ownership and Control
The third major area encompassed by the term corporate reformation is that of ownership and control. It has been wrested from the current board; the new management will often embark on a full or partial liquidation strategy involving the sale of assets. The leveraged buyout preserves the integrity of the firm as legal entity but consolidates ownership in the hands of a small group. In the 1980s, many large publicly traded firms went private and employees employed a similar strategy called a leveraged buyout or LBO.
Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how Thanurchase is communicated to and received by the target company’s board of directors, employees and shareholders
Acquiring New Technology: To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.
Improved Market Reach and Industry Visibility: Compnies buy companies to reach new markets and grow revenues and earnings. A merger may expand two companies marketing and distribution, giving them new sales opportunities. A merger can also improve. A merger can also improve a company’s standing in the investment community; bigger firms often have an easier time raising capital than smaller ones.
That said, achieving synergy is easier said than done – it is not automatically realised once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite.
Q.13. Explain the different methods of reformation used by organisation.
Ans. Reformation Methods
There are several reformation methods doing an outright sell-off, doing an equity carve-out, spinning off a unit to existing shareholders or issuing tracking stock. Each has advantages for companies and investors. All of these deals are quite complex.