The way companies can be combined, a company can also be divided into more than one legal entities. The divisions of the company are referred to with different terms such as demerger, spin off, split off, split-up, carve out, divestment, divestiture, etc.
When to undertake business divisions? A company should undertake strategic division of business to focus on its core core activities, to get rid of non-strategic assets, to get rid of an attractive markets, to get rid of an attractive products, to get rid of an unattractive geographic locations, or even to raise money in difficult times for the rest of the business.
It is creating subsidiary with same proportion of shares as the main company. In a spin off, a company creates a subsidiary. The holding in the subsidiary and the main company have the same proportion. When is spin-off of carried out? When the company wants to take different decisions, different payment structure, different strategy; wants to give a different degree of push to a product, it creates a subsidiary through spin off.
In a split-up, a holding parent and a few subsidiaries are created from the original company. In the process of splitting up of a company, the company creates a holding company ( which has only financial assets and no physical production operations) and this holding company in turn holds the shares of the subsidiary companies. The shareholding could be different in each company.
When is split up carried out? When a company is into diversified businesses, and the management competencies to run these different activities cannot be managed centrally by the same management, a company is split-up into many subsidiaries. There is no interference from the people not belonging to a product or market in the operations making management of each subsidiary efficient. This is a convenient tool to divide the family wealth in corporate form among the heirs.
It means to separate a business vertical & sell to the outsiders. The division in the form of a split off is a a business transfer in true sense. In the process of split off, a certain vertical of a company is separated into a new, different company; and then it is sold to a third party.
When is split off carried out? When the company wants to exit a certain product, practical, market, or geographical location, it can create a new company, sell it and get rid of that.
In an equity carve out, the holding company reduces its holding in a subsidiary company to very small fraction and instead of showing it as a subsidiary it is shown as just another investment. All the income from such new investment is treated as investment income.
When is equity carve-out undertaken? When a holding company has a substantial shareholding in a subsidiary, it has to report the consolidated income and also fulfill a lot of compliance activity. By becoming marginal or minority shareholder, statutory and regulatory as well as business risk of subsidiary is done away with. However, the financial benefits in the proportion of leftover ownership continues.
When a government sells its stake in the public sector undertakings, it is called divestment. It is typically undertaken through a tender. The process of divestment requires to be fair, equitable and transparent in compliance with principles of natural justice for all the bidders.
When is divestment undertaken? Instrument is undertaken by the government to exit from unrelated business activity and to raise funds to meet the fiscal deficit. It possess a very good opportunity for private businesses to acquire strategic assets in the country.
It is same as divestment but the term is used for the process of dilution of shareholding in the private or public limited companies through a process that is similar to that of divestment. Unlike divestment, divestitures are led by pure commercial motive.
When does divestiture to take place? The dynamics in the shareholding of many companies have many undercurrents. If an investor, or an investor group, or a business house changes its investment strategy, sectors of interest, alliances, etc., it disposes of its existing holding in one company and looks out for new business.
Apohan’s services for mergers
Apohan carries out professional, end-to-end, customised consultancy services under above classification of merger and acquisition activities to achieve the objectives of the business. Following are the Apohan’s services for division of a company:
Understanding business client objectives
Preparation of client profile
Industry scanning for strategic investor company who would be interested in buying split-up entity
Study of applicable local legal and regulatory framework for mergers
Analysis of broad demerger options (contractual, equity, local, foreign, etc)
Analysis of mode of issue of equity (private placement, etc)
Analysis of form of equity (common, preference, convertible, etc)
Orientation of client management for the demerger process
Preparation of the demerged entity profile
Carving out a new business from a location, product line or market segment, etc
Incorporation of a new company from demerged entity
Preparation of the desired target investor profile (ticket size, fund types, etc)
Anonymous advertising in print media, online media, social media
Circulation of opportunity among investor forums, business forums, online deal platforms
Preparation of the a list target investors
Ice-breaking discussions with target buyers
Selection of the target investor
Preparation of mutual NDA between principles
Structuring of the merger
Negotiation for sharing of control
Role of the previous directors
Financial performance targets in case of turnaround
Formulation of a strategy for a demerged company (size, location, capacity, etc)
Preparation of project information memorandum
Preparation of project profile
Preparation of a Business plan
Preparation of time Schedule of investment requirement
Negotiation on mode of issue of equity
Finalization of type of equity
Preparation of nature of amendments in MOA & AOA
Preparation of of drafts of board resolutions for internal approvals
Preparation of the financial model
Preparation of valuation for various levels of Equity stakes in the company
Preparation of key strategic terms of demerger agreement
Selection of accounting, taxation and secretarial experts
Valuation for the purpose of taxation through certified valuers
Identification of due diligence agencies
Assistance in due diligence or reverse due diligence (corporate, financial, key contracts, marketing, procurement, key assets, real estate, manufacturing facility, permits & certifications, technology, operations, brand, intellectual property, compliance, associate companies, forensic, human resources, information technology, administration, etc.)
Preparation of due diligence report
Preparation of risk profile of the envisaged merged entity
Compilation of data for specific query
Preparation of term sheet
Preparation of draft business transfer agreement
Assistance in board meeting and General Meeting as special expert invitees
Preparation of disclosure schedule
Assistance in negotiation of business transfer agreement
Assistance in execution of the investment document
Assistance in understanding the investment payment process
Assistance in disbursement of payment
Resolution of deadlocks
Key inputs on integration process
Hand holding support for management of joint venture after the deal