Experimentation with structure

In the morning, today, I was informed that the Ed Board (so what if I’ve graduted, right?) needs a couple of articles for the newsletter. I had two hours.

Anyway, I decided to have a little fun while writing it. Raj had told me about how one particular writer fiddles around with the structure and makes the most boring topics like ‘Eggs’ actually fun to read. Believe me – I read and enjoyed. Anyway, I had very little time, so this is the best I could do at such short notice. Suggestions would be appreciated, since I’ve now been called up to review other articles:

Staking Claim: The theater of Mergers, Acquisitions and Restructuring

You may think corporate restructuring is boring: that fights over custody of companies can never be as exciting as Mike Tyson biting Evander Holyfield’s ear off; that battle for companies is like bidding at an art auction at Sotheby’s, and you would rather watch cricketers and coaches hurl accusations at each other on television than hear calculated and deliberate statements read out by company spokespersons.

If I told you that a merger is a mere transaction in which the assets of one or more firms are combined to form a third, new firm, or that an acquisition involves a firm taking complete possession of another, you’d probably think that I’m reading out a standard definition from a textbook. Which is essentially the problem: there is much more to a merger, an acquisition or a restructuring than can ever be covered in a book, leave alone an article. This is because, above all, form of restructuring is a human process, and the future of employees, investors, shareholders and consumers are at stake.

Swords are drawn when the Reliance Group moves towards a split, or even when the Oriental Bank of Commerce acquires Global Trust Bank. Employees look the management in the eye, fearing that they’ll be laid off like Whirlpool did when they acquired Kelvinator of India in 1995 by giving VRS. Some stakeholders cling on to what they have, while others try to bargain for more. Employees quiver at the prospect of job-prospecting and unions do their best to heighten the anxiety. Being retained is a priority, and the worst they’re are willing to suffer is being transferred, as in the case of the reforms that LIC initiated in 1999.

Shareholders try to figure out how much compensation they’ll receive, and debate short and long term implications of the restructuring. Traders at stock markets watch every little movement with a prayer on their lips and crossed fingers. Furtive calls are exchanged between terminals and careers depend on split second decisions.

The sheer enormity of the impact of restructuring would leave even the best writers history at a loss for words. And yet this enormous burden is borne by the Chairman, at whom the buck stops, and who must face a world of worried stakeholders, like Chairman and Managing Director of the Oriental Bank of Commerce, Mr. B. D. Narang, who had to allay the fears of employees and customers when Global Trust Bank went bust.

Companies may merge or acquire for a variety of reasons: for an increase in scale in an expanding market, for consolidation in a contracting market, for diversification, or even for entering a new market and literally buying production capacity. As with other arranged marriages, both companies look for convenience and benefit that management textbooks term as synergy. When Glaxo Wellcome PLC and SmithKline Beecham PLC merged in 2004, the resulting entity was the largest drug manufacturing company globally, valued at $182.4 billion and with a 7.3 percent share of the global pharmaceutical market. The companies had complementary drug portfolios, the expected pre-tax cost savings were estimated at $1.6 billion after three years and the marriage has allowed them to pool their R&D funds, and marketing capabilities.

But how can this theater be without tragedy? The HP-Compaq marriage may have been heralded as one of the major successes of CEO Carly Fiorina to begin with, but the subsequent failure of the merged entity to retain market position ahead of Dell cost Fiorina her job.

The recent struggle for control of Reliance Industries Limited saw a classic duel being played out for a global audience. The masterful use of politics, power and influence decided that one, and while I shall refrain from adjudicating which of the two brothers was wounded less, it is clear that those who bought the RIL and Reliance Capital stocks when it they bottomed out have gained most.

There might, in fact, be another tragedy in the offing: Whirlpool edged out Triton Acquisition Holding and The Haier Investment Group to acquire rival Maytag for $2.7 Billion. The acquisition will give Whirlpool better R&D capability, a varied basket of products, increased valuations, and above all – a 72% market share in washers in the US. The deal is under scrutiny for Anti-trust violations, and may be rescinded. While Whirlpool might still benefit because delays in management decisions, attrition and loss of market share would have weakened Maytag as a competitor, Maytag’s valuations will have dipped to levels that shareholders will probably never be able to recover their money.

The restructuring exercise is an exhibition of fear, hatred, greed, courage and negotiation, and of the tragedy of change. And you thought corporate restructuring was boring?


(Suggestions? )

(And The Rhymebawd still thinks corporate restructuring is boring)


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  1. weird that you’re talking abt it, but you know whats also really cool- the tax implications that post aquisition reorganisation can have. i mean, when theres that much money involved you just have rows and rows of intermediate subsidiaries being created for the heck of it. its craziness! but also fun. in a way. in a very mind boggling way.

  2. Does that happen all across the globe or does only Indian Law make it necessary? I know what you’re talking about when you say its fun. 🙂

    I don’t know if it has come forth or not, but what I’ve always found interesting is how people deal with it. When two parties, say the management and the employee, are against each other, each tries to second guess the other. Their actions can be classified into three different levels of involvement: influence, power and politics. And which of three is used when to counter the others usage of broadly the same tactics often determines the outcome.

    I have a whitepaper waiting to be written…with the baap of all examples- the Reliance battle. 😀

  3. all over the globe. mergers are too technical for me but i know the structuring can make a huge diff to your tax liab and so its standard practice where huge amounts of money are involved. for example when youre setting up a subsidiary, whether you buy shares or give it a loan can mean the difference between tax on interest (usually around 5-7%) and tax on dividend (30%)… so it is a huge deal. anyway won’t bore you more… but whats your paper on exactly?

  4. Hmm…what gave you the idea that I’d find this boring?

    I’ve now got time to rewrite this. It seems they gave me the deadline in order to rush things.

    Mailing you about the paper.

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