Business Daily from THE HINDU group of publications
Sunday, May 20, 2007
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Business Daily from THE HINDU group of publications Sunday, May 20, 2007 ePaper |
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Corporate
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Restructuring Markets - Stock Markets
D. Murali
MR SANJAY AGGARWAL
Chennai May 19 The recent announcement by Bajaj Auto on planned demerger of the company is the latest in a long line of such decisions by corporates, including NIIT, Zee Telefilms, Indo Rama Synthetics, GE Shipping, Jindal Strips and JK Industries. Welcoming the decision, Mr Sanjay Aggarwal, Principal, Ernst & Young, said that demergers unlock significant value for shareholders.He told Business Line that the demerger has been realised as "a powerful tool for facilitating business growths.''Companies are also taking recourse to this route to resolve entanglements, he added."They use it to realign control within family members. It is also employed as a strategy for resolving cross-holdings and family structuring.''For instance, post-demerger, the shareholders of Reliance Industries had direct exposure to various businesses such as Reliance Communications, Reliance Energy Ventures, Reliance Capital Ventures and RNRL. "There has been a significant upside to the wealth of shareholders.''
What is demerger?
A demerger involves transfer of one or more undertakings of an existing company to a new company. The shareholders own the same collection of assets, but they now have shares of two separate companies. Since there is no real change in assets, one would expect that there is no real change in values.However, Mr Aggarwal said the sum of values of all the companies tends to be much higher than the original company in many cases. This happens when companies engaged in multiple businesses under one umbrella have little synergy with each other."These companies tend to get rated by the capital markets on the basis of the larger business segment.''In the process, the remaining business is assigned little or no value despite possible surplus assets like real estate or investments in associate companies.According to Mr Aggarwal, it is a matter of concern when different business segments are under separate price earning regimes or growth potentiality.
Segregating assets
"Segregating assets with low operating performance potential helps in improving return on capital employed in the remaining business.''Another advantage of opting for a demerger is enhanced ability to leverage on equity account, he added."In a high growth phase, companies need funding an ongoing basis, as they focus on capacity expansions and acquisitions to achieve global size. There is limitation on internal accruals and debt raising, which is a function of the equity base.''Which is where the demerger offers a solution. "For example, a company with presence in the cement and sugar businesses will attract a larger set of equity investors once it segregates the businesses; also, it can choose to dilute equity only in a particular business.''Besides, a demerger assists in creating specific management focus on a particular business. For enterprises with businesses in different industry segments, a demerger can assist in segment-wise alignment and creation of focused entities.He cited the case of Grasim Industries, which hived off its viscose and textile business to Indian Rayon and became a pure-play cement manufacturer by merging UltraTech Cement — which it acquired from L&T — with itself.Above all, Mr Aggarwal said, the demerger as a concept is tax-neutral in nature."However, various conditions of the Indian Income-Tax Act, 1961 have to be complied with in order to be tax-neutral. Additionally, it is subject to relatively lower stamp duty regime in various States.''
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