Volume 1, Issue 8 (August, 2014)

Online ISSN-2347-7571

Published by: Sai Om Publications

Sai Om Journal of Commerce & Management A Peer Reviewed International Journal

A CASE STUDY ON CORPORATE RESTRUCTURING – ACQUISITION OF FAMILY CREDIT LIMITED BY L&T FINANCE HOLDING LIMITED Dr. Sonali Dharmadhikari1 Associate Professor, BVDU, IMED, Pune, India Email: [email protected] Ranpreet Kaur2 Associate Professor, BVDU, IMED, Pune, India Email: [email protected] ABSTRACT In the today’s era of intensive competition, the survival and growth of the business has become challenging. Post globalization, a cut throat competition is observed in the business world. The company has to adopt various long term strategies to be successful in the corporate world. Corporate Restructuring has become one of the popular business strategies for the growth, development, expansion and diversification of business. The researcher has taken acquisition deal of Family Credit Ltd. (FCL) by L&T Finance Holding Ltd. in financial service sector. The case is studied and analyzed by collecting data from news articles, books and authentic website of the company. The critical and creative analysis is done to know the impact on the shareholders’ wealth and company’s post merger profitability on real and practical grounds in financial service sector of India.

Keywords: Corporate Restructuring; Wealth Maximization; Profitability; Competition INTRODUCTION In the today’s era of intensive competition, the survival and growth of the business has become challenging. Companies use to follow different strategies to achieve its objective of shareholders’ wealth maximization. Corporate Restructuring is one of the strategies which are followed in today’s business world to give new height to the business. It is defined as “A practice of redesigning one or more aspects of the business to create value.” It can be stated as an elementary change in direction, strategy and approach for an organization, which have effect on the way in which the organization is well thought-out. Due to globalization, companies sometimes use it as strategy to enter into new market of global village. In India also companies follow corporate restructuring as a business strategy to create value for shareholders as well as for the future growth of business. LEARNING OBJECTIVES 1. To acquaint the reader with the concept and application of Business combinations and Corporate Restructuring. 2. To identify with motives behind Corporate Restructuring. 3. To analyze the impact of Business Combination post-merger. 4. To study the impact on shareholders’ wealth as well as on the profitability of company Available online on www.saiompublications.com

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Sai Om Journal of Commerce & Management A Peer Reviewed International Journal BACKGROUND OF THE CASE This Case focuses on Mergers & Acquisitions as a strategy of Corporate Restructuring with reference to Financial Services in the area of Financial Management. Corporate Restructuring: Post Globalization, a cut throat competition is observed in the Business world. Due to integration of world economies, survival of the business has become a challenge. The company has to adopt various long term strategies to be successful in the corporate world. Corporate restructuring has become one of the popular strategies for the growth, development, expansion and diversification of business. It is the process of redesigning of the aspects of company to move the company in an entirely new direction. Corporate restructuring becomes necessity when the company has grown to the point that the original structure can no longer manage to increase the shareholders’ wealth and growth of company. Corporate restructuring helps the company to increase its cutting edge over the competition and enhance its leadership position. Financial Service Sector: Financial Services are defined as the services provided by the finance industry, which include a variety of Companies and institutes that deal with money, together with accountancy companies, insurance companies, credit unions, consumer finance companies, banks, investment funds, stock brokerages and some enterprises. Financial sector is going on transformation and revolutionary changes. The financial sector of India, as a whole, exhibits vibrancy and resilience," C Rangarajan, Chairman of the Prime Minister's Economic Advisory Council. In corporate restructuring there are lot of financial services which are extended by this sector. Growth and development of financial sector reflects the expanding and inflating portrait of this sector in India. Even RBI and Government efforts to promote economic development have given more pace and opportunity to develop Financial Service sector. About the L&T Finance Holdings: Like the rest of the companies in the L&T Financial Services group, Company share the professional values and ethos of parent company, Under L&T Financial Services, Company successfully built businesses across Infrastructure Finance, Corporate Finance, Retail Finance, Mutual Funds and General Insurance. Company aspire to become a fully integrated financial services player and are also building solid businesses in the Consumer Financing segment. About the Family Credit Limited: Family Credit aspires to be the preferred consumer finance company to cater to the needs of Indian consumers. Company’s aim is to develop a team of highly efficient employees to deliver value to the customers through its associates & channel partners by following strong ethical practices. Family Credit, consistently endeavour to bring the value through quality products & services. Family Credit has 53 branches with a loan portfolio of 12.87 billion rupees as of June 30, 2012. The company reported a net profit of about 50 million rupees and a net interest margin of 13.6% for the quarter ended June 30. Execution of the deal: L&T Finance had completed the acquisition of Family Credit Limited (FCL) from French company Society Generale. L&T Finance had announced the acquisition of Family Credit for Rs 120 crore in October 2012. The acquisition will consolidate its presence in auto financing business in India, the company said. As of June 30, FCL had loan book size of Rs 1,287 crore of which two-wheeler financing constituted 53% and car financing 35%. It has 53 branches across 16 states in India and presence in more than 1,400 dealer outlets with a customer base in excess of 4,00,000. Family Credit has 53 branches with a loan portfolio of 12.87 billion rupees as of June 30, 2012. The company reported a net profit of about 50 million rupees and a net interest margin of 13.6% for the quarter ended June 30. Refer Table 1, 2 & 3 for Facts and Statistics of Merger. After merger, Family credit Ltd. a Non Banking Financial Services Company (NBFC) is a wholly owned subsidiary of L&T Finance Holdings Ltd. Fluctuations in Market Price of Shares – Post Merger for L&T Finance holdings Ltd.Shares of Mumbai based L&T Finance holdings Ltd ended at Rs. 93.05, up by 4.55% on BSE. Refer Graph 1.

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Online ISSN 2347-7571

Sai Om Journal of Commerce & Management A Peer Reviewed International Journal DISCUSSION AND INTERPRETATION OF THE CASE Findings and Observations (chart) 

From the above chart, it can be interpreted that L&T Finance Holdings Ltd share prices and volume has shown upward trend Oct 2012 to Feb 2013. After that there are slightly fluctuations in the share prices. As compared to previous financial year (Jan 2012), upward i.e. positive trend is observed.

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The duration showing upward trend is post merger phase. Thus, it can be concluded that the merger has positively affected company’s share price which leads to wealth maximization for shareholders as capital appreciation in their investment.

Findings and Observations (Financial Data- Income Statement) 

Total Income has been increased by 55% post merger and EBIT has been increased by 54%. Thus, after merger, there is a sharp rise in the income of L&T Finance.

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In post merger period, company has gone for payment of dividend for preference shareholders as well as equity shareholders which shows company has enhanced shareholders’ wealth by declaring dividend and shows improving financial health of the company.

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There is a drastic hike in EPS. It has been increased by 3.3 times as compared to pre merger period which proves the success of acquisition deal.

Post Merger Benefits 

It is observed that merger is going to create synergies for both companies as L&T Holdings will expand product offerings from retail financing to consumer financing.

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Company has amplified the umbrella of its products to the auto financing and two wheeler product offerings.

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Merger leads to Wealth Maximization for shareholders and improving profitability of L&T Holdings Ltd.

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Merger will facilitate company to overcome the competitors as add on to product portfolio of auto financing.

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Opportunity for L&T Holdings Ltd. to enter in to new market, new users (increase in customer base in surplus of 4,00,000 of FCL) by entering in to the Auto financing.

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Merger leads to enhance the market share of company in the financial service sector.

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Financial Constraint can be removed or the surplus cash can be deployed in post merger.

CONCLUSION Mergers & Acquisitions are always considered as the attractive business strategy for Corporate Restructuring. It is the practice of achieving synergy, profitability, market share, removing financial constraint, shareholders’ wealth, deploying surplus cash, enhancing product portfolio and reducing competition. In the above case, after analyzing secondary data of the company in post merger period, it can be concluded that merger leads to wealth maximization for shareholders. L&T Holdings Ltd. has attained the synergy, new customer base of approx. 4,00,000 in new product portfolio of auto financing and presence in 16 states in the business combination with FCL. Thus, to conclude this acquisition deal is successful as increase in shareholders’ wealth has been observed and the very purpose of corporate restructuring has been achieved ASSIGNMENT QUESTIONS Q-1 Analyze the case from the point of view of Shareholders. VOL. 1, ISSUE 8 (August 2014)

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Sai Om Journal of Commerce & Management A Peer Reviewed International Journal Q-2 whether M & A deal leads to gain synergy? If yes justify. Q-3 How the deal affected market price of the Surviving Company? Q-4 Do you think deal is going to affect market penetration of the L & T Holdings? Justify Q-5 Assume you are the part of decision making authority for this M & A deal than what will be your decision as company should go for deal or not. Give Explanation for the same. REFERENCES 1. I M Pandey, “Financial Management” Tenth edition, Vikas Publishing House Pvt. Ltd 2. Prasad G Godbole “Mergers, Acquisitions and Corporate Restructuring” Second edition, Vikas Publishing House Pvt. Ltd 3. Cooper Donald R. and Schindler Pamel S., “Business Research Methods”, Tata Mcgraw Hill Publication, Eighth edition 4. Research Bulletin Volume XXXVII (ISSN 2230 9241), Institute of Cost Accountants of India, June 2013 5. Indian Journal of Finance, Vol 6 (ISSN: 0973-8711 IC Value 5.09), Nov. 2012 6. http://articles.economictimes.indiatimes.com/2013-12-30/news/45675580_1_ma-transactionsdeals-harish-hv 7. http://articles.economictimes.indiatimes.com/keyword/financial-sector 8. http://www.thehindubusinessline.com/industry-and-economy/banking/lt-fin-completes-acquisitionof-family-credit/article4262118.ece his article was published on January 1, 2013 9. www.ltfinanceholdings.com 10. http://www.familycreditindia.com

ANNEXURE Tables/GraphsTable 1. Facts and Statistics of Merger Market Cap (Rs Cr.) :11,041 Latest Div. (%):7.50

EPS - TTM (Rs):1.14

P/E Ratio (x):56.23

Div. Yield (%):N.A.

Book Value / sh. (Rs) :21.70

Face Value (Rs): 10.00 P/B Ratio (x) 2.96

Table 2. Facts and Statistics of Merger Deal Amount Period FCI Branches Loan Portfolio Net Profit of FCL Product Portfolio Market coverage in India Dealers Outlets

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Rs. 120 Cores Oct. 2012 53 Rs. 12.8 Billion Rs. 50 Million Two wheeler financing:53% Car financing: 35% 16 States More than 1,400

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Sai Om Journal of Commerce & Management A Peer Reviewed International Journal

Source: Economic Times Graph I: Share Prices and volume of L&T Finance holdings Ltd. Table 3. Financial Data- Income Statement Particulars Sales Turnover Excise Duty NET SALES Other Income TOTAL INCOME Manufacturing Expenses Material Consumed Personal Expenses Selling Expenses Administrative Expenses Expenses Capitalised Provisions Made TOTAL EXPENDITURE Operating Profit EBITDA Depreciation Other Write-offs EBIT Interest EBT Taxes Profit and Loss for the Year Non Recurring Items Other Non Cash Adjustments Other Adjustments REPORTED PAT Preference Dividend Equity Dividend Equity Dividend (%) Shares in Issue (Lakhs) EPS - Annualised (Rs)

Mar'13(Post Merger) 12Months 171.98 .00 171.98 0 200.67 .00 .00 15.09 .00 25.98 .00 .00 41.07 130.90 159.60 .10 .00 159.50 27.77 131.73 56.14 75.60 235.73 .00 .00 311.33 1.50 128.76 7.49 17167.61 1.81

Mar'12(Pre Merger) 12Months 111.84 .00 111.84 0 129.42 .00 .00 11.16 .00 14.80 .00 .00 25.96 85.87 103.46 .01 .00 103.45 14.55 88.90 17.65 71.25 .00 .00 .00 71.25 .00 .00 .00 17147.62 .42

Note: Rs (in Crores) VOL. 1, ISSUE 8 (August 2014)

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