Definition: Corporate restructuring is the process of redesigning one or more aspects of a company.
The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction. Here are some examples of why corporate restructuring may take place and what it can mean for the company.
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In general, the idea of corporate restructuring is to allow the company to continue functioning in some manner. Even when corporate raiders break up the company and leave behind a shell of the original structure, there is still usually a hope, what remains can function well enough for a new buyer to purchase the diminished corporation and return it to profitability.
Purpose of Corporate Restructuring –
- To enhance the share holder value, The company should continuously evaluate its:
- Portfolio of businesses,
- Capital mix,
- Ownership & Asset arrangements to find opportunities to increase the share holder’s value.
- To focus on asset utilization and profitable investment opportunities.
- To reorganize or divest less profitable or loss making businesses/products.
The company can also enhance value through capital Restructuring, it can innovate securities that help to reduce cost of capital.
Corporate Restructuring entails a range of activities including financial restructuring and organization restructuring.
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1. Financial Restructuring
Financial restructuring is the reorganization of the financial assets and liabilities of a corporation in order to create the most beneficial financial environment for the company. The process of financial restructuring is often associated with corporate restructuring, in that restructuring the general function and composition of the company is likely to impact the financial health of the corporation. When completed, this reordering of corporate assets and liabilities can help the company to remain competitive, even in a depressed economy.
Just about every business goes through a phase of financial restructuring at one time or another. In some cases, the process of restructuring takes place as a means of allocating resources for a new marketing campaign or the launch of a new product line. When this happens, the restructure is often viewed as a sign that the company is financially stable and has set goals for future growth and expansion.
Need For Financial Restructuring
The process of financial restructuring may be undertaken as a means of eliminating waste from the operations of the company.
For example, the restructuring effort may find that two divisions or departments of the company perform related functions and in some cases duplicate efforts. Rather than continue to use financial resources to fund the operation of both departments, their efforts are combined. This helps to reduce costs without impairing the ability of the company to still achieve the same ends in a timely manner
In some cases, financial restructuring is a strategy that must take place in order for the company to continue operations. This is especially true when sales decline and the corporation no longer generates a consistent net profit. A financial restructuring may include a review of the costs associated with each sector of the business and identify ways to cut costs and increase the net profit. The restructuring may also call for the reduction or suspension of production facilities that are obsolete or currently produce goods that are not selling well and are scheduled to be phased out.
Financial restructuring also take place in response to a drop in sales, due to a sluggish economy or temporary concerns about the economy in general. When this happens, the corporation may need to reorder finances as a means of keeping the company operational through this rough time. Costs may be cut by combining divisions or departments, reassigning responsibilities and eliminating personnel, or scaling back production at various facilities owned by the company. With this type of corporate restructuring, the focus is on survival in a difficult market rather than on expanding the company to meet growing consumer demand.
All businesses must pay attention to matters of finance in order to remain operational and to also hopefully grow over time. From this perspective, financial restructuring can be seen as a tool that can ensure the corporation is making the most efficient use of available resources and thus generating the highest amount of net profit possible within the current set economic environment.
2. Organizational Restructuring
In organizational restructuring, the focus is on management and internal corporate governance structures. Organizational restructuring has become a very common practice amongst the firms in order to match the growing competition of the market. This makes the firms to change the organizational structure of the company for the betterment of the business.
Need For Organization Restructuring
- New skills and capabilities are needed to meet current or expected operational requirements.
- Accountability for results are not clearly communicated and measurable resulting in subjective and biased performance appraisals.
- Parts of the organization are significantly over or under staffed.
- Organizational communications are inconsistent, fragmented, and inefficient.
- Technology and/or innovation are creating changes in workflow and production processes.
- Significant staffing increases or decreases are contemplated.
- Personnel retention and turnover is a significant problem.
- Workforce productivity is stagnant or deteriorating.
- Morale is deteriorating.
Some of the most common features of organizational restructures are:
- Regrouping of business: This involves the firms regrouping their existing business into fewer business units. The management then handles theses lesser number of compact and strategic business units in an easier and better way that ensures the business to earn profit.
- Downsizing: Often companies may need to retrench the surplus manpower of the business. For that purpose offering voluntary retirement schemes (VRS) is the most useful tool taken by the firms for downsizing the business’s workforce.
- Decentralization: In order to enhance the organizational response to the developments in dynamic environment, the firms go for decentralization. This involves reducing the layers of management in the business so that the people at lower hierarchy are benefited.
- Outsourcing: Outsourcing is another measure of organizational restructuring that reduces the manpower and transfers the fixed costs of the company to variable costs.
- Enterprise Resource Planning: Enterprise resource planning is an integrated management information system that is enterprise-wide and computer-base. This management system enables the business management to understand any situation in faster and better way. The advancement of the information technology enhances the planning of a business.
- Business Process Engineering: It involves redesigning the business process so that the business maximizes the operation and value added content of the business while minimizing everything else.
- Total Quality Management: The businesses now have started to realize that an outside certification for the quality of the product helps to get a good will in the market. Quality improvement is also necessary to improve the customer service and reduce the cost of the business.
VARIOUS STRATEGIES FOR BUSINESS RESTRUCTURING
Smart sizing: It is the process of reducing the size of a company by laying off employees on the basis of incompetence and inefficiency.
Acquisitions: HLL took over TOMCO.
Diversification: Videocon group is diversified into power projects, oil exploration and basic telecom services.
Merger: Asea and Brown Boveri came together to form ABB.
Strategic alliances: Siemens India has got a Strategic alliance with Bharati Telecom for marketing of its EPABX.
Expansion: Siemens is expanding its medical electronics division- a new factory for medical electronics is already come up in Goa.
Networking: It refers to the process of breaking companies into smaller independant business units for significant improvement in productivity and flexibility. The phenomenon is predominant in South Korea, where big companies like Samsung, Hyundai and Daewoo are breaking themselves up into smaller units. These firms convert their managers into entrepreneurs.
Virtual Corporation: It is a company that has taken steps to turn itself inside out. Rather than having managers and staff sitting INSIDE in their offices moving papers from in basket to out basket, a virtual corporation kicks the employees outside, sending them to work in customer’s offices and plants, determining what the customer needs and wants, then reshaping the corporate products and services to the customer’s exact needs. This is a futuristic concept wherein companies will be edgeless, adaptable and perpetually changing. The centrepiece of the business revolution is a new kind of product called a “Virtual Product” Some of the these products already exist, camcorders create instant movies, personal computers and laser printers have made instant desktop publishing a reality. And for all these we can obtain cash instantly at ATMs.
Verticalization: It refers to regrouping of management functions for particular functions for a particular product range to achieve higher accountability and transparency. Siemens in 1990 moved from a “function-oriented” structure to a vertical “entrepreneur-oriented” structure embracing size business and three support divisions.
Delayering- Flat organization: In the post world war period the demand for goods was ever increasing. Main objective of the corporations was production and capacity build up to meet the demand. The classical, pyramidal structure was well suited to this high growth environment. This structure was scalable and the corporations could immediately translate their growth plans into action by adding workers at the bottom layer and filling in the management layers. But the price paid in the whole process was much higher. The overall process became complicated; number of middle managers and functional managers grew making the coordination of various functions complex. Senior/top management was alienated from the front-line people as well as the end users of the product or sen/ice. Decision-making became slower. Hence, a need is felt to attack the unproductive, bulky and sluggish network of white-collar staff. A powerful strategy would be to remove the layers of senior and middle management i.e. making the organization structure flat.
The perspective of organizational restructuring may be different for the employees. When a company goes for the organizational restructuring, it often leads to reducing the manpower and hence meaning that people are losing their jobs. This may decrease the morale of employee in a large manner. Hence many firms provide strategies on career transitioning and outplacement support to their existing employees for an easy transition to their next job.
The important methods of Corporate Restructuring are:
- Joint ventures
- Sell off and spin off
- Equity carve out
- Leveraged buy outs (LBO)
- Management buy-outs
1. Joint Ventures
Joint ventures are new enterprises owned by two or more participants. They are typically formed for special purposes for a limited duration. It is a combination of subsets of assets contributed by two (or more) business entities for a specific business purpose and a limited duration. Each of the venture partners continues to exist as a separate firm, and the joint venture represents a new business enterprise. It is a contract to work together for a period of time each participant expects to gain from the activity but also must make a contribution.
GM-Toyota JV: GM hoped to gain new experience in the management techniques of the Japanese in building high-quality, low-cost compact & subcompact cars. Whereas, Toyota was seeking to learn from the management traditions that had made GE the no. 1 auto producer in the world and In addition to learn how to operate an auto company in the environment under the conditions in the US, dealing with contractors, suppliers, and workers.
DCM group and Daewoo motors entered in to JV to form DCM DAEWOO Ltd. to manufacture automobiles in India.
Spinoffs are a way to get rid of underperforming or non-core business divisions that can drag down profits.
Process of spin-off
- The company decides to spin off a business division.
- The parent company files the necessary paperwork with the Securities and Exchange Board of India (SEBI).
- The spinoff becomes a company of its own and must also file paperwork with the SEBI.
- Shares in the new company are distributed to parent company shareholders.
- The spinoff company goes public.
Notice that the spinoff shares are distributed to the parent company shareholders. There are two reasons why this creates value:
Parent company shareholders rarely want anything to do with the new spinoff. After all, it’s an underperforming division that was cut off to improve the bottom line. As a result, many new shareholders sell immediately after the new company goes public.
Large institutions are often forbidden to hold shares in spinoffs due to the smaller market capitalization, increased risk, or poor financials of the new company. Therefore, many large institutions automatically sell their shares immediately after the new company goes public.
There is no money transaction in spin-off. The transaction is treated as stock dividend & tax free exchange.
Is a transaction in which some, but not all, parent company shareholders receive shares in a subsidiary, in return for relinquishing their parent company’s share. In other words some parent company shareholders receive the subsidiary’s shares in return for which they must give up their parent company shares
Feature of split-offs is that a portion of existing shareholders receives stock in a subsidiary in exchange for parent company stock.
Is a transaction in which a company spins off all of its subsidiaries to its shareholders & ceases to exist.
The entire firm is broken up in a series of spin-offs.
The parent no longer exists and
Only the new offspring survive.
In a split-up, a company is split up into two or more independent companies. As a sequel, the parent company disappears as a corporate entity and in its place two or more separate companies emerge.
Divesture is a transaction through which a firm sells a portion of its assets or a division to another company. It involves selling some of the assets or division for cash or securities to a third party which is an outsider.
Divestiture is a form of contraction for the selling company. means of expansion for the purchasing company. It represents the sale of a segment of a company (assets, a product line, a subsidiary) to a third party for cash and or securities.
Mergers, assets purchase and takeovers lead to expansion in some way or the other. They are based on the principle of synergy which says 2 + 2 = 5! , divestiture on the other hand is based on the principle of “anergy” which says 5 – 3 = 3!.
Among the various methods of divestiture, the most important ones are partial sell-off, demerger (spin-off & split off) and equity carve out. Some scholars define divestiture rather narrowly as partial sell off and some scholars define divestiture more broadly to include partial sell offs, demergers and so on.
- Change of focus or corporate strategy
- Unit unprofitable can mistake
- Sale to pay off leveraged finance
- Need cash
- Defend against takeover
- Good price.
4. Equity Carve-Out
A transaction in which a parent firm offers some of a subsidiaries common stock to the general public, to bring in a cash infusion to the parent without loss of control.
In other words equity carve outs are those in which some of a subsidiaries shares are offered for a sale to the general public, bringing an infusion of cash to the parent firm without loss of control. Equity carve out is also a means of reducing their exposure to a riskier line of business and to boost shareholders value.
5. Leveraged Buyout
A buyout is a transaction in which a person, group of people, or organization buys a company or a controlling share in the stock of a company. Buyouts great and small occur all over the world on a daily basis.
Buyouts can also be negotiated with people or companies on the outside. For example, a large candy company might buy out smaller candy companies with the goal of cornering the market more effectively and purchasing new brands which it can use to increase its customer base. Likewise, a company which makes widgets might decide to buy a company which makes thingamabobs in order to expand its operations, using an establishing company as a base rather than trying to start from scratch.
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6. Management buyout
In this case, management of the company buys the company, and they may be joined by employees in the venture. This practice is sometimes questioned because management can have unfair advantages in negotiations, and could potentially manipulate the value of the company in order to bring down the purchase price for themselves. On the other hand, for employees and management, the possibility of being able to buy out their employers in the future may serve as an incentive to make the company strong.
It occurs when a company’s managers buy or acquire a large part of the company. The goal of an MBO may be to strengthen the managers’ interest in the success of the company.
Purpose of Management buyouts
From management point of view may be:
- To save their jobs, either if the business has been scheduled for closure or if an outside purchaser would bring in its own management team.
- To maximize the financial benefits they receive from the success they bring to the company by taking the profits for themselves.
- To ward off aggressive buyers.
- The goal of an MBO may be to strengthen the manager’s interest in the success of the company. Key considerations in MBO are fairness to shareholders price, the future business plan, and legal and tax issues.
Benefits of Management buyouts
- It provides an excellent opportunity for management of undervalued co’s to realize the intrinsic value of the company.
- Lower agency cost: cost associated with conflict of interest between owners and managers.
- Source of tax savings: since interest payments are tax deductible, pushing up gearing rations to fund a management buyout can provide large tax covers.
Restructuring strategies encompasses enhancing economy and improving efficiency. When a company wants to grow or survive in a competitive environment, it needs to restructure itself and focus on its competitive advantage. Thus, the merger and acquisition strategies have been conceived to improve general economic well-being of all those who are, directly or indirectly, connected with the corporate sector. The intension of buy back is visualized as to support share value during periods of temporary weakness, survival and to prevent takeover bids.
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