UNIT 1
CORPORATE RESTRUCTURING: INTRODUCTION AND CONCEPTS
Looking at the contemporary Indian context what we find is that most companies are in the throes of intense change. More often we find the older companies restructuring as these were the ones which diversified excessively in the first case. Newer companies set up in the 1990 and in the new Millennium, do not find much need for restructuring. But this does not mean that these companies can afford to be complacent. They too need to be on the guard and continuously assess the assumptions and mental models they use to devise their organizations and strategies.
In 1994 survey on corporate restructuring carried out by the NationalManagement Forum of the All India Management Association noted that such restructuring had been a continuous process but accelerated after 1991 when the liberalization process started.The major reason for restructuring was the introduction of new economic policies in India such as removal of industrial licensing and lowering of import duties.The main outcome expected from restructuring was gaining customer focus.That the liberalization process provides the thirst for corporate restructure is seen in almost all cases. For instance, an in-depth study on corporate restructuring at Crompton Greaves concerned with organizational and process restructuring points to economic liberalization as the major catalyst for restructuring.
Key Takeaways:
- The major reason for restructuring was the introduction of new economic policies in India such as removal of industrial licensing and lowering of import duties.
- The main outcome expected from restructuring was gaining customer focus.
Restructuring as per Oxford dictionary means” to give a new structure to, rebuild or rearrange”
Restructuring as per Cambridge dictionary means” the act of organizing a company, business or a system in a new way to make it operatemore effectively.”
Corporate restructuring is defined as the process involved in changing the organization of a business. Corporate restructuring can involve making dramatic changes to a business by cutting out or merging departments. Corporate restructuring implies rearranging the business for increased efficiency and profitability.It is an action taken by the corporate entity to modify its capital structure or its operations significantly. Generally, corporate restructuring happens when a corporate entity is experiencing significant problems and is in financial jeopardy.
In corporate restructuring , the financial structure and organizational structure of the entity need to rearrange or rebuild to achieve the some objectives. Financial restructuring may take place due to a drastic fall in the sales because of adverse economic conditions. For example, X Limited has surplus funds but it is not able to consider any viable projects for their business entity. Whereas Z Limited identified viable projects but has no money to fund the cost of the project. The Merger of X Limited and Y Limited is a mutually beneficial option and would result in positive synergies of both the companies.
Key Takeaways:
- Corporate restructuring is defined as the process involved in changing the organization of a business.
- Corporate restructuring can involve making dramatic changes to a business by cutting out or merging departments.
- Corporate restructuring implies rearranging the business for increased efficiency and profitability
Corporate restructuring is the process of significantly changing a company’s business model, management team, financial structure to address challenges and increase shareholders value. Restructuring may involve major layoffs or bankruptcy, through restructuring is usually designed to minimize the impact on employees, if possible. Restructuring may involve the company’s sale or merger with another company. Companies use restructuring as a business strategy to ensure their long term viability.Facebook and Tesla are the major examples of corporate restructuring as a business strategy.If the shareholders or creditors of the business entity observes the chances of danger on their investment then they might force for restructuring to prevent any kind of future loss. Corporate restructuring is implemented in the following situations:
a) Change in the strategy
b) Lack of profits
c) Reverse synergy
d) Cash flow requirement etc.
Key Takeaways:
- Corporate restructuring is the process of significantly changing a company’s business model, management team, financial structure to address challenges and increase shareholders value.
- Restructuring may involve major layoffs or bankruptcy, through restructuring is usually designed to minimize the impact on employees, if possible.
- Restructuring may involve the company’s sale or merger with another company.
The scope of corporate restructuring encompasses
- Cost reduction- it allows to leverage the same to its own advantage by being able to raise larger funds at lower costs.
- Improving efficiency: reducing the cost of capital translates into profits.
- Availability of funds: it allows the entities to grow in all levels and become more competitive.
- Risk reduce: corporate restructuring helps to reduce risk.
The various needs for undertaking corporate restructuring are as under :
- To focus on core strengths, operational synergy and efficient allocation of managerial capabilities and infrastructure.
- Consolidation and economies of scale by expansion and diversion to exploit extended domestic and global markets.
- Revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a healthy units.
- Acquiring constant supply of raw materials and access to scientific research and technological developments.
- Capital restructuring by appropriate mix of loan and equity capital to reduce the cost of servicing and improve return on capital employed.
Corporate restructuring strategy depends upon the nature of business , type of diversification required and results in profit maximization through pooling of resources in effective manner, utilization of idle resources, effective management of competition etc. planning the type of restructuring requires detailed business study, expected business demand, available resources, utilized/ idle portion of resources, competitor analysis, environmental impact etc. The bottom line is that the right restructuring strategy provides optimum synergy for the organizations involved in the restructuring process. It involves examination of various aspects before, during and after the restructuring process.
IMPORTANT ASPECTS TO BE CONSIDERED WHILE PLANNING OR IMPLEMENTING CORPORATE RESTRUCTURING:
The corporate restructuring process requires various aspects to be considered before, during and after the restructuring which are as under
a) Valuation and funding
b) Legal and procedural issues
c) Taxation and stamp duty aspects
d) Accounting aspects
e) Competition aspects
f) Human and cultural synergies.
After analyzing pros and cons of each aspect, a right type of business strategy is chosen which will be fit and profitable for the business.
Key Takeaways:
- The bottom line is that the right restructuring strategy provides optimum synergy for the organizations involved in the restructuring process.
- It involves examination of various aspects before, during and after the restructuring process.
- MERGER: Merger is the combination of two or more companies which can be merged together either by way of amalgamation or absorption or by forming a new company. Mergers may be
a) Horizontal Merger: It is a merger of two or more companies that compete in the same type of industry.Maruti Suzuki is one of the best example for horizontal merger where both the company deals in car manufacturing.
b) Vertical merger: It is a merger of two companies which are operating in the same industry but at different stages of production or distribution system. For example a cotton supplier and textile manufacturer company if getting merge it will be vertical merger.
c) Co generic merger: It is a type of merger where two or more companies are in the same or related but do not offer the same products, but related productsand may share similar distribution channel.
d) Conglomerate merger: These merger involve firms engaged in unrelated type of business.
2. DEMERGER: The corporate restructuring where the business operations are segregated into one or more components. For example Hero and Honda , earlier it was merged company known as Hero-Honda.
3. REVERSE MERGER: It is the opportunity for the listed companies to become public listed company without opting initial public offer. In this process the private company acquires the majority shares of the public company with its own name.
4. DISINVESTMENT: It means the action of an organization or government to sell or liquidate an asset or subsidiary to private entities where the government have more than 51% share in that PSUs.The word, Disinvestment generally used in the context of public sector undertakings. For example VSNL to Tata group, Indian petrochemicals corporation Limited to Reliance industries Limited.
5. TAKEOVER/ACQUISITION: It means an acquirer takes over the control over the target company. This type of acquisition takes place to achieve the market supremacy. For example, Vodafone Hutch- Essar, Tata and Corus steel,
6. JOINT VENTURE (JV): A joint venture is an entity formed by two or more companies to undertake financial activity together. The parties agree to contribute equity to form a new entity and share the revenues, expenses, and control of the company.
7. STRATEGIC ALLIANCE: Any agreement between two or more parties to collaborate with each other, in order to achieve certain objectives while continuing to remain independent organizations is called strategic alliance. For example, HP & Disney, Spotify and Uber, etc
8. FRANCHISING: It is an arrangement where one party grants another party the right to use the trade name as well as certain business systems and processes, to produce and market goods or services according to certain specifications. The franchisee usually pays one time fee plus a percentage of sales revenue as royalty and gains to the franchiser. For example, McDonald’s, Dominos, KFC, Pizza Hut, Taco Bell, Baskins Robbins etc.
9. SLUMP SALE: Slump sale means the transfer of one or more undertakings as a result of the sale of lump sum consideration without values being assigned to the individual assets and liabilities in such sales. A slump sale must satisfy the following points-
a) Business is sold off as a whole and as a going concern
b) Sale for a lump sum consideration
c) Materials available on record do not indicate item wise value of the asset transferred.
Key Takeaways:
- Merger is the combination of two or more companies which can be merged together either by way of amalgamation or absorption or by forming a new company.
- Slump sale means the transfer of one or more undertakings as a result of the sale of lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
- Any agreement between two or more parties to collaborate with each other, in order to achieve certain objectives while continuing to remain independent organizations is called strategic alliance.
Reference:
1.Azhar Kazmi, Strategic Management and Business Policy, Third edition, McGraw Hill Education (India) Private limited, New Delhi.
2.Corporate Restructuring, Valuation and Insolvency, The Institute of Company Secretaryof India.