Corporate Restructuring – Meaning, Types, and Characteristics

Corporate restructuring 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.

Introduction

The process of corporate restructuring is considered very important to eliminate all the financial crisis and enhance the company’s performance. The management of the concerned corporate entity facing the financial crunches hires a financial and legal expert for advisory and assistance in the negotiation and the transaction deals. 

Usually, the concerned entity may look at debt financing, operations reduction, any portion of the company to interested investors. In addition to this, the need for corporate restructuring arises due to the change in the ownership structure of a company. Such change in the ownership structure of the company might be due to the takeover, merger, adverse economic conditions, adverse changes in business such as buyouts, bankruptcy, lack of integration between the divisions, over-employed personnel, etc.

Types of Corporate Restructuring

1. Financial Restructuring: This type of restructuring may take place due to a severe fall in the overall sales because of adverse economic conditions. Here, the corporate entity may alter its equity pattern, debt-servicing schedule, equity holdings, and cross-holding pattern. All this is done to sustain the market and the profitability of the company.
2. Organisational Restructuring: Organisational Restructuring implies a change in the organisational structure of a company, such as reducing its level of the hierarchy, redesigning the job positions, downsizing the employees, and changing the reporting relationships. This type of restructuring is done to cut down the cost and to pay off the outstanding debt to continue with the business operations in some manner.

Reasons for Corporate Restructuring

Corporate restructuring is implemented in the following situations:

• Change in the Strategy: The management of the distressed entity attempts to improve its performance by eliminating certain divisions and subsidiaries which do not align with the core strategy of the company. The division or subsidiaries may not appear to fit strategically with the company’s long-term vision. Thus, the corporate entity decides to focus on its core strategy and dispose of such assets to the potential buyers.
• Lack of Profits: The undertaking may not be enough profit-making to cover the cost of capital of the company and may cause economic losses. The poor performance of the undertaking may be the result of a wrong decision taken by the management to start the division or the decline in the profitability of the undertaking due to the change in customer needs or increasing costs.
• Reverse Synergy: This concept is in contrast to the principles of synergy, where the value of a merged unit is more than the value of individual units collectively. According to reverse synergy, the value of an individual unit may be more than the merged unit. This is one of the common reasons for divesting the assets of the company. The concerned entity may decide that by divesting a division to a third party can fetch more value rather than owning it.
• Cash Flow Requirement: Disposing of an unproductive undertaking can provide a considerable cash inflow to the company. If the concerned corporate entity is facing some complexity in obtaining finance, disposing of an asset is an approach in order to raise money and to reduce debt.

Characteristics of Corporate Restructuring

• To improve the Balance Sheet of the company (by disposing of the unprofitable division from its core business)
• Staff reduction (by closing down or selling off the unprofitable portion)
• Changes in corporate management
• Disposing of the underutilised assets, such as brands/patent rights.
• Outsourcing its operations such as technical support and payroll management to a more efficient 3rd party.
• Shifting of operations such as moving of manufacturing operations to lower-cost locations.
• Reorganising functions such as marketing, sales, and distribution.
• Renegotiating labour contracts to reduce overhead.
• Rescheduling or refinancing of debt to minimise the interest payments.
• Conducting a public relations campaign at large to reposition the company with its consumers.

Important Aspects to be Considered in Corporate Restructuring Strategies

• Legal and procedural issues
• Accounting aspects
• Human and Cultural synergies
• Valuation and funding
• Taxation and Stamp duty aspects
• Competition aspects, etc.

Types of Corporate Restructuring Strategies

1. Merger: This is the concept where two or more business entities are merged together either by way of absorption or amalgamation or by forming a new company. The merger of two or more business entities is generally done by the exchange of securities between the acquiring and the target company.
2. Demerger: Under this corporate restructuring strategy, two or more companies are combined into a single company to get the benefit of synergy arising out of such a merger.
3. Reverse Merger: In this strategy, the unlisted public companies have the opportunity to convert into a listed public company, without opting for IPO (Initial Public offer). In this strategy, the private company acquires a majority shareholding in the public company with its own name.
4. Disinvestment: When a corporate entity sells out or liquidates an asset or subsidiary, it is known as “divestiture”.
5. Takeover/Acquisition: Under this strategy, the acquiring company takes overall control of the target company. It is also known as the Acquisition.
6. Joint Venture (JV): Under this strategy, an entity is formed by two or more companies to undertake financial act together. The entity created is called the Joint Venture. Both the parties agree to contribute in proportion as agreed to form a new entity and also share the expenses, revenues and control of the company.
7. Strategic Alliance: Under this strategy, two or more entities enter into an agreement to collaborate with each other, in order to achieve certain objectives while still acting as independent organisations.
8. Slump Sale: Under this strategy, an entity transfers one or more undertakings for lump sum consideration. Under Slump Sale, an undertaking is sold for consideration irrespective of the individual values of the assets or liabilities of the undertaking.