CORPORATE RESTRUCTURING - MEANING
Corporate Restructuring is an expression that connotes a restructuring
process undertaken by business enterprise. It is the process of redesigning
one or more aspects of a company. Hence, Corporate Restructuring is a
comprehensive process by which a company can consolidate its business
operations and strengthen its position for achieving its short-term and long-
term corporate objectives.
Restructuring as per Oxford dictionary means reorganization of a company
with a view to achieve greater efficiency and profit, or to adapt to a changing
market.
Corporate restructuring play a major role in enabling enterprises to achieve
economies of scale, global competitiveness, right size, reduction of operational
costs and administrative costs. The process of reorganizing one or more
aspects of the business of a company or financial structure for increasing its
efficiency and profitability is known as corporate restructuring.
Corporate restructuring is the process of significantly changing a company’s
business model, management team or financial structure to address
challenges and increase shareholder value. Corporate restructuring is an
inorganic growth strategy.
HISTORICAL BACKGROUND___________________________________________________________
Before 1991 Indian economy was closed economy. Various licenses and
registration under various enactments were required to set-up an industry.
Due to restrictive government policies and rigid regulatory framework there
existed very limited scope for restructuring. However, after 1991, the main
thrust of Industrial Policy, 1991 was on relaxations in industrial licensing,
foreign investments, and transfer of foreign technology, etc. With the
economic liberalization, globalization and opening-up of economies, the
Indian corporate sector started restructuring businesses to meet the
opportunities and challenges.
NEED AND SCOPE_______________________________________________________________________
Corporate Restructuring is concerned with arranging the business activities of
the Corporate as a whole so as to achieve certain pre-determined objectives at
corporate level. Objectives may include the following:
• To enhance shareholders value
CORPORATE RESTRUCTURING - MEANING
• Deploying surplus cash from one business to finance profitable growth in
another
• Exploiting inter-dependence among present or prospective businesses
• Risk reduction
• Development of core-competencies
• To obtain tax advantages by merging a loss-making company with a profit-
making company
• Revolution in information technology has made it necessary for companies
to adopt new changes for improving corporate performances.
• To become globally competitive
• To increase the market share
• Convertibility of rupee has attracted medium-sized companies to operate in
the global markets.
• Competitive business necessitated to have sharp focus on core business
activities, to gain synergy benefits, to minimize the operating costs, to
maximize efficiency in operation and to tap the managerial skill to the best
advantage of the firm.
• By diversification of business activities, the minimization of business risk is
possible and it enables the firm to achieve at least the minimum targeted rate
of return
• With the integration of sick unit into the successful unit, the adjustment of
unabsorbed depreciation and write off of accumulated loss is possible and
thereby the successful unit can have strategic tax planning.
CORPORATE RESTRUCTURING - MEANING
TYPES OF CORPORATE RESTRUCTURING STRATEGIES____________________________
Various types of corporate restructuring strategies include:
1. Merger
2. Demerger
3. Reverse Mergers
4. Disinvestment
5. Takeovers
6. Joint venture
7. Strategic alliance
8. Slump Sale
9. Franchising
10. Strategic alliance etc.
CORPORATE RESTRUCTURING - MEANING
1. Merger
Merger is the combination of two or more companies which can be merged
together either by way of amalgamation or absorption. The combining of two
or more companies, is generally by offering the stockholders of one company
securities in the acquiring company in exchange for the surrender of their
stock.
Mergers may be
(i) Horizontal Merger: It is a merger of two or more companies that compete
in the same industry. It is a merger with a direct competitor and hence
expands as the firm's operations in the same industry. Horizontal mergers are
designed to achieve economies of scale and result in reduce the number of
competitors in the industry.
(ii) Vertical Merger: It is a merger which takes place upon the combination
of two companies which are operating in the same industry but at different
stages of production or distribution system. If a company takes over its
supplier/producers of raw material, then it may result in backward
integration of its activities. On the other hand, Forward integration may result
if a company decides to take over the retailer or Customer Company. Vertical
merger provides a way for total integration to those firms which are striving
for owning of all phases of the production schedule together with the
marketing network
(iii) Co generic Merger: It is the type of merger, where two companies are in
the same or related industries but do not offer the same products, but related
products and may share similar distribution channels, providing synergies for
the merger. The potential benefit from these mergers is high because these
transactions offer opportunities to diversify around a common case of
strategic resources.
(iv) Conglomerate Merger: These mergers involve firms engaged in
unrelated type of activities i.e. the business of two companies are not related
to each other horizontally nor vertically. In a pure conglomerate, there are no
important common factors between the companies in production, marketing,
research and development and technology. Conglomerate mergers are
merger of different kinds of businesses under one flagship company. The
purpose of merger remains utilization of financial resources enlarged debt
CORPORATE RESTRUCTURING - MEANING
capacity and also synergy of managerial functions. It does not have direct
impact on acquisition of monopoly power and is thus favored throughout the
world as a means of diversification
2. Demerger
It is a form of corporate restructuring in which the entity's business
operations are segregated into one or more components. A demerger is often
done to help each of the segments operate more smoothly, as they can focus
on a more specific task after demerger.
3. Reverse Merger
Reverse merger is the opportunity for the unlisted companies to become
public listed company, without opting for Initial Public offer (IPO).In this
process the private company acquires the majority shares of public company,
with its own name.
4. Disinvestment
Disinvestment means the action of an organization or government selling or
liquidating an asset or subsidiary. It is also known as "divestiture".
5. Takeover/Acquisition
Takeover means an acquirer takes over the control of the target company. It is
also known as acquisition. Normally this type of acquisition is undertaken to
achieve market supremacy. It may be friendly or hostile takeover.
Friendly takeover: In this type, one company takes over the management of
the target company with the permission of the board.
Hostile takeover: In this type, one company takes over the management of the
target company without its knowledge and against the wish of their
management.
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. It
may be Project based joint venture or Functional based joint venture.
CORPORATE RESTRUCTURING - MEANING
Project based Joint venture: The joint venture entered into by the companies
in order to achieve a specific task is known as project based JV.
Functional based Joint venture: The joint venture entered into by the
companies in order to achieve mutual benefit is known as functional based JV.
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.
8. Franchising
Franchising may be defined as an arrangement where one party (franchiser)
grants another party (franchisee) the right to use trade name as well as
certain business systems and process, to produce and market goods or
services according to certain specifications. The franchisee usually pays a one-
time franchisee fee plus a percentage of sales revenue as royalty and gains.
9. Slump sale
Slump sale means the transfer of one or more undertaking as a result of the
sale of lump sum consideration without values being assigned to the
individual assets and liabilities in such sales. If a company sells or disposes of
the whole or substantially the whole of its undertaking for a predetermined
lump sum consideration, then it results in a slump sale.
