Corporate restructuring- Corporate restructuring refers to the process of
reconfiguring a company’s hierarchy, internal structure, or operations
procedures. It is itself made of two words i.e. Corporate plus restructuring.
This in simple words thus changing the whole structure( policies, strategies,
goals) of a company to be more competitive in the market or to overcome
the financial losses.
TYPES OF CORPORATE RESTRUCTURING-
OPERATIONAL RESTRUCTURING- (External)
Operational restructuring involves modifying a company’s asset structure,
which might involve acquiring new businesses to drive growth, forming joint
ventures, establishing strategic alliances, discontinuing unprofitable product
lines, or reducing the workforce.
Mergers & Acquisitions (M&A)
An acquisition involves acquiring a controlling stake in a company. The
acquirer can offer cash, shares, or a combination of both to the target’s
shareholders. The difference between a merger and an acquisition is that a
merger is generally a transaction between two or more equals, resulting in
the creation of an entirely new company.
Moreover, such business combinations can be categorized into three
types:
Horizontal integration is the consolidation of companies operating in the
same industry or market segment. This enhances market share, reduces
competition, and achieves economies of scale.
Forward integration occurs when a company acquires businesses that
are downstream in the value chain. This offers the acquiring company
control over distribution channels, ensures a steady market for products,
and enhances control over the end-user experience.
Example: In March 2017, Toyota acquired material handling supplier
Vanderlande for €1.2bn. This acquisition allowed Toyota to broaden its
range of materials-handling equipment and systems globally beyond lift
trucks, marking a significant step in expanding the materials-handling
solutions business.
Backward integration occurs when a company acquires businesses that
are upstream in the value chain. This helps the company gain control over
key inputs, ensures a stable supply of raw materials, and can reduce
dependency on external suppliers.
Divestment: Divestiture, Spin-Off and Carve-Out
Divestment refers to a company’s strategic decision to sell, liquidate, or
otherwise dispose of a portion of its assets, subsidiaries, or business units.
Divestment is focus on core business areas, improve financials, or
generate capital for other strategic initiatives.
Divestiture involves the outright sale or disposal of a portion of a
company’s assets, business units, or subsidiaries. The segment sold
becomes independent, and the parent company no longer has any control
over the segment or owns any stake.
Example: In June 2008, Ford sold Jaguar and Land Rover to Tata
Motors for a net consideration of US$2.3bn in an all-cash transaction.
Spin-off occurs when a parent company separates a part of its business
into a new, independent entity by distributing shares of the new company to
existing shareholders.
Carve-Out, similar to a spin-off, involves creating a new, independent
entity from a segment of the parent company and then selling some of the
shares to the public via an IPO. However, in a carve-out, the parent
company retains a significant ownership stake in the new entity and may
gradually reduce the stake over time.
Joint ventures and strategic alliances are both forms of partnership
between companies that are created to achieve a specific business goal. A
joint venture involves the creation of a new entity with shared ownership,
while a strategic alliance involves collaboration and the sharing of
resources between independent entities without forming a new separate
entity Example: DENSO and Toyota established a joint venture in July
2019 to conduct research and develop next-generation in-vehicle
semiconductors.
Workforce Reduction
This involves a deliberate and strategic decrease in a company’s
headcount through layoffs or early retirements. It is typically undertaken to
streamline operations, improve efficiency, cut costs, adapt to changing
market conditions, or respond to a decline in business activity.
Financial Restructuring (Internal reconstructuring)
Financial restructuring involves modifying a company’s capital structure,
focusing on its financial aspects. There are several components involved in
financial restructuring, including reducing debt reduction, raising debt to
impact the weighted average cost of capital (WACC)
Debt Reduction
This involves minimizing a company’s overall debt burden. This can be
achieved by paying off existing debt, negotiating better terms, or
refinancing debt to obtain more favorable interest rates and terms
Share Buybacks:
Share buybacks involve a company repurchasing its own outstanding
shares from the market.. It can be a way for the company to deploy excess
cash effectively. Example: In May 2022, BMW approved a buyback of up
to 10% of its share capital over five years. The main goal was to retire
these shares, consequently decreasing the share capital.
ORGANISATIONAL RESTRUCTURING-(INTERNAL RESTRUCTURING)
Organizational restructuring is the deliberate change of a company’s
internal framework, including its structure, processes, job roles, reporting
relationships, and culture. It involves shifts in departmental arrangements,
workforce composition, legal entities, and the simultaneous development of
new growth strategies.
Need and necessity( Rationale)
1.Lack of Profits: The main reason for the corporate restructuring is that
the company is unable to make enough profits, which is required for the
survival of the company. Sometimes, the management makes wrong
decisions regarding the new product or new division, which leads to poor
performance, or with the change in customer needs, there is a decline in
the profit level, which can lead to restructuring.
2. Cash Flow Requirement: Generally, the sale of an unproductive project
can result in a significant cash inflow for the company. If the company is
facing difficulty in getting finance, it can dispose of its assets to raise
money and reduce debt.
3. Changing Strategy: Sometimes, the struggling organisation tries to
improve its performance by reducing divisions and subsidiaries that are
inconsistent with the main strategy of the company. These divisions and
subsidiaries can not strategically fit into the long-term vision of the
company. Thus, the company must focus on the core functions and
dispose of its assets to buyers.Long-Term Growth: The restructuring helps
the company achieve long-term success by positioning itself by expanding
its product range, accessing new markets, or acquiring new technology.
5. Improves Financial Performance: Restructuring helps the company
improve its financial performance by decreasing costs, improving revenue,
or enhancing profitability.
Others-Risk reduction, smoothening of business operations, optimizing
shareholders wealth, creating global business, expansion and
diversification, revival/performance enhancement.
Historical background- In earlier years, India was a highly regulated
economy. To set-up an industry various licenses and registration under
various enactments were required. The scope and mode of corporate
restructuring was, therefore, very limited due to restrictive government
policies and rigid regulatory framework.
The real opening up of the economy started with the Industrial Policy, 1991
whereby ‘continuity with change’ was emphasized and main thrust was on
relaxations in industrial licensing, foreign investments, and transfer of
foreign technology etc. For instance, amendments were made in MRTP
Act, within all restrictive sections discouraging growth of industrial sector.
With the economic liberalization, globalization and opening up of
economies, the Indian corporate sector started restructuring to meet the
opportunities and challenged of competition.
The economic and liberalization reforms, have transformed the business
scenario all over the world. The most significant development has been the
integration of national economy with 'market-oriented globalized economy'.
The multilateral trade agenda and the World Trade Organization (WTO)
have been facilitating easy and free flow of technology, capital and
expertise across the globe. A restructuring wave is sweeping the corporate
sector the world over, taking within its fold both big and small entities,
comprising old economy businesses, conglomerates and new economy
companies and even the infrastructure and service sector. From banking to
oil exploration and telecommunication to power generation, petrochemicals
to aviation, companies are coming together as never before. Not only this
new industries like e-commerce and biotechnology have been exploding
and old industries are being transformed. With the increasing competition
and the economy, heading towards globalisation, the corporate
restructuring activities are expected to occur at a much larger scale than at
any time in the past. Corporate Restructuring play a major role in enabling
enterprises to achieve economies of scale, global competitiveness, right
size, and a host of other benefits including reduction of cost of operations
and administration.
EMERGING TRENDS IN CORPORATE RESTRUCTURING
As businesses face the reality of the macroeconomic headwinds, cost
inflation, higher interest rates and lower consumer discretionary
spending,companies and their directors need to consider the risk of
corporate insolvency and wisely navigate the uncertainties that will arise.
The impact of the changed economic landscape is hitting the food service
businesses, especially the restaurant sector, and retail, where footfall and
average spend is lower and online competition is eroding revenues at store
level. More than half of company failures in 2023 came in the retail,
hospitality and construction sectors and around 99% were small-
andmedium-sized enterprises (SMEs).
The construction sector is also seeing a number of company failures .What
is notable about many business closures in the restaurant and retail area is
the predominance of companies which are small and have less than 50
full-time employees.In all situations where the risk of insolvency and
insolvent trading are identified, the directors’ responsibility shifts from the
interests of shareholders to the interests of all the business’s creditors, so
as not to take any action that would worsen the situation.Companies have
been impacted by the same rising interest rates that have given consumers
sticker shock from 2022 through the present. Rising interest rates make it
harder for companies to borrow money. As a result of economic
headwinds, many companies have used restructuring to free up capital and
operate more efficiently.Should these economic challenges continue,
analysts expect to see an increase in bankruptcy filings. Bankruptcies
decreased in 2021-2022, with levels the lowest in a decade. Supportive
government policies helped contribute to the decrease in bankruptcies.
Companies could borrow at favorable interest rates, lenders were flexible
and lenient if companies needed to modify agreements, and there was
governmental support in the form of stimulus payments and federal
incentives.
Now that business-friendly policies have changed, companies are
experiencing increasing challenges with less support and fewer options.
Given these constraints, it should come as no surprise that the number of
companies filing for bankruptcy is increasing.
While restructuring isn't pleasant, it can be the best solution in a difficult
climate. Bankruptcies can drive mergers and acquisitions, financial
restructuring and other types of restructuring as companies seek solutions
to tough problems.
(Strategies of corporate restructuring wahi hai joh types mein diya hai
mergers , alliances, reducing workforce, joint ventures joh maine upar
describe krdiya h)
