In this post of basics of finance, we would be having a look at Corporate Restructuring. The Oxford dictionary defines Restructuring as ‘a reorganization of a company with a view to achieving greater efficiency and profit or to adapt to a changing market.’ Restructuring is a corporate management term and involves reorganizing of the legal, ownership, operational and other structures of a company. Corporate restructuring takes place in two forms:-
a) Financial Restructuring
b) Organizational Restructuring

This post explains corporate restructuring in basics of finance series started by the buzz stand

Basics of Finance – Corporate restructuring

Financial Restructuring

Financial Restructuring is a part of financial strategy involving reshuffling or reorganizing the financial base which is mainly made up of equity capital and debt capital. The assets and liabilities of the company are re-organised in order to improve the financial environment of the company. For the purpose of restructuring usually financial or legal advisors are hired. The main reasons for undertaking financial restructuring are:
I. Poor financial performance involving drastic fall in sales.
II. External competition.
III. Loss of market share.
IV. To grasp emerging market opportunities.
Financial restructuring is done either by changing the equity pattern, cross-holding pattern, debt-servicing schedule and the equity holdings.

Organizational Restructuring

Organizational Restructuring means bringing about change in the structure of the organisation which involves reducing the hierarchical levels, downsizing the employees, redesigning job position, changing the reporting relationship and eliminating departments. The basic reasons for undertaking organisational restructuring includes:-
I. To meet with the changing business needs.
II. To cut the cost and pay off the outstanding debt.

Corporate restructuring can be performed using either of the forms above stated or by undertaking combination of both. Now we discuss various types of Corporate Restructuring:-

a. Merger / Amalgamation

Merger takes place when two or more business combine to form one business. Here all the assets and liabilities of the merging companies become the asset and liability of the amalgamated company. Famous example is of merger of Indian Software Company Ltd. and Indian Reprographics Ltd. into HCL Ltd.

b. Acquisition and Takeovers

When a company acquires the effective control over the assets or management of another company without any merger it is called acquisition. Here mainly the management of the acquired company gets re-structured.

c. Divestiture

It is defined as sale of assets of the company or any of its division for cash (or for a combination of cash and debt) and not against equity shares. It is undertaken to mobilize resources for core business activity.

d. Demerger

Demerger is a form of corporate restructuring wherein a business segregates its operations into different components. It takes in two forms:-
• Spin-off:- Here the company’s division is separated as an independent company. Thus, both the resulting company act as a separate corporate entities.
• Split-up: – Herein, the company splits up into two or more independent companies. As a result the shares of the parent company are distributed among the split-up units.

e. Capital Reduction

In this process the company tries to reduce its liability on its shares in respect of share capital not paid up, or cancels any paid-up share capital which is post or is allowed to pay-off any paid-up capital which is in excess.

f. Joint Venture

Joint venture is an arrangement in which the participating companies contribute to the equity capital of a new company (called joint venture) in pre-decided proportion. Example is Maruti Suzuki.
And there are few other reasons too like buy outs, strategic alliance, etc.

Here is the list of some famous cases of Corporate Restructuring in India
1)   Tata Steel takes over McKinsey & Co, Arthur D Little and Booz Allen & Hamilton making itself globally competitive.
2)  Honda Motors India broke alliance with Kinetic Engineering to set up HMCI Pvt Ltd.
3)  Ranbaxy acquires firm outside India to penetrate into international market.
4)  Tata acquires Tetley, Chorus and Jaguar Land Rover to enter into global tea, steel and automobile business respectively.
5)  ICICI converted its investment banking business into a JV company ICICI Securities with JP Morgan as the JV partner.

Now comes the question what benefit does a company gets post restructuring itself? Corporate restructuring reaps a lot benefits to the company which includes:
i. Helps in reviving a declining business.
ii. Increases a company’s value and prepares it for sale or transfer to the next generation.
iii. In gaining a competitive advantage.
Summing up restructuring helps a company in its long term survival and success.

Corporate Restructuring has become very popular over recent past which has brought about rigorous changes in global corporate world. While making the restructuring deals, it is essential to consider not only the monetary aspect of acquiring a company but also the cultural and manpower issues that will crop up after such an acquisition. Thus, restructuring a company is a critical process which must be undertaken after thorough discussion have been done and all points related to the process have been analysed and properly looked into.

You can learn more by reading our basics of finance series. In case of any help or information you can contact The Buzz Stand Team.