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Corporate Restructuring

Corporate restructuring becomes a buzzword during economic downturns. A company going through tough financial scenario needs to understand the process of corporate restructuring thoroughly. Although restructuring is a generic word for any changes in the company, this word is generally associated with financial troubles.

Definition of Corporate Restructuring

Corporate restructuring is a corporate action taken to significantly modify the structure or the operations of the company. This usually happens when a company is facing significant problems and is in financial jeopardy or is taken over by a third party or even can be a Board room power shift. Often, the restructuring is referred to the ways to reduce the size of the company and make it small. Corporate restructuring is essential to eliminate all the financial troubles and improve the performance of the company.

The troubled company’s management hires legal and financial experts to assist and advise in the negotiations and the transaction deals. The company can go as far as appointing a new CEO specifically for making the controversial and difficult decisions to save or restructure the company. Generally, the company may look at debt financing, operations reduction and sale of the company’s portions to interested investors.

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Reasons for Corporate Restructuring
Change in the Strategy

The management of the troubled company attempts to improve the company’s performance by eliminating certain subsidiaries or divisions which do not align with the core focus of the company. The division may not seem to fit strategically with the long-term vision of the company. Thus, the company decides to focus on its core strategy and sell such assets to the buyers that can use them more effectively.

Lack of Profits

The division may not be profitable enough to cover the firm’s cost of capital and cause economic losses to the firm. The poor performance of the division may be the result of the management making a wrong decision to start the division or the decline in the profitability of the division due to the increasing costs or changing customer needs.

Reverse Synergy

This concept is in contrast to the M&A principles of synergy, where a combined unit is worth more than the individual parts together. According to reverse synergy, the individual parts may be worth more than the combined unit. This is a common reasoning for divesting the assets. The company may decide that more value can be unlocked from a division by divesting it off to a third party rather than owning it.

Cash Flow Requirement

A sale of the division can help in creating a considerable cash inflow for the company. If the company is facing some difficulty in obtaining finance, selling an asset is a quick approach to raising money and reduce debt.

Methods to Divest Assets

There are various ways in which a company can reduce its size. The following are the methods by which a company separates a division from its operations:

Divestitures

Under divestitures, a company sells, liquidates or spins off a subsidiary or a division. Generally, a direct sale of the divisions of the company to an outside buyer is the norm in divestitures. The selling company gets compensated in cash and the control of the division is transferred to the new buyer.

Equity Carve Outs

Under equity carve-outs, a new and independent company is created by diluting the equity interest in the division and selling it to outside shareholders. The new subsidiary’s shares are issued in a general public offering and the new subsidiary becomes a different legal entity with its operations and management separated from the original company.

Split Offs

Under split-offs, the shareholders receive new stocks of the subsidiary of the company in trade for their existing stocks in the company. The reasoning here is that the shareholders are letting go of their ownership in the company to receive the stocks of the new subsidiary.

Liquidation

Under liquidation, a company is broken apart and the assets or the divisions are sold piece by piece. Generally, liquidations are linked to bankruptcies.

Spin Offs

Under spin-offs, the company creates an independent company distinct from the original company as done in equity carve-outs. The major difference is that there is no public offering of the shares, instead, the shares are distributed among the company’s existing shareholders proportionately. This translates into the same shareholder base as the original company, with the operations and management totally separate. Since the stocks of the new subsidiary are distributed to its own shareholders, the company is not compensated by cash in this transaction.

Conclusion

The corporate restructuring allows the company to continue to operate in some way. The management of the company tries all the possible measures to keep the entity going on. Even when the worst happens and the company is forced to pieces because of the financial troubles, the hope remains that the divested pieces can function good enough for a buyer to acquire the diminished company and take it back to profitability.

Different levels of Corporate Restructuring

Corporate restructuring can involve Financial restructuring and Organisational restructuring.

Financial restructuring is more focused on evaluating the company capital structure and decide if this is efficient to generate high cash.For any business, Cashflows is the king and all efforts are done to improve cash flows as this would improve shareholder returns.


When a company has more debt in its capitalisation structure compared to equity, then at distressed/tough environments, the companies may not generate enough cashflows to repay the interest payments of its creditors.In such a case, companies can restructure its debt either by refinancing their debt at lower interest rates or negotiate with its creditors to either extend their repayment dates or convert a part of its outstanding debt to equity.If creditors feel that the current situation faced by the company is temporary and are convinced that the interest repayments are blocking their current growth, then the creditors can free the company from the cash crunch, allowing them to reinvest this cash in growth initiatives. The creditors also have a better chance to recover its outstanding payments when the distressed companies turnaround and becomes profitable.

The companies generally engage the services of bankers and attorneys in financial restructuring activities.

Some of the other ways of restructuring would be, company looking to sell its business or a part of its business through spin offs, split offs and divestitures. In these situations, the company can raise money by selling a part of its business that is no longer profitable or strategic and can use these proceeds to either repay its debt or invest in strategic investments.

In this digital age, most of the current business models are not relevant, which in turn has made the assets owned by companies no longer profitable.For instance, with the advent of cloud, companies that have huge data centres operations have assets that no longer generate high cashflows.So divesting this assets would help company to raise proceeds.The divestment should also take into account the revenues and customers relationships that the companies lose when they divest a part of their business.In addition, there will be restructuring expenses that the company needs to undertake which includes engaging bankers to search for clients who would be interested to buy these assets.

The company needs to have an excellent forecasting capability on when to divest their businesses.A company should look to divest when their divested business are profitable so that the company can get a good price and also be able to complete the process fast.In the case of a distressed sale, valuations are very low and the time taken to find a buyer is also high.

Characteristics of Corporate Restructuring

  • Staff decrease Layoffs (by shutting down or auctioning off the unfruitful areas )
  • Changes in corporate administration.
  • Discarding the under-utilised resources, for example, brands/patent rights.
  • Re-appropriating its tasks to a progressively productive outsider, for example, specialised help in matters of finance.
  • Moving of tasks, for example, moving of assembling activities to bring down cost areas.
  • Revamping capacities, for example, promoting, deals, and dissemination.
  • Renegotiating work agreements to decrease overhead.
  • Rescheduling or renegotiating of obligation to limit the intrigue instalments.
  • Directing an advertising effort everywhere to reposition the organisation with its customers.

How Restructuring Works

When a company restructures internally, the operations, processes, departments, or ownership may change, enabling the business to become more integrated and profitable. Financial and legal advisors are often hired for negotiating restructuring plans. Parts of the company may be sold to investors, and a new chief executive officer (CEO) may be hired to help implement the changes.

The results may include alterations in procedures, computer systems, networks, locations, and legal issues. Because positions may overlap, jobs may be eliminated and employees laid off.

Restructuring can be a tumultuous, painful process as the internal and external structure of a company is adjusted and jobs are cut. But once it is completed, restructuring should result in smoother, more economically sound business operations. After employees adjust to the new environment, the company is typically better equipped for achieving its goals through greater efficiency in production.