You are on page 1of 51

Introduction: Corporate restructuring is one of the most complex and fundamental phenomena that management confronts.

Each company has two opposite strategies from which to choose: to diversify or to refocus on its core business. While diversifying represents the expansion of corporate activities, refocus characterizes a concentration on its core business. From this perspective, corporate restructuring is reduction in diversification. Corporate restructuring is an episodic exercise, not related to investments in new plant and machinery which involve a significant change in one or more of the following Pattern of ownership and control Composition of liability Asset mix of the firm. It is a comprehensive process by which a co. can consolidate its business operations and strengthen its position for achieving the desired objectives: (a)Synergetic (b)Competitive (c)Successful It involves significant re-orientation, re-organization or realignment of assets and liabilities of the organization through conscious management action to improve future cash flow stream and to make more profitable and efficient.

MEANING & NEED FOR CORPORATE RESTRUCTURING Corporate restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction. Here are some examples of why

corporate restructuring may take place and what it can mean for the company. Restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production process. In this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the corporation gain a larger market share. Corporate restructuring may also take place as a result of the acquisition of the company by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout. What remains after this restructuring maybe a smaller entity that can continue to function, albeit not at the level possible before the takeover took place. In general, the idea of corporate restructuring is to allow the company to continue functioning in some manner. Even when corporate raiders break up the company and leave behind a shell of the original structure, there is still usually a hope, what remains can function well enough for a new buyer to purchase the diminished corporation and return it to profitability.

Purpose of Corporate Restructuring Business restructuring is a means towards an end. It is a tenacious, long drawn out process that is embarked upon to achieve identified business goals provided by the corporate vision. Companies experiencing a major restructuring are generally doing poorer than expected and wish to increase future earnings by writing down their assets. If a firm is operating in an environment where changes in competition, technology, product, customer mix and cost of financing are minimal or if the firm is in a steady or dominant position in the industry, there may not be a need for the firm to restructure. With the onset of competition,

rapid obsolescence in technology, skills and product market and rising volatility in money and capital market, the steady state is virtually non-existent. Overnight, companies that were known to dominate the respective industries for decades have begun to underperform and are showing signs of extinction. The reasons can be traced to:

Absence in growth segments of the market. Lack of economies of scale. Poor efficiency in operations. Changes in business structures . both domestic and global. Declining competitiveness of the product, technology and value creation process. High cost structure and high cost of capital. 7. Mismanagement of fixed and working capital. Lack of funds to support brand and distribution network. Changes in environment in areas like technology, competition, regulations etc. It can prevent a competitor from establishing a similar position in that industry. It offers a special timing advantage because it enables a firm to leap ahead in the process of expansion. It may entail less risk and even less cost In a saturated market simultaneous expansion and replacement (through a merger) makes more sense than creation of additional capacity through internal expansion. Changes in government policy regulating a given industry.

Hence restructuring becomes crucial whenever there is a major shift in the business environment, which is beyond the control of the firm. Such restructuring, given the volatility of present day business environment has to be a continuous process.

The main purpose of corporate restructuring is as follows: To enhance the share holder value, The company should continuously evaluate its:

1. Portfolio of businesses, 2. Capital mix, 3. Ownership & 4. Asset arrangements to find opportunities to increase the share holders value.

To focus on asset utilization and profitable investment opportunities. To reorganize or divest less profitable or loss making businesses/products.
The company can also enhance value through capital Restructuring, it can innovate

securities that help to reduce cost of capital. Characteristics of Corporate Restructuring 1. To improve the companys Balance sheet, (by selling unprofitable division from its core business). 2. To accomplish staff reduction (by selling/closing of unprofitable portion) 3. Changes in corporate mgt 4. Sale of underutilized assets, such as patents/brands. 5. Outsourcing of operations such as payroll and technical support to a more efficient 3rd party. 6. Moving of operations such as manufacturing to lower-cost locations. 7. Reorganization of functions such as sales, marketing, & distribution 8. Renegotiation of labor contracts to reduce overhead 9. Refinancing of corporate debt to reduce interest payments. 10. A major public relations campaign to reposition the co., with consumers.

11. Forfeiture of all or part of the ownership share by pre restructuring stock holders (if the remainder represents only a fraction of the original firm, it is termed a stub).

Benefits of Business Restructuring The benefits of Business Restructuring will be explained through 2 corporate examples: A.B Group and the merger between Dabur & Balsara. The Aditya Birla group merged group companies, Indo Gulf Fertilizers and Birla Global Finance into Indian Rayon & Industries. The company has been renamed Aditya Birla Nuvo. The benefits of the above restructuring are stated below: 1. It created shareholder value. 2. It created a company that captures opportunities in the evolving Indian economy through leadership in focussed value businesses and driving high growth businesses. 3. It provided the shareholders of Indo Gulf Fertilizers - so far restricted in its growth due to regulatory uncertainties - a broader canvas to participate in value creation. 4. It also extended the participation of Birla Global Finance shareholders beyond mutual funds into life insurance. 5. With such strong financials, Indian Rayon would be in a better position to tap possible new opportunities.

6. In the emerging environment of consolidation in the mutual funds industry, Indian Rayon's strong balance sheet will help it compete better. Another most important acquisition that happened is the acquisition of Balsara group by Dabur. The benefits of this restructuring are as follows: 1. It strengthened Daburs position in oral care: Balsaras were the pioneers in herbal oral care products launched in the seventies. Balsaras herbal oral care range (Promise, Babool and Meswak) is a good strategic fit for Dabur whose products are also positioned on the herbal platform. 2. Added a new avenue of growth - Household care: Balsara had a diverse portfolio of brands in extremely attractive categories. The acquisition enabled Dabur to enter the Rs.20 billion household care business through well entrenched brands. 3. Enabled Dabur to expand regional presence: 45% of Balsara revenues were from west & south. This complemented Daburs regional saliency. 4. Economies of scale from combined business: The acquisition provided several synergies to Dabur Backend on the synergies in manufacturing supply chain, and marketing purchase, front. IT, etc. Combined business provided economies of scale in marketing, sales and distribution. operations, The acquisition also marked Daburs entry into niche segments of household care products providing it completely new area of growth.

Corporate Debt Restructuring In India Corporate Debt Restructuring (CDR) is more than a mere fad for India Inc. As the global economic resurges after several months of an economic slowdown, analysts fastidiously evaluate the impact of debt restructuring processes on the overall well being of the economy. It may be argued that these prevailing conditions are perhaps the appropriate litmus test to assess the success of the CDR system in emerging economies such as India.

CDR & India: A Fad which is here to Stay? For Corporate India, CDR has remained at the receiving end of constant media-attention. With a formalized CDR system which was put in place over half a decade ago by the RBI, and an ever growing number of corporations taking refuge under its provisions, CDR has established a strong foothold in the field of banking and finance. Current Trends: The Global Crisis & Debt Restructuring What do giant companies such as Wockhardt, Vishal Retail, India Cements, HPL, Subhiksha, Sakthi Sugars, Jindel Steel, Essar Steel, have in common? They are all recent participants of the Indian CDR system. In between 2001 and 2005, the CDR Cell restructured 138 cases with an aggregate debt of over Rs 75,000 crore. Of these, 75% of the cases were a success they performed well and met their debt obligations in time. The total references received by the cell at the end of December 2009 stood at 208 with an aggregate of Rs 90,888 crores.Of these, 29 cases totaling Rs 5,018 crores were rejected and 173 cases with a total debt of Rs 84,510 crores were implemented under the program. These proposals came from all quarters of the industry. While in the year 2008-09 alone the CDR Cell in India received proposals from 34 companies, the number of cases received for restructuring tripled in the year 2009-10. It is believed that investments earmarked for CDR constitute 60% of the total industrial investments. Waajid Siddique in his comment published in a popular business law magazine, observed that at a macro level, the current situation (referring to the global economy in the wake of the sub-prime crisis) constitutes the largest global restructuring ever attempted. The primary reason for this surge has been attributed to the mounting debt of companies along with a drop in the returns causing a sustained period of debt. Although India outperformed expectations riding through the global economic slowdown relatively unaffected, its exposure to the crisis was unavoidable. Therefore, CDR has had, and shall continue to play, an integral role in the Indian restructuring efforts in the post-crisis phase. CDR: what is it and why do we hear so much about it? it is a proactive step to avoid companies from slipping into a mess from where it may become difficult to make any recovery.

- An executive, quoted by a leading Indian financial daily. Adam Smith, way back in the late 18th century, spoke about the invisible hand of self-interest that motivated the proliferation of business. Today, the situation has changed, but not by much. In the working of corporations within todays complex mechanisms, it is the self-interest of the various creditors and the members of the company which are the driving force. Simply put, CDR is a non-statutory and voluntary method for companies to resolve their unmet financial obligations. It is founded on the understanding that making such restructuring facilities available to companies in a timely and transparent matter goes a long way in ensuring their viability which is sometimes threatened by internal and external factors. Corporate debt restructuring as a remedial measure prevents incipient delinquency in corporate accounts. Therefore, this system resolves the financial difficulties of the corporate sector and enables entities to become viable. Other available options to restructuring may include re-financing or filing for bankruptcy. In practice, restructuring brings to the table the interests of the company along with those of the creditors. This is what sets restructuring apart from other creditor friendly approaches. This restructuring is multi-faceted. It usually involves the waiver of part of interest or concessions in payment, or converting the un-serviced portions of interests into term loans, re-phasement of recovery schedules, reduction in margins, reassessment of credit facilities including working capital, restructuring the management, reduction in equity capital to make more capital available for expansion, conversion of debentures into equity to give relief on the compulsory payment of interest on the debentures. In addition to these, often, additional finance may be sought for bringing about change in the working of the corporation.

A look at the Indian Insolvency & Restructuring Regime

2.1 A Look at the Insolvency / Restructuring Laws A need has long been felt for India to develop a comprehensive code of insolvency and restructuring laws. Currently, the regime is highly fragmented and consolidation would be a move in the right direction. When companies in India are faced with financial turmoil, they may consider a number of options to achieve restructuring or liquidity. There are six ways for them to attempt to achieve the desired results. These include winding up, arrangements or compromises under the Companies Act, restructuring under the Sick Industrial Companies (SIC) Act, reconstruction of assets under the Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act, and restructuring as per specific governing statutes which is mostly in the case of public sector banks and insurance companies. Lastly, informal debt restructuring as per the RBI guidelines also provides a forum to address these concerns. A. Winding-Up Background: The Companies Act, 1956 lays down procedures for companies to wind-up. The winding up may be ordered by the court in circumstances where the company is unable to pay its debt or it may be consequent to a petition filed by the creditors or the shareholders or by the company itself. Voluntary winding up may also follow the occurrence of a trigger- event as specified in the articles of the company. After the appointment of a liquidator, in whom the estate of the company vests, assets are distributed in a preferential order. While the winding up process is under way, the operations of the company are halted and there is a bar on initiating any other legal proceedings against the company without the leave of the court. Foremost priority is given to the dues of the workmen and debts owed to secured creditors who often choose to enforce their securities outside of the winding up process. From the proceeds of the companys estates, amounts owed to the government are paid first. Thereafter, the dues of the unsecured creditors and those secured creditors who participate in the winding up process are settled. Any remaining surpluses are then divided amongst the shareholders. Drawbacks:

One of the major drawbacks of this process is that the Act as such does not provide for a time frame for winding up. The average time taken for the procedure to complete is as high as 10 years. In addition to this, the recoveries are often low and the creditors usually suffer losses. B. Schemes of Compromise or Arrangements Background: The Companies Act also allows for formation of schemes of compromise or arrangements, facilitating the entering into such schemes in between debtor companies and their creditors or members. In the course of such an arrangement, the creditors who stand to be affected by the proposed scheme are divided into appropriate classes. These individual classes must consent to the scheme with a 75% majority. Once approved, the scheme needs to be sanctioned by the court which reserves the right to modify the scheme. Pending the execution of the scheme, companies are usually granted moratoriums on actions their pending dues to the creditors. Drawbacks: Once again, this procedure involves convening several meetings and court approvals and is therefore time consuming. Nonetheless, since the court does not look in to the commercial benefits of the scheme and only assesses whether the scheme is in the interest of the company or not, constructive schemes can be implemented. For these reasons, and its ability to bind dissenting creditors, this process has been successful in the past. C. Restructuring under the Sick Industrial Companies (Special Provisions) Act, 1985 Background: An industry is considered to have become sick when it accumulates losses equal to, or more than, its net worth. Under the SIC Act, if a company turns sick, the directors of the company must refer the matter to the BIFR (Board of Industrial and Financial Reconstruction) which has extremely broad powers. BIFR, on its satisfaction that the company may be restructured, sanctions a scheme which is binding on the members and the creditors. Drawbacks: In practice, this process has been widely implemented by debt-struck companies. Unfortunately, the process rarely culminates in a successful restructuring because of the inordinate delays in the implementation. Companies, in fact, use the reference to BIFR as a tactic to defeat debt claims.

Efforts are under way to reform the law in this regard and to make the Act a potent mechanism to address sick companies. D. Reconstruction of Assets under the SRFAESI Act, 2002 Background: The Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SRFAESI) envisages private sector participation in asset reconstruction companies to manage NPAs acquired from creditors and grants them certain special rights to aid in the reconstruction of the assets. The secured creditors may exercise their rights outside of this mechanism without interference from the BIFR. Drawbacks: Although the Act dates back to the year 2002, this process has not been fully tested and commentators are of the opinion that its success rate as such remains unknown. E. Statute Specific Remedies Background: Where the corporation in question has been incorporated under a specific statute, which is the case with public sector banks and insurance companies, they may reconstruct as per the provisions of that specific statute. Drawback: To the creditors of these corporations, other aforementioned remedies are not available.

Restructuring Types The broad types of Restructuring are displayed in the following diagram:

Each of these can be further classified into various types or methods of restructuring depending upon the objectives to be achieved. 2.3.1 Portfolio & Asset Restructuring Broadly, these types of restructuring affect distinctly the asset base or the product / service portfolios of the organizations in consideration, as also the power and control related issues. Also, these types of restructuring initiatives are usually undertaken to enhance the profitability of the both companies in a mutually rewarding situation - as in a Merger scenario . or either of the dealing parties . as in the case of Acquisitions . or even certain objective decisions as the divestments of certain businesses to ensure growth and sustainable development.

I. Mergers & Amalgamations: It is a combination of two or more business enterprises into a single enterprise. Usually mergers occur in a friendly setting where executives from the respective companies participate in a due diligence process to ensure a successful combination of all parts. The Shareholders of each company must agree to it prior to undertaking it. Mergers can be of three types; namely: a). Horizontal Mergers: A horizontal merger is when two companies competing in the same market merge or join together. This type of merger can either have a very large effect or little to no effect on the market. When two extremely small companies combine, or horizontally merge, the results of the merger are less noticeable. These smaller horizontal mergers are very common. If a small local drug store were to horizontally merge with another local drugstore, the effect of this merger on the drugstore market would be minimal. In a large horizontal merger, however, the resulting ripple effects can be felt throughout the market sector and sometimes throughout the whole economy. E.g. the Daimler Chrysler Merger.

b. Vertical Mergers: A merger between two companies producing different goods or services for one specific finished product. By directly merging with suppliers, a company can decrease reliance and increase profitability. An example of a vertical merger is a car manufacturer purchasing a tire company. Vertical Mergers can be in the form of Forward Integration of Business [E.g. A manufacturing company entering in the Direct Marketing Function . which was not its foray in the erstwhile times) or in the form of Backward Integration of Business [E.g. A manufacturing company also focussing on the producing the required raw materials and managing its supply chain activities on its own . which was not its foray earlier]. c. Conglomerates: This type of merger involves mergers of corporates in related as well as unrelated businesses to achieve three objectives; a. Product Extension b. Entry into new Geographic Markets c. Entry into unrelated yet profitable businesses. E.g. most big business houses such as Reliance Industries, Aditya Birla Group, etc. undertake such mergers to expand their businesses. Benefits of undertaking Mergers & Amalgamations:

Entry into new businesses Asset / Competencies Acquisitions Development of New Capabilities

Issues in undertaking Mergers & Amalgamations: i. Selection and Financial Analysis of the Target Firm (the company to be merged with). ii. Valuation of the Target Firm iii. Establishing the Basis of Exchange iv. Rightsizing the new entity v. Maintaining Employee Productivity vi. Reorganizing the organization Some Corporate Examples: ICICI Bank Limited and Bank of Madurai, Proctor & Gamble and Gillette, Dabur and Balsara, etc.

II. Joint Ventures: A joint venture (often abbreviated JV) is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise. The venture can be for one specific project only, or a continuing business relationship such as the Sony Ericsson joint venture. This is in contrast to a strategic alliance, which involves no equity stake by the participants, and is a much less rigid arrangement. a. Project Based JV: These are Joint Ventures entered into by companies in order to accomplish a specific project. b . Functional JV: These are Joint Ventures wherein, companies agree to share their functions and facilities such as production, distribution, marketing, etc. to achieve mutual benefit. Motives for forming a joint venture Internal reasons 1. Build on company's strengths 2. Spreading costs and risks 3. Improving access to financial resources 4. Economies of scale and advantages of size 5. Access to new technologies and customers 6. Access to innovative managerial practices Competitive goals 1. Influencing structural evolution of the industry 2. Pre-empting competition 3. Defensive response to blurring industry boundaries 4. Creation of stronger competitive units 5. Speed to market 6. Improved agility Strategic goals

1. Synergies 2. Transfer of technology/skills 3. Diversification Benefits of Joint Ventures

Complementary Benefits Acquiring and Sharing Expertise New Business / Product Development Capacity Expansion

Issues in Joint Ventures

Due Diligence Business Strategy Development of HR Strategies Implementation

III. Acquisitions: An acquisition, also known as a takeover, is the buying of one company (the target) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover. There are two major types of Acquisition. These are explained as follows: 1. Management Buyouts: It is a form of Acquisition wherein the management of a company decides to take their company private because it feels it has the expertise to grow the business better if it controls the ownership. Quite often, management will team up with a venture capitalist to acquire the business because its a complicated process that requires significant capital. Hence,

large borrowings are made by managers to buy stocks held by large shareholders - who later become the shareholders of the new entity to earn higher returns for themselves. 2. Takeovers: Takeovers are normally viewed as unfriendly acquisitions as in this case, one company purchases a majority interest in the target company resulting in loss of management control for the target company. Incidentally, the acquiring company has a stronger market standing than the target company in this case. It is definitely not a merger of equals. Typically, this type of acquisition is undertaken to achieve market dominance. There are three types of Takeovers; namely: a. Hostile Takeover: It is a takeover attempt that is strongly resisted by the target firm and is undertaken by purchasing the majority of outstanding shares of the target company in the open stock market. The technique that the acquirer adopts in this case is .Street Sweep.. E.g. Oracle Corp. and Peoplesoft Inc. Hostile Takeover b. Leveraged Buyout: It is a type of acquisition wherein the acquiring company uses a large amount of Debt . financing to pay the target company its valuation at the time of the takeover in cash and / or Junk bonds (i.e. the bonds are usually not investment grade and are referred to as junk bonds.) E.g. Oracle Corp. and I . Flex Takeover 3. Asset Buyout: A buyout strategy in which key assets of the target company are purchased, rather than its shares. This is particularly popular in the case of bankrupt companies, who might otherwise have valuable assets which could be of use to other companies, but whose financing situation makes the company unattractive for buyers (an asset buyout strategy may be pursued in almost any case where the potential target company has an unattractive financing structure). Motives behind Acquisitions

To achieve Market Dominance. To achieve Economies of Scale. To Increase Revenues. To enable Cross - Selling. To improve Technological Capabilities.

To enable better Tax Management. To expand into new Geographies. To expand Customer Base, etc.

Benefits of Acquisitions

Fairness of Price Paid Lower Cost to the Acquiring firm Market Dominance

Issues in Acquisitions

Resistance from the target company Inability to secure adequate shares to gain Management Control Hostility Reputation Assaults

III. Acquisitions: An acquisition, also known as a takeover, is the buying of one company (the target) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover. There are two major types of Acquisition. These are explained as follows: 1. Management Buyouts: It is a form of Acquisition wherein the management of a company decides to take their company private because it feels it has the expertise to grow the business better if it controls the ownership. Quite often, management will team up with a venture capitalist to acquire the business because its a complicated process that requires significant capital. Hence, large borrowings are made by managers to buy stocks held by large shareholders - who later become the shareholders of the new entity to earn higher returns for themselves.

2. Takeovers: Takeovers are normally viewed as unfriendly acquisitions as in this case, one company purchases a majority interest in the target company resulting in loss of management control for the target company. Incidentally, the acquiring company has a stronger market standing than the target company in this case. It is definitely not a merger of equals. Typically, this type of acquisition is undertaken to achieve market dominance. There are three types of Takeovers; namely: a. Hostile Takeover: It is a takeover attempt that is strongly resisted by the target firm and is undertaken by purchasing the majority of outstanding shares of the target company in the open stock market. The technique that the acquirer adopts in this case is .Street Sweep.. E.g. Oracle Corp. and Peoplesoft Inc. Hostile Takeover b. Leveraged Buyout: It is a type of acquisition wherein the acquiring company uses a large amount of Debt . financing to pay the target company its valuation at the time of the takeover in cash and / or Junk bonds (i.e. the bonds are usually not investment grade and are referred to as junk bonds.) E.g. Oracle Corp. and I . Flex Takeover 3. Asset Buyout: A buyout strategy in which key assets of the target company are purchased, rather than its shares. This is particularly popular in the case of bankrupt companies, who might otherwise have valuable assets which could be of use to other companies, but whose financing situation makes the company unattractive for buyers (an asset buyout strategy may be pursued in almost any case where the potential target company has an unattractive financing structure). Motives behind Acquisitions

To achieve Market Dominance. To achieve Economies of Scale. To Increase Revenues. To enable Cross - Selling. To improve Technological Capabilities. To enable better Tax Management. To expand into new Geographies. To expand Customer Base, etc.

Benefits of Acquisitions

Fairness of Price Paid Lower Cost to the Acquiring firm Market Dominance

Issues in Acquisitions

Resistance from the target company Inability to secure adequate shares to gain Management Control Hostility Reputation Assaults

IV. Divestitures: The partial or full disposal of an investment or asset through sale, exchange, closure or bankruptcy. Divestiture can be done slowly and systematically over a long period of time, or in large lots over a short time period. E.g. Volvo AB sold passenger business to Ford for $6.5B. There are four types of Divestiture initiatives; namely: 1. Spin Offs: A company owns or creates a subsidiary whose shares are distributed on a pro rata basis to the shareholders of the parent company where the Parent usually retains some ownership of approximately 10 to 20%. There are two approaches to spin offs. The first approach deals with disinvesting the corporation in terms of keeping equitable shareholding pattern for the newly formed companies. In this case, the company distributes, on a pro-rata basis, all shares that it owns in its subsidiaries, to its shareholders, thereby creating two separate corporations with the same proportional equity in place of the one corporation that existed previously. E.g. Hilton spin-off Park Place Entertainment Corp (casino business) . 1 share for 1 share.

The second approach resorts to floating a new entity, with the selling company (i.e. the company which is disinvesting) participating in its equity and later selling off the assets or division proposed to be spun . off to the new company. E.g. Kimberly Clark spin-off Midwest Express Airlines 2. Splits: As the term denotes, Splits refer to splitting the corporate entity into two or more parts to achieve its strategic objectives such as enhanced profitability by removing non . core businesses from the mainstream businesses, etc. There are two types of Splits; namely: a. Split-ups: When a firm splits into 2 or more entities - usually accomplished with carve-outs and spin-offs of individual parts, it is said to have split-up. The result of a split-up is that the parent company ceases to exist. E.g. In September 1995, AT&T spilt into 3 publicly traded companies and the 4th business was sold. b. Split-offs: In this case, some of the shareholders of the parent company receive a subsidiary's shares on condition that they return the shares they hold of the parent company. Family owned businesses with complex cross holdings in all subsidiaries use this approach to separate the interest of different family streams. e.g., The Reliance Industries Group has now split-off into Reliance Industries Limited, Reliance Infocomm, Reliance Energy, etc. 3. Equity Carve-outs: It is the IPO of some portion / some percentage of the common stock of the wholly owned subsidiary of the Parent Company. It is sometimes known as .split-off. IPO. It is one method of equity financing when the assets of the parent company and the subsidiary are separated. It initiates the public trading of the Subsidiarys shares and is not reversible a it is in case of redeemable preference shares. E.g. In 1999, General Motors did a carve-out and spin-off of Delphi - Delphi had many customers though GM remained protected. 4. Disinvestment: Disinvestment, sometimes referred to as divestment, refers to the use of a concerted economic boycott, with specific emphasis on liquidating stock, to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change. The term was first used in the 1980s, most commonly in the United States, to refer to the use of a concerted economic boycott designed to pressure the government of South Africa into abolishing its policy of apartheid.

Motives behind Divestitures 1. Dismantling conglomerates 2. Abandoning core business 3. Changing strategies 4. Adding Value by Selling into a better fit 5. Large Additional Investment required 6. Harvest past successes 7. Discard unwanted business from prior acquisitions 8. Finance prior acquisitions done before LBO 9. Ward off takeover 10. Meeting Government requirements Benefits of Divestitures i. Shedding Excess Flab i.i Effective Market Regulation ii. Financial Support Issues in Divestitures i. Market Reactions ii. Government Interventions Some Corporate Examples: AT&T sold Global Network to IBM, Hoechst AG sold its Paint Division to DuPont, etc Capital Restructuring Capital is generally the assets, often monetary, that are available to generate more assets. Thus the liquidity of capital should be high. Restructuring them means reallocating them to improve their availability (liquidity). The process requires selling assets to buy different ones in order to improve your capital (monetary) position so that you can improve your asset position thus enabling you to earn more with them. It is generally undertaken by companies that are generally doing poorer than expected and wish to stabilize future performance of their assets.

Capital / Financial Restructuring touches upon the following aspects: 1. Leverage of the company: This is essentially the Debt: Equity Ratio. Here, companies have the option of undertaking Debt Restructuring - especially if it is a Debt - laden company (high debt leveraged company). > Debt Restructuring: It is a process that allows a private or public company - or a sovereign entity - facing cash flow problems and financial distress, to reduce and renegotiate its deliquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations. 2. Investment Pattern: This relates to ability of corporations to identify the various investments opportunities that would lead to higher returns. 3. FDI Participation: This aspect relates to the change in structure of the shareholding due to the increasing FDI inflows. 4. Divestitures: As stated earlier in the types of Divestiture in Portfolio and Asset Management, this aspect relates to divesting divisions and / or businesses to improve the financial standing of the organization. Motives of Capital Restructuring 1. To enhance liquidity. 2. To lower the cost of capital. 3. To reduce risk. 4. To avoid loss of Control. 5. To improve Shareholder Value. Benefits of Capital Restructuring

Greater Financial Muscle Access to Better / Greater Technologies Focus on Core Competencies

Issues in Capital Restructuring

> Loss of Management Control

2.3.3 Organizational Restructuring Organizational Restructuring hovers around the changes in organizational design. It brings about changes in decision making, information flow and management style. Though this restructuring, just like all other restructurings, is initiated by the CEO, it requires the participation of all hierarchies of an organization, especially the employees. Organizational restructuring, combined with portfolio restructuring and financial restructuring makes meaningful changes materialize and touches upon the following aspects: 1) Centralization/decentralization of the organization: Functions or units of the organization may be centralized or decentralized to create new linkages to better implement the strategy. Nature of Decision making in the organization may be changed due to the changes in reporting levels and hierarchy. 2) Organizational Culture: The essential fabric of the firm i.e. its culture is affected as a consequence of changes in reporting levels and hierarchical levels. 3) Training and Redeployment: Imparting training to the workforce enables the organization to cope better with the changing environment. At the same time some employees need to be redeployed. However, training and redeployment may be inadequate at times and therefore inducting educated and skilled professionals at different levels becomes necessary. 4) Changes in HR Policies: The current HR policies of the organization need to be changed in accordance with the changing scenario. The HR department needs enable change management. 5) Rationalization of Pay Structure: The present pay structure should be modified and reevaluated to maintain the internal and external equity among the employees. Symptoms indicating the need for organizational restructuring

Parts of the organization are significantly over or under staffed. Organizational communications are inconsistent, fragmented, and inefficient. Technology and/or innovation are creating changes in workflow and production processes. Significant staffing increases or decreases are contemplated. New skills and capabilities are needed to meet current or expected operational requirements. Accountability for results are not clearly communicated and measurable resulting in subjective and biased performance appraisals. Personnel retention and turnover is a significant problem. Workforce productivity is stagnant or deteriorating. Morale is deteriorating

Benefits of Organizational Restructuring i. Lower cost ii. Better formulation and implementation of strategies Issues in Organizational Restructuring i. Culture. ii. Downsizing iii. Loss of Employee Morale. The approaches that various companies, large and small, public and private, adopted in their efforts to restructure in terms of DOWNSIZING differed in terms of how they viewed their employees.

One group viewed employees as costs to be cut. These are the "downsizers". The other group viewed employees as assets to be developed. These are the "responsible restructurers."

Various strategies for business restructuring are available. In our study of the subject, we found out that following strategies play an important role in the business restructuring: 1. Smart-sizing: It is the process of reducing the size of a company by laying off employees on the basis of incompetence and inefficiency. Some Examples

Acquisitions: HLL took over TOMCO. Diversification: Videocon group is diversified into power projects, oil exploration and basic telecom services. Merger: Asea and Brown Boveri came together to form ABB. Strategic alliances: Siemens India has got a Strategic alliance with Bharati Telecom for marketing of its EPABX. Expansion: Siemens is expanding its medical electronics division- a new factory for medical electronics is already come up in Goa.

2. Networking: It refers to the process of breaking companies into smaller independant business units for significant improvement in productivity and flexibility. The phenomenon is predominant in South Korea, where big companies like Samsung, Hyundai and Daewoo are breaking themselves up into smaller units. These firms convert their managers into entrepreneurs. 3. Virtual Corporation: It is a company that has taken steps to turn itself inside out. Rather than having managers and staff sitting INSIDE in their offices moving papers from in basket to out basket, a virtual corporation kicks the employees outside, sending them to work in customer's offices and plants, determining what the customer needs and wants, then reshaping the corporate products and services to the customer's exact needs. This is a futuristic concept wherein companies will be edgeless, adaptable and perpetually changing. The centrepiece of the business revolution is a new kind of product called a "Virtual Product" Some of the these products already exist, camcorders create instant movies, personal computers and laser printers have made instant desktop publishing a reality. And for all these we can obtain cash instantly at ATMs.

4. Verticalization: It refers to regrouping of management functions for particular functions for a particular product range to achieve higher accountability and transparency. Siemens in 1990 moved from a "function-oriented" structure to a vertical "entrepreneur-oriented" structure embracing size business and three support divisions. 5. Delayering- Flat organization: In the post world war period the demand for goods was ever increasing. Main objective of the corporations was production and capacity build up to meet the demand. The classical, pyramidal structure was well suited to this high growth environment. This structure was scalable and the corporations could immediately translate their growth plans into action by adding workers at the bottom layer and filling in the management layers. But the price paid in the whole process was much higher. The overall process became complicated; number of middle managers and functional managers grew making the coordination of various functions complex. Senior/top management was alienated from the front-line people as well as the end users of the product or service. Decision-making became slower. Hence, a need is felt to attack the unproductive, bulky and sluggish network of white-collar staff. A powerful strategy would be to remove the layers of senior and middle management i.e. making the organization structure flat. 6. Business Process Reengineering: The Business Process Reengineering method (BPR) is defined by Hammer and Champy as 'the fundamental reconsideration and radical redesign of organizational processes, in order to achieve drastic improvement of current performance in cost, service and speed'. Value creation for the customer is the leading factor for BPR and information technology often plays an important enabling role. Business process reengineering is also known as BPR, Business Process Redesign, Business Transformation, or Business Process Change Management.

Category of corporate restructuring Corporate Restructuring entails a range of activities including

Financial restructuring and organization restructuring . FINANCIAL RESTRUCTURING Financial restructuring is the reorganization of the financial assets and liabilities of a corporation in order to create the most beneficial financial environment for the company. The process of financial restructuring is often associated with corporate restructuring, in that restructuring the general function and composition of the company is likely to impact the financial health of the corporation. When completed, this reordering of corporate assets and liabilities can help the company to remain competitive, even in a depressed economy. Just about every business goes through a phase of financial restructuring at one time or another. In some cases, the process of restructuring takes place as a means of allocating resources for a new marketing campaign or the launch of a new product line. When this happens, the restructure is often viewed as a sign that the company is financially stable and has set goals for future growth and expansion. Need For Financial Restructuring The process of financial restructuring may be undertaken as a means of eliminating waste from the operations of the company. For example, the restructuring effort may find that two divisions or departments of the company perform related functions and in some cases duplicate efforts. Rather than continue to use financial resources to fund the operation of both departments, their efforts are combined. This helps to reduce costs without impairing the ability of the company to still achieve the same ends in a timely manner. In some cases, financial restructuring is a strategy that must take place in order for the company to continue operations. This is especially true when sales decline and the corporation no longer generates a consistent net profit. A financial restructuring may include a review of the costs associated with each sector of the business and identify ways to cut costs and increase the net profit. The restructuring may also call for the reduction or suspension of production facilities that are obsolete or currently produce goods that are not selling well and are scheduled to be phased out. Financial restructuring also take place in response to a drop in sales, due to a sluggish economy or temporary concerns about the economy in general. When this happens, the corporation may need to reorder finances as a means of keeping the company operational through this rough time. Costs may be cut by combining divisions or departments,

reassigning responsibilities and eliminating personnel, or scaling back production at various facilities owned by the company. With this type of corporate restructuring, the focus is on survival in a difficult market rather than on expanding the company to meet growing consumer demand. All businesses must pay attention to matters of finance in order to remain operational and to also hopefully grow over time. From this perspective, financial restructuring can be seen as a tool that can ensure the corporation is making the most efficient use of available resources and thus generating the highest amount of net profit possible within the current set economic environment.

ORGANIZATIONAL RESTRUCTURING In organizational restructuring, the focus is on management and internal corporate governance structures. Organizational restructuring has become a very common practice amongst the firms in order to match the growing competition of the market. This makes the firms to change the organizational structure of the company for the betterment of the business. Need For Organization Restructuring
New skills and capabilities are needed to meet current or expected operational

Accountability for results are not clearly communicated and measurable resulting in

subjective and biased performance appraisals. Parts of the organization are significantly over or under staffed.
Organizational communications are inconsistent, fragmented, and inefficient

Technology and/or innovation are creating changes in workflow andproduction processes. Significant staffing increases or decreases are contemplated. Personnel retention and turnover is a significant problem. Workforce productivity is stagnant or deteriorating.

Morale is deteriorating. Some of the most common features of organizational restructures are:

Regrouping of business This involves the firms regrouping their existing business into fewer business units. The management then handles theses lesser number of compact and strategic business units in an easier and better way that ensures the business to earn profit.

Downsizing Often companies may need to retrench the surplus manpower of the business. For that purpose offering voluntary retirement schemes (VRS) is the most useful tool taken by the firms for downsizing the business's workforce

Decentralization In order to enhance the organizational response to the developments in dynamic environment, the firms go for decentralization. This involves reducing the layers of management in the business so that the people at lower hierarchy are benefited.

Outsourcing Outsourcing is another measure of organizational restructuring that reduces the manpower and transfers the fixed costs of the company to variable costs.

Enterprise Resource Planning

Enterprise resource planning is an integrated management information system that is enterprisewide and computer-base. This management system enables the business management to understand any situation in faster and better way. The advancement of the information technology enhances the planning of a business. Hurdles of Business Restructuring Restructuring is not as simple as "Making the mission statement in the morning, assessing the corporate strengths and weaknesses in the afternoon and articulating the strategies by evening". Some of these are discussed below: Culture: Culture is an important intermediary which determines whether the strategy will or will not be successfully implemented. Culture either helps or hinders an organization as it seeks to achieve competitive advantage. The right culture for an organization is the one that best supports its strategic objectives. The challenge for an organization is thus to assess the fit between the current culture and the culture required to implement the chosen strategy successfully and to take steps to change the organization's culture to better align it with what is required. Inadequate focus and commitment of top management towards change program: Any change program will be successful only if it gets adequate support and commitment of the top management. If the top management themselves are not focused or committed the restructuring will be a failure. "What is in it for me" attitude: Say in case of a merger or an acquisition, if each party is concerned only about itself rather than the organization as a whole, the restructuring would not be effective nor successful i.e. if each party tries to gain benefits for itself at the cost of the others, the new organization would fail. Mind set/resistance to change: Any restructuring activity involves some amount of change. Be it a merger or a joint venture or a takeover, the management as well as the employees require to align themselves the new structure. If they are not willing to change their mindset, the restructuring will not be successful.

Lack of involvement of employees: A restructuring activity requires a lot of change: change in the mindset, change in the working, change in the reporting, a change in the structure, etc. Since human tendency is to resist change, the best way to incorporate any change is to involve people in the formation of this change. Failure to do so would invite resistance from them which in turn will affect a successful restructuring. Poor planning: As goes the phrase "Well started is half done". If your planning stage itself is faulty, the whole activity would be affected. Resource Availability: Resource availability could be another constraint. Lack of availability of adequate resources could affect the working of the business and affect the restructuring activity as a whole. Cost and time: The cost and time involved for the gains to seep through into the organization may at times make the firm retreat from the process of restructuring. Poor communication: At times, due to poor communication, the need and benefits of the restructuring activity has not been percolated to the lower levels of the organization. This in turn would affect the effective working of the employees and their performance. Unstructured communication flow, unclear reporting structures, etc, after a restructuring activity, could also affect the efficient working of the organization. Restructuring At Lucent Technologies (A Success Story) Lucent Technologies was a technology company composed of what was formerly AT&T Technologies, which included Western Electric and Bell Labs. It was spun-off from AT&T on September 30, 1996. About Lucent Technologies

In September 1995, the US based telecom giant AT&T announced that it would be restructuring itself into three separate companies- a services company(AT&T), a products and systems company (Lucent technologies) and a computer company (NCR).

In February 1996, AT&T divested Lucent off into a separate company

At the time it was spun off, Lucent was already a major player in many business-mobility, data, optical and voice networking technologies, professional network designs and consulting services, web-based enterprise solutions which linked public and private networks and optoelectronics and communications semiconductors

By 1997, Lucent was the leading telecom equipment maker and was lauded as one of the biggest success stories of the 1990s. Lucent had acquired many technology companies in the late 1990s.

Surfacing of the Problems

In the late 1990s, as the internet and data traffic businesses gained ground, Lucent lost its competitive advantage in its core business of telecom equipment. Though Lucent invested in a few Internet and wireless companies after 1996, the company focused more on its core competencies and failed to evolve in line with the changing market dynamics towards convergence of voice, data and internet.

With the growing popularity of wireless technologies, Lucent began to lag behind its competitors, who were quick to recognize the potential of Internet. Compared to its competitors, Lucent had been very slow to respond to it customers? need for higher-speed optical networking equipment which resulted in a severe blow to its revenue as well as its market reputation

By late 1999, Lucent's high priced acquisitions were not earning reasonable profits and the company was also unable to integrate the operations of the acquired companies effectively, leading to problems on the corporate culture front.

The poor integration of corporate cultures led to a major exodus of talent from the acquired companies, as a result of which, Lucent could not launch new technologies to match its competitors

Besides, Lucent had diversified workforce of over 1,38,000 people across its businesses, and the workforce at each business unit had its own unique culture. Lucent became a hub of diversified cultures and varied service delivery models. This made it difficult for the HR staff to integrate the HR functions across the business units and to develop and implement efficient retention strategies.

In 1997, Lucent launched a major strategic initiative called "GROWS" an acronym for its key elements - Global, Results, Obsessed, Workplace and Speed. This initiative promoted an open supportive and diverse workplace at the company. However, by late 1999, under McGinn's leadership, Lucent's focus on HR diminished.

When Lucent had increased its sales to customers, many of them defaulted on their payments as the technology and telecom industry reeled under an unprecedented slump in 2000, which threw Lucent into a deep financial crisis.

Analysts and industry observers attributed Lucent's miserable performance to the wrong strategies and mis-execution by the top management.

In 2001, Lucent announced a new restructuring plan. The plan concentrated on the following things:

Elimination of product lines Significant cost cuts to the extent of $2bn a year Workforce reduction by 10,000 jobs Reduction in working capital

Restructuring Activity In 2001, Lucent came up with the Service Delivery Project Team. The major objective of this team was to simplify and standardize global HR policies and processes, in order to improve efficiency throughout the organization, giving HR management a position of strategic importance in the entire transformation process. Tiger Team In Feb 2002, Lucent selected six HR leaders from its domestic and global operations to serve fulltime for six weeks on HR restructuring exercise. The major objective of this team was to create a road map indicating how the company could meet the financial challenges of its various businesses, without disrupting the company's day-to-day Hr operations. The Tiger Team undertook an analysis of Hr operations. The team also studied the possibilities of making HR activities more efficient through policy changes, automation and process improvements.

Expert Help Lucent established a Project Management Office to oversee the implementation of findings and suggestions of the Tiger Team. During the implementation period, the PMO was assisted by Hewitt Associates. Focus on IT Lucent also focused on IT to save on the costs and time consumed in transactional and repetitive HR activities by transferring them to global IT platforms and regional HR operating centres. Workforce Reduction Between 2000 and 2002, Lucent resorted to workforce reduction By early 2003, Lucent had cut its workforce from 1,35,000 in late 2000 to 45,000 through various means like outsourcing, spinoffs and lay offs. Service Delivery Model Lucent consulted the experts in compensation strategies and policies, staffing and talent management and also other companies which had been through similar organizational transformations. Lucent then went through a rigorous strategy setting phase, which helped it to lay the foundation for its long-term HR vision. Effects of Restructuring 1. Since the function of the HR organisational segments were clearly defined the decision making process became very easy and quick. 2. The focus on IT, enabled the company to:

Manage HR functions efficiently. Reduce workforce costs Drastically reduced the need for manual interfaces.

Encouraged employees to take advantage of various online training programs offered by the company. Helped HR business partners to align their working closely with senior managers.

3. A strong shared vision, leadership support and clear communication was responsible for the success Lucent 4. Lucent not only met cost reduction target but also exceeded its targets through its cost-cutting initiatives. Analysis Proper planning phase: As goes the phrase "Well started is half done" - Lucent went through a rigorous three-month strategy setting phase, which helped it to lay the foundation for its long-term HR vision. Because of this Lucent could develop a detailed HR organization structure i.e. the "service delivery model" which led to its success. Proper Implementation: Implementation was done only after communicating the changes to the workforce and in consultation with the employees. This enabled the employees to accept the change easily. Strong shared vision and full support of their top management greatly expedited the decision making process. Aligned Hr activities to Strategic Business Goals: Lucent tried to standardize global HR policies and processes, to align it with strategic business goals thus giving HR management a position of strategic importance in the entire transformation process. Clear definition of functions: Since, function of the HR organisational segments were clearly defined, the decision making process became very easy and quick. Restructuring At Hewlett Packard The Hewlett-Packard Company, commonly referred to as HP, is an American information technology corporation, specializing in personal computers, notebook computers, servers, printers,

digital cameras, and calculators, network management software, among other technology related products. Stanford University classmates Bill Hewlett and Dave Packard founded HP in 1939. The company's first product, built in a Palo Alto garage, was an audio oscillatoran electronic test instrument used by sound engineers. One of HP's first customers was Walt Disney Studios, which purchased eight oscillators to develop and test an innovative sound system for the movie Fantasia. Surfacing of the Problems

Notwithstanding the efforts made by the top management to generate synergies across divisions, the decentralized structure that HP had, till the 1980s, created major problems for the company.

HP began to be perceived by users as three or four companies, with little co-ordination between them. In 1990s, HP found that its elaborate network of committees was slowing down its ability to take quick decisions - slow decision-making. To solve this problem, the then CEO John Young, dismantled the committee network and also cut a layer of management from the hierarchy. He further decentralized decision-making and divided the computer business into two primary groups. One group was made responsible for PCs, printers and other products sold through dealers and the other for work stations and minicomputers sold to large customers.

With the growth in size of operations - 83 different product divisions, the bureaucracy had increased significantly. This bureaucracy was hindering innovation as well. The company's stagnant revenues and the declining profit growth rate in 1998 compounded its problems. HP's culture, which emphasized teamwork and respect for co-workers, had over the years translated into a consensus-style culture that was proving to be a sharp disadvantage in the fast growing Internet business era.

Restructuring Activity by the New Ceo .Carleton S. Fiorina

Fiorina began by demanding regular updates on key units. She also injected the muchneeded discipline into HP's computer sales force. Sales compensation was tied to performance and the bonus period was changed from once a year to every six months. To boost innovation and new product development, Fiorina increased focus on "breakthrough" projects. She started an incentive program that paid researchers for each patent filing.

Fiorina developed a multiyear plan to transform HP from a "strictly hardware company" to a Web services powerhouse. To achieve this plan, Fiorina dismantled the decentralized organization structure.

Fiorina reorganized the units into six centralized divisions. She expected the new structure to strengthen the collaboration, between sales & marketing executives and product development engineers thus helping to solve the customer problems faster. This was the first time a company with thousands of product lines and scores of businesses had attempted a front-back approach, a strategy that required laser focus and superb coordination.

Negative Repercussions 1. Earlier HP's product chiefs had run their own operations from designing of the product to providing sales and support. In the new set-up, they had a very limited role. 2. In the new structure, the back end product designers would not be able to stay close enough to the customers to deliver products as per their requirements. 3. While productivity linked commissions to the sales force were intended to boost revenues and profitability, they only helped in raising sales for low margin products that did little for corporate profits. 4. The new structure did not clearly assign responsibility for profits and losses. There was less financial control and more disorder. 5. With employees in 120 countries, redrawing the lines of communication and getting personnel from different divisions to work together was proving very troublesome. 6. The front back reorganization had created confusion internally.

7. These changes had affected employee morale. Many employees had lost faith in Fiorina?s ability to execute her restructuring plans. Analysis What went wrong at HP? Improper Implementation of Restructuring Strategies - Sweeping changes were initiated in a very short span of time without allowing employees time to understand the changes in the spirit in which they were introduced & adjust to the same. Improper Allocation of Authority & Lack of Coordination - This can be substantiated by the following reasons:

With no authority to set sales forecast, back-end managers were unable to allocate the R&D funds effectively. At the same time, if the back-end colleagues came up with the wrong products - because of their lack of close association with the customers - the front-end sales representatives had trouble meeting their forecast, thereby not being able to contribute positively to the corporate financial objectives.

Top down Management Approach & Autocratic style of Leadership by C. FIORINA According to some analysts, the major reason for the shortfall in HP's revenues was Fiorina's aggressive management restructuring. Improper Timing: The time chosen for initiating Business Restructuring was inappropriate as there was a global slowdown in the technology sector. Lack of Prioritization - Fiorina was accused of being over-ambitious and trying to tackle all of HP?s problems together at the same time. Improper Timing: The time chosen for initiating Business Restructuring was inappropriate as there was a global slowdown in the technology sector.

3.3 Comparative Analysis Lucent Technologies Employee Involvement HP ImplementationSweeping changes were initiated in a very short


enabled the employees to accept the changespan of time without allowing employees time to easily. It ensured greater cooperation to theunderstand the changes in the spirit in which they management from the employees. Decision making process became very easy and quick. Prioritized the need to restructure HR activities were introduced & adjust to the same. Decision making though extremely quick was highly efficient but hardly effective in the long run.

Lack of Prioritization first Participative Management restructuring Aggressive Management restructuring Aligned their working closely with seniorFront Back reorganization made work together managers was proving very troublesome

Case Study: Business Model of Napster Pages: Page 1 Page 2 The Napster brand has had a varied history. Its initial incarnation was as the first widely used service for free peer-to-peer (P2P) music sharing. The record companies mounted a legal challenge to Napster due to lost revenues on music sales which eventually forced it to close. But the Napster brand was purchased and its second incarnation offers a legal music download service in direct competition with Apples iTunes.

The original Napster Napster was initially created between 1998 and 1999 by a 19 year old called Shawn Fanning while he attended Bostons Northeastern University. He wrote the programme initially as a way of solving a problem for a friend who wanted to find music downloads more easily online online. The name Napster came from Fannings nickname. The system was known as Peer to Peer since it enabled music tracks stored on other Internet users hard disks in MP3 format to be searched and shared with other Internet users. Strictly speaking, the service was not a pure P2P since central services indexed the tracks available and their locations in a similar way to which instant messaging (IM) works. The capability to try a range of tracks proved irresistible and Napster use peaked with 26.4 million users worldwide in February 2001. It was not long before several major recording companies backed by the RIAA (Recording launched a lawsuit. Of course, such action also gave Napster tremendous PR and millions of users used the service. Some individual bands also responded with lawsuits. Rock band Metallica found that a demo of their song I disappear began circulating on the Napster network and was

eventually played on the radio. Other well-known artists who vented their ire on Napster included Madonna and Eminem. However, not all artists felt the service was negative for them. UK band Radiohead pre-released some tracks of their album Kid A on to Napster and subsequently became Number 1 in the US despite failing to achieve this previously. Eventually as a result of legal action an injunction was issued on March 5th 2001 ordering Napster to cease trading of copyrighted material. Napster complied with this injunction, but tried to read a deal with the record companies to pay past copyright fees and to turn the service into a legal subscription service. In the following year, a deal was agreed with German media company Bertelsmann AG to purchase Napsters assets for $8 million as part of agreement when Napster filed for Chapter 11 bankruptcy in the United States. This sale was blocked and the web site closed. Eventually, the Napster brand was purchased by Roxio, Inc who used the brand to rebrand their PressPlay service. Since this time, other P2P services such as Gnutella, Grokster and Kazaa prospered which have been more difficult for the copyright owners to purse in court, however, many individuals have now been sued in the US and Europe and the associations of these services with spyware and adware has damaged these services, which has reduced the popularity of these services. New Napster in 2008 Fast Forward to 2008 and Napster now has around 830,000 subscribers in the United States, Canada and United Kingdom who pay up to 14.95 each month to gain access to about 1.5 million songs. The company is seeking to launch in other countries such as Japan through partnerships. Revenue for financial year 2008 is expected to exceed $125 million, representing growth of 17%. The online music download environment has also changed with legal music downloading propelled through increasing adoption of broadband, the success of Apple iTunes and its portable music player, the iPod which by 2005 had achieved around half a billion sales. Napster gains its main revenues from online subscriptions and permanent music downloads. The Napster service offers subscribers on-demand access to over 1 million tracks that can be streamed

or downloaded as well as the ability to purchase individual tracks or albums on an a la carte basis. Subscription and permanent download fees are paid by end user customers in advance either via credit card, online payment systems or redemption of pre-paid cards, gift certificates or promotional codes. Napster also periodically licenses merchandising rights and resells hardware that its end users use to store and replay their music. BBC estimated that the global music market is now worth $33 billion (18.3 billion) a year while the online music market accounted for around 5% of all sales in the first half of 2005. Napster , quoting Forrester Research estimates that United States purchases of downloadable digital music will exceed $1.9 billion by 2007 and that revenues from online music subscription services such as Napster will exceed $800 million by 2007. BBC reports Brad Duea, president of Napster as saying: The number one brand attribute at the time Napster was shut down was innovation. The second highest characteristic was actually free. The difference now is that the number one attribute is still innovation. Free is now way down on the list. People are able to search for more music than was ever possible at retail, even in the largest megastore. The Napster online music service Napster subscribers can listen to as many tracks as they wish which are contained within the catalogue of over 1 million tracks (the service is sometimes described as all you can eat rather than a la carte). Napster users can listen to tracks on any compatible device that includes Windows Digital Rights Management software, this includes MP3 players, computers, PDAs and mobile phones. Duea describes Napster as an experience rather than a retailer. He says this because of features available such as: Napster recommendations Napster radio based around songs by particular artists Napster radio playlists based on the songs you have downloaded Swapping playlists and recommendations with other users iTunes and Napster are probably the two highest profile services, but they have a quite different model of operating. There are no subscribers to iTunes, where users purchase songs either on a per track basis or in the form of albums. By mid 2005, over half a billion tracks had been purchased on Napster. Some feel that iTunes locks people into purchasing Apple hardware, as one would expect

Duea of Napster says that Steve Jobs of Apple has tricked people into buying a hardware trap. But Napsters subscription model has also been criticised since it is service where subscribers do not own the music unless they purchase it at additional cost, for example to burn it to CD. The music is theirs to play either on a PC or on a portable player, but for only as long as they continue to subscribe to Napster. So it could be argued that Napster achieves lock-in in another form and requires a different approach to music ownership than some of its competitors. Napster Strategy Napster describe their strategy as follows. The overall objective is to become the leading global provider of consumer digital music services. They see these strategic initiatives as being important to achieving this:

Continue to Build the Napster Consumer Brand as well as increasing awareness of the Napster brand identity, this also includes promoting the subscription service which encourages discovery of new music. Napster (2005) say We market our Napster service directly to consumers through an integrated offline and online marketing program consistent with the existing strong awareness and perception of the Napster brand. The marketing message is focused on our subscription service, which differentiates our offering from those of many of our competitors. Offline marketing channels include television (including direct response TV), radio and print advertising. Our online marketing program includes advertising placements on a number of web sites (including affiliate partners) and search engines

Continue to Innovate by Investing in New Services and Technologies this initiative encourages support of a wide range of platforms from portable MP3 players, PCs, cars, mobile phones, etc. The large technical team in Napster shows the importance of this strategy. In the longer-term, access to other forms of content such as video may be offered. Napster see their ability to compete depend substantially upon our intellectual property. They have a number of patents issued, but are also in dispute with other organizations over their patents.

Continue to Pursue and Execute Strategic Partnerships Napster has already entered strategic partnerships with technology companies (Microsoft and Intel), hardware

companies (iRiver, Dell, Creative, Toshiba and IBM), retailers (Best Buy, Blockbuster, Radio Shack, Dixons Group, The Link, PC World, Currys, Target), and others (Molson, Miller, Energizer, Nestle). Continue to Pursue Strategic Acquisitions and Complementary Technologies This is another route to innovation and developing new services.

Advantages and Disadvantages of Corporate Restructuring

Corporate restructuring is a process in which a company changes the organizational structure and processes of the business. This can happen through breaking up a company into smaller entities, through buy outs and mergers. When a company uses one of these methods, it could strengthen the company or it could create more problems than it is worth. Increasing Value of Parts One of the main reasons that businesses use corporate restructuring is to divide the business up for sale. If a company is trying to sell as a conglomerate, it will likely get lower offers from investors. When the company is split up into separate parts, it can often get better offers for those individual parts. This can increase the value of the company as a whole and help get a higher sales price for the business. Reduce Costs Another benefit of restructuring a company is to reduce business costs. For example, a company could merge with another company that is very similar and use economies of scale to run more efficiently. It could cut back on employees and equipment to streamline business operations. In this way, the company can expand its reach without adding too much to the overhead of the business. If handled correctly, the company can add significant value for its shareholders. Sponsored Links Dell Business Laptops

Wide Range of Business Laptops w/ Intel Core. Know More! Costs of Restructure Even though you can reduce long-term costs by restructuring the business, the process of restructuring can be expensive in itself. When a company restructures itself, it must pay legal fees and other costs associated with the restructure. If a company merges with another company, it will also have to come up with the money to buy the other company. If the restructure does not work out, it could cost the company dearly and ultimately lead to its demise. Hurt Employee Relations When a company goes through a corporate restructure, it can significantly hurt its relations with employees. Employees fear change and when they are scared of being downsized, it can affect morale. In many of these moves, companies have to release some of the workforce. This can affect the loyalty of employees and it could hurt the company in the long run. When employees do not know if they will be one of the unlucky few who get released, it can create tension.

The Disadvantages of Restructuring Organizations A corporate restructure is often associated with a failing business model or major job cuts. While the restructure may help the company move forward and improve business, the process comes with some fallout for both the company and the employees. Anticipating these disadvantages and potential difficulties helps you deal with them to reduce the negative impact. Employee Uncertainty Restructuring often causes employees to panic and wonder how the changes will affect their job security. When the news gets out that the company is restructuring, some employees may begin looking for new employment. The stress of the restructuring sometimes takes away from the staff's focus on their actual work. Employees become even more worried if the company isn't

forthcoming with details about the restructure. While you might not have the option of sharing all of the details ahead of time, a sense of transparency that allows employees to have some idea of what's happening may put your employees at ease. Investor Reactions Depending on the size and funding of your company, investor reactions are sometimes negative to a restructuring situation. If your investors oppose the restructure or fear they'll lose money, you now have another issue to handle during the process. For companies that are publicly traded, a negative reaction to the restructure can result in dropping stock prices. Educating investors on the specifics of the restructuring plans and keeping them informed may help reduce their concerns. Loss of Assets In some cases, the corporate restructure involves downsizing the workforce, facilities or product lines. This means you're forced to choose the employees who you'll let go. With the employees who leave, you also lose the experience, skills and knowledge of company projects that those staff members possess. Prioritizing the staffing and facility needs going forward helps you decide how to handle the loss of various assets. Decreased Public Image As your company restructures, your public image may begin shifting. The restructuring potentially leaves customers and the public in general questioning the future of the company. If you decrease your staff, you risk even greater public scrutiny, particularly in tough economic times when many people are already unemployed. Hiring a public relations consultant can help you keep your public image under control when going through a restructure.

Forms of Corporate Restructuring By Tyler Lacoma, eHow Contributor

Corporate restructuring changes the way a company approaches finances, technology or its business focus. Corporate restructuring is a general term used to describe major changes within a company. These changes usually affect basic business practices, redetermining who makes the major decisions in a company or how certain parts of its business plan are approached. The type of restructuring depends on the elements of the business being affected and the reasons that the restructuring is occurring.

Internal Restructuring

Corporate restructuring occurs based on the needs of the company. Internal restructuring typically occurs as a result of business analysis that shows a need for greater efficiency in the way business departments communicate and complete tasks. Sometimes a particular segment of the business will start to fail, and the company will need to reallocate resources in order to support it. Sometimes a business may have expanded to much, and needs to refocus on its core abilities. At other times a business may need to restructure its financial position in order to continue making profits. Often, restructuring plans are necessary simply to meet the constantly change demands of technology that competitors are embracing. Not all reasons for restructuring are negative, and many benefit employees as well as executives in the company.

Financial Restructuring

Financial restructuring deals with all changes the businesses makes to its debts and equity, including mergers, acquisitions, joint ventures and other deals. Generally these occur when a company joins or is bought by another company. Ownerships of the company, or at least some interest in the company, is transferred to another organization or group of investors. Actual business practices may remain unchanged.

Technological Restructuring

Technological restructuring occurs when a new technology has been developed that changes the way an industry operates. This type of restructuring usually affects employees, and tends to lead to new training initiatives, along with some layoffs as the company improves efficiency. This type of restructuring also involves alliances with third parties that have technical knowledge or resources.

Restructuring Methods

Restructuring methods are typically divided into expansion, refocusing, corporate control, and ownership structure. The last two, corporate control and ownership structure, apply mostly to financial changes and affect ownership. Corporate control, for instance, is a method where the company buys back enough shares to be able to make its own decisions again. Expansion occurs with acquisition, mergers, or joint ventures. Refocusing can take many forms, including business splits, sell offs of certain ventures, and general consolidation practices.

The Effects of a Corporate Restructuring Strategy Corporate restructuring is a legal maneuver employed by a company with too much debt and not enough income or a business model that is proving unsuccessful. The effects of restructuring are varied and range from nervous nail-biting from shareholders to employees wondering about job security. A corporation with a well-honed restructuring strategy can mitigate these initial worries and emerge a leaner company with a profitable business plan. Find the Specific Problem

A corporate restructuring strategy must determine and effectively target the specific challenge or problem the corporation is facing. This allows the corporation's

rebuilding efforts the best chance for success without hindering any parts of the company that are currently working well. At its best, a restructuring is a highly targeted surgical strike that fixes the problem without dismantling the whole company to do it. A restructuring strategy that lacks direction can often cause more harm for a corporation by worsening an existing problem and weakening functioning departments or business strategies. Management Understanding

All levels of management must have an understanding of the corporation's overall restructuring strategy. This allows managers to prepare employees for possible changes within departments, and to develop new operational strategies to meet shifting corporate priorities. Managers may also have to prepare for the possibility of difficult business decisions resulting from corporation restructuring. Department sizes many shrink, causing employee layoffs along with pay cuts for managers. Departments may also merge with other departments in a corporation as a result of the restructuring. Managers must understand how the corporation's new leadership structure operates in order to ensure that productivity stays at a high level.

Effects on Investors

Corporate restructuring makes investors nervous. This can cause a stock sell-off that decreases the overall value of the corporation and exacerbates the underlying reason for the restructuring. A corporation undergoing a restructuring must develop a proactive strategy to communicate to investors all the positives that will come with reorganization. Investor funds are a key component in the restructuring process. If a corporation loses a large number of investors, it may experience difficulty raising capital needed to bring its restructuring plan to fruition.

Improving Organizational Direction


A company emerging from a successful restructuring should have an improved organizational direction with increased focus and streamlined operational costs. The company's new direction should revolve around a set of specific business goals identified in the very beginning stages of restructuring. Business goals could be as simple as turning a profit, or as complex as dividing the corporation into several new companies, all with specific business models and different product offerings.