Corporate restructuring

INTRODUCTION OF CORPORATE RESTRUCTURING:

DEFINITION OF RESTRUCTURING Restructuring is the corporate management term for the act of partially dismantling or otherwise reorganising a company for the purpose of making it more efficiently and therefore more profitable. It generally involves selling off portions of the company and making severe staff reductions. 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.

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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 may be 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 1. To enhance the share holder value, the company should continuously evaluate its: Portfolio of businesses, Capital mix, Ownership & Asset arrangements to find opportunities to increase the share holders value.

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2. To focus on asset utilization and profitable investment opportunities.

3. To reorganize or divest less profitable or loss making businesses/products.

4. 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. 3. 4. 5. To accomplish staff reduction (by selling/closing of unprofitable portion) Changes in corporate mgt Sale of underutilized assets, such as patents/brands. 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 labour 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.

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TYPES OF CORPORATE RESTRUCTURING
PORTFOLIO RESTRUCTURING:
Involves divesting or acquiring a line of business perceived peripheral to the long term business strategy of the company Represents the companys attempt to respond to the marketing needs without losing sight of its core competencies.

Purpose:
Restructuring as a result of some strategic alliance Responding to shareholders desire to downsize and refocus the companys operations Responding to outside boards suggestion to restructure Responding to strategies adopted as a response to exercising call or put options

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.

Purpose of Financial Restructuring

Generate cash for exploiting available investment opportunities

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Ensure effective use of available financial resources Change the existing financial structure, in order to reduce the cost of capital Leveraging the firm Preventing attempts of hostile takeover.

ORGANISATIONAL 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. It can take the form of divestiture and acquisitions.

Need For Organization Restructuring

1. New skills and capabilities are needed to meet current or expected operational requirements. 2. Accountability for results are not clearly communicated and measurable resulting in subjective and biased performance appraisals. 3. Parts of the organization are significantly over or under staffed. 4. Organizational communications are inconsistent, fragmented, and inefficient. 5. Technology and/or innovation are creating changes in workflow and production processes. 6. Significant staffing increases or decreases are contemplated. 7. Personnel retention and turnover is a significant problem. 8. Workforce productivity is stagnant or deteriorating. 9. Morale is deteriorating.

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Some of the most common features of organizational restructures are:
1. 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. 2. 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. 3. 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. 4. Outsourcing Outsourcing is another measure of organizational restructuring that reduces the manpower and transfers the fixed costs of the company to variable costs. 5. 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.

Example of Organisational Restructuring: CSX Corporation

A second local company with restructuring headlines is CSX Corporation. To meet their organizational restructuring goals of cutting 800 jobs, CSX announced they had meet their objectives by eliminating 200 jobs and would save $65 million this year (Gordon, 2000). This is
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the more typical restructuring strategy, reduction in force, to cut jobs in the name of savings. In an effort to ease the impact on employees, CSX used voluntary early retirement and separation programs to achieve their goals. This restructuring received favourable comments from University of North Florida Professor Don Wiggins on how a smart company [CSX] used a good plan to reach their objectives (Gordon, 2000). Organizational restructuring goals are normally increase profits and the by-product is reduced labour force.

BUSINESS PROCESS REEGINEERING (BPR):

BPR is analysis and design of workflows and processes within an organization. It is basically rethinking and re-design made to organizations existing resources.

Example of BPR:
Ford reengineered their business and manufacturing process from just manufacturing cars to manufacturing quality cars, where the number one goal is quality. This helped Ford save millions on recalls and warranty repairs. Ford has accomplished this goal by incorporating barcodes on all their parts and scanners to scan for any missing parts in a completed car coming off of the assembly line. This helped them guarantee a safe and quality car.

Forms of Corporate Restructuring

Mergers Acquisition Takeover Joint Ventures Divestiture Leverage Buyout Management Buyout Strategic Alliance

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Mergers:
It is a process by which one firm acquires assets and liabilities of another firm in such a way that the latter ceases to exist. It is cheaper and less time consuming and procedure ridden than buying individual assets.

Acquisition:
It is a process by which one firm purchase substantial percentage of shares of another firm from the open market or directly from the shareholders through tender offer. The target company has no formalities to complete.

Takeover:
It is a process by which control of the corporate is transferred from a group of promoters to another group. Cash or securities may be paid for the transfer.

Joint venture:
It is a form of business combination in which two different firms contribute financial, production, organisation/marketing skills to form a new company or to carry out a particular economic activity.

Example of joint venture:

Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. The stated reason for this venture is to combine Sony's consumer electronics expertise with Ericsson's technological leadership in the communications sector. Both companies have stopped making their own mobile phones.

Reasons of Joint Venture:

Internal Reasons: 1. Build on cos strengths 2. Improving access to financial resources 3. Economies of scale & advantages of size 4. Access to new technology Competitive Goals: 1. Influencing structural evolution of the industry

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2. Creation of stronger competitive units. Benefits of Joint Venture 1. Combining complementary R&D or technologies. 2. New product development. 3. Financial support or sharing of economic risk. 4. Expansion of new domestic market. 5. Ability to increase profit margins. 6. Developing or acquiring marketing or distribution expertise.

Divesture:
It is a transaction through which a firm sells a portion of its assets or a division to another company. It involves selling some of the assets or division for cash or securities to a third party which is an outsider.

Reasons for adoption Divestitures

1. The particular (saleable) assets do not contribute to the firms profits; rather, put extra pressure on its resources. 2. Divesting off the excess assets can help a firm focus on its remaining assets. Thereby, increasing the overall efficiency of the enterprise.

Reasons of Divestitures
1. Unprofitable division 2. Reverse synergy 3. Capital market factors 4. Increased cash flow 5. Abandoning core business

Benefits of Divestitures
1. Justification lies in increased economies of scale and economies of scope 2. Advantageous where business cycles are involved.

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3. Companies also go in for divestment for it is an invaluable strategy of discovering unanticipated economies and synergies through trial and error.

Leverage Buyout:
LBO is, the acquisition, financed largely by borrowing, of all the stock, or assets of a public company by a small group of investors. The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.

Reasons for Leveraged Buyouts

1. A private investment firm may feel it can run the target firm more efficiently. By gaining control they can make the firm more efficient and more profitable. 2. Buying a firm with borrowed money helps reduce tax bill. Firms don't pay tax on interest payments, they do if they transfer equity directly. 3. By borrowing money, private equity firms have potential to gain a greater rate of return on their investment.

Pros and cons of Leveraged Buyouts

1. Corporate restructuring Pros- One positive aspect of leveraged buyouts is the fact that poorly managed firms prior to their acquisition can undergo valuable corporate reformation when they become private. By changing their corporate structure (including modifying and replacing executive and management staff, unnecessary company sectors, and excessive expenditures), a company can revitalize itself and earn substantial returns. Cons- Corporate restructuring from leveraged buyouts can greatly impact employees. At times, this means companies may have to downsize their operations and reduce the number of paid staff, which results in unemployment for those who will be laid off. In addition, unemployment after leveraged acquisition of a company can result in negative effects of the overall community, hindering its economic prosperity and development. Some leveraged buyouts may not be friendly and can lead to rather hostile takeovers, which goes against the wishes of the acquired firms managers.

2. Small amount of capital requirements Pros- Since this type of acquisition involves a high debt-to-equity ratio, large corporations can easily acquire smaller companies with very little capital. If the acquired companys returns are greater than

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the cost of the debt financing, then all stockholders can benefit from the financial returns, further increasing the value of a firm. Cons- However, if the companys returns are less than the cost of the debt financing, then corporate bankruptcy can result. In addition, the high-interest rates imposed by leveraged buyouts may be a challenge for companies whose cash-flow and sale of assets are insufficient. The result cannot only lead to a companys bankruptcy but can also result in a poor line of credit for the buyout investors.

3. Economy Pros- Every leveraged buyout can be considered risky, especially in reference to the existing economy. If the existing economy is strong and remains solid, then the leveraged buyout can greatly improve its chances for success. Cons- On the other hand, a weak economy is highly indicative of a problematic LBO. During an economic crisis, money may be difficult to come by and dollar weakness could make acquiring companies result in poor financial returns. In addition, acquisition can affect employee morale, increase animosity against the acquiring corporation, and can hinder the overall growth of a company.

Management buyout:
MBO is a process by which the substantial parts of the shares of the company are purchased by the Executives of the company from the promoters.

Reasons for MBO

The management teams are unhappy with the decisions made by the owners, CEO or board of executives. The business is in trouble/undergoing administration proceedings and employees feel that they can buy the business at a good price. The owners of the business decide to sell it and ask employees if they want to buy the business. For example the owners of a family run business want to retire or a group of companies decide that the business is no longer a key part of their current/future business strategy. The management teams do not want the business to be bought by someone else especially if this will involve the new buyers bringing their own employees or management team in.

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Advantages of MBO
An MBO will give the management the chance to run their business. The new company will have a highly motivated management team, who are not only eager to make a profit but also have a deep knowledge of the business they will be running. Since the management understand and have been involved in the running of the business to be acquired, the commercial due diligence that is usually undertaken when a company is acquired should be easier and less time-consuming.

Disadvantages of MBO
An MBO involves a very serious financial commitment and acceptance of risk by the management. The management will move from being employees to being owners of the business. If the business is not successful, they will feel it directly. Even though the commercial due diligence required could be less extensive, the legal and financial affairs of the business still need to be examined. This will involve advice and expense. Since acquisition by an MBO is highly leveraged (i.e. has a high proportion of debt relative to equity), this does not put the new company in the best position to compete on price.

Strategic Alliance:
It is an agreement among two or more firms to co-operate in order to achieve a commercial objective. It can provide companies with meaningful ways of achieving growth through cooperation. It is in the form of JV, Franchising.

Why companies enter into Strategic Alliances? Internal reasons:

To spread costs and risks. To safeguard resources this cannot be obtained through the market. To improve access to financial resources. To derive benefits of economies of scale. To gain access to new technologies, customers and innovative managerial practices.

Competitive goals:
To prevent competitors

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To create stronger competitive units To influence structural evolution of the industry To respond defensively to blurring industry boundaries and globalization

Advantages of strategic alliances

Get instant market access, or at least speed your entry into a new market. Exploit new opportunities to strengthen your position in a market where you already have a foothold. Increase sales. Gain new skills and technology. Develop new products at a profit. Share fixed costs and resources. Enlarge your distribution channels. Broaden your business and political contact base. Gain greater knowledge of international customs and culture.

Disadvantages of Strategic Alliances

Time consuming for managers in terms of communication, trust-building, and coordination costs Loss of control over such important issues as product quality, operating costs, employees. Clash of egos and company cultures Poor resource allocation.

Becoming too dependent on another firm for essential expertise over the long-term.

Barriers of Corporate Restructuring

Inadequate commitment from the Top management Resistance to change Poor communication Absence of required skills Failure to understand the benefits of restructuring Lack of resources Non adherence to time schedule

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CONCLUSION
The restructuring usually takes place when a business is struggling and losing money. A third party will be brought in to assess the way that the business is being run, and then make recommendations based on what they found that will help make the business run more efficiently. A strong corporate restructuring firm will have experts in a wide variety of areas that can examine all aspects of a business to help find solutions. A good corporate restructuring firm will not just identify problems of where money is being lost, but also offer solutions that a company can implement in order to solve those problems. They will also help a company through the process of restructuring by developing forecasts of what to expect and making sure the company is able to secure the capital available to make those changes. Corporate restructuring can help restore, preserve and enhance the value of an organisation.

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