Corporate restructuring

Meaning
To restructure means the purposeful process of changing the structure
of an institution: a company, an industry, a market, a country, the
world economy, etc.
Definition
“To give a new structure to rebuild or rearrange” –
Oxford Dictionary
“Restructuring is an attempt to change the
structure of an institution in order to relax some
or all of the short-run constraints. It is
concerned with changing structures in pursuit of
a long-run strategy” - Sander
Motives behind corporate
restructuring
1. Motives behind expansion
2. Motives behind corporate control
3. Motives behind contraction
4. Motives behind change in ownership structure
 Motives behind expansion
1. Growth
2. Technology
3. Product advantage and product differentiation
4. Government policy
5. Differential labour cost, productivity, etc
6. Diversification,etc
 Motives behind corporate
control
1. Improving leverage ratio
2. Utilization of surplus cash
3. Enhancement of voting power of promoters without spending own
money
4. Preventing undervaluation, etc
Motives behind contraction
1. Improving performance
2. Booming independence
3. Effort to unlearn – exploit opportunities more effectively
4. Increasing value of the firm
Motives behind change in
ownership structure
1. Alteration in the control structure
2. Providing fairness to minority shareholders
3. Changing the nature of the firm
4. Manoeuvring leverage
Methods of corporate
restructuring
 Expansion
1. Mergers and acquisitions
2. Asset acquisition
3. Joint venture – two companies enter into an
agreement and accumulate certain
resources with a view to achieve a coomon
goal
4. Tender offer – a public offer is made for
acquiring the shares of a target company
 Contraction
a. Spin-offs – company distributes all the shares of
its subsidiary to its shareholders
b. Split-offs – a new company is created in order to
take over the operations of an existing division.
c. Divestitures – it means the sale of a portion or
segment of the company to an external party.
d. Split-ups – the entire company is broken up in
series of subsidiaries.
e. Equity carved out – sale of a segment or portion
of the firm through an equity offering to the
external parties.
Corporate control
1. Anti-take over defences – to prevent
forcefully acquiring of its management
2. Share repurchases – repurchasing its own
shares by a company from the market
3. Exchange offers – the right or option to
exchange a portion or all of their holding for
a different class of securities of the firm
4. Proxy contests – this is the way to take
control of a company without owing a
majority of its voting rights.
Changes in ownership structure
1. Leveraged buy-outs – LBO- acquisition of a
company due to debt
2. Master limited partnership –MLP – formation of
one general partner with unlimited liability and
one or more limited partners with limited liability
3. Going private – repurchasing of all of a
company’s stock by employees or a private
investor
4. Employees Stock Option Plan –ESOP – right to
purchase securities at a future date
Reasons of corporate
restructuring
Economies of scale – due to increase in volume of
production
Operating economies – various functions can be
consolidated and duplications can be avoided.
Synergy – 1 + 1 is > 2
Reduction in tax liability – as a result of merger with
sick company to set-off against its profits
Managerial effectiveness
Other reasons like
- maximum dividend to shareholders
- enhance the EPS
- increase the promoter’s voting power
- elimination of competition, etc
Kinds of corporate restructuring
1. Portfolio restructuring – changes in the mix
of assets
2. Financial restructuring – changes in the
capital structure of the firm
3. Organisational restructuring – changes in
the organisational structure of the firm
4. Technological restructuring – an alliance with
other companies to exploit technological
expertise.
 Limitations of corporate restructuring
1. Work assurance – after the announcement of
restructuring the employees may feel relief.
2. Retention of best management – it is very rare and
often ineffective.
3. Delay in deal finalization – so many issues like labour
trouble, queries from shareholders are involved.
4. Executive stress – after the announcement
5. Cultural mismatch of two firms
6. Inability to create value
7. Opposition from trade unions