ASSIGNMENT

TOPIC: MAKE A COMPARITIVE STUDY OF

CORPORATE RESTRUCTURING & FINANCIAL
RESTRUCTURING

SUBMITTED TO, SUBMITTED BY,

PROF.JEENU MATHEW GAYATHRI.S
MANGALAM T3 MBA
MANAGEMENT A BATCH
STUDIES,ETTUMANOOR MANGALAM
MANAGEMENT STUDIES
 INTRODUCTION
Restructuring is an action taken by a company to significantly
modify the financial and operational aspects of the company,
usually when the business is facing financial pressures.
Restructuring is a type of corporate action taken that involves
significantly modifying the debt, operations or structure of a
company as a way of limiting financial harm and improving the
business.

When a company is having trouble making payments on its

debt, it will often consolidate and adjust the terms of the debt
in a debt restructuring, creating a way to pay off bondholders.
A company restructures its operations or structure by cutting
costs, such as payroll, or reducing its size through the sale of
assets.
A company may restructure as a means of preparing for a
sale, buyout, merger, change in overall goals or transfer to a
relative. The company may choose to restructure after it fails to
successfully launch a new product or service, which then leaves
it in a position where it cannot generate enough revenue to
cover payroll and debts.As a result, depending on agreement by
shareholders and creditors, the company may sell its assets,
restructure its financial arrangements, issue equity for reducing
debt, or file for bankruptcy as the business maintains
operations.
 CORPORATE RESTRUCTURING &
FINANCIAL RESTRUCTURING

The process of corporate restructuring is considered very

important to eliminate all the financial crisis and enhance the
company’s performance. The management of concerned
corporate entity facing the financial crunches hires a financial
and legal expert for advisory and assistance in the negotiation
and the transaction deals. Usually, the concerned entity may
look at debt financing, operations reduction, any portion of the
company to interested investors.
In addition to this, the need for a corporate restructuring arises
due to the change in the ownership structure of a company.
Such change in the ownership structure of the company might
be due to the takeover, merger, adverse economic conditions,
adverse changes in business such as buyouts, bankruptcy, lack
of integration between the divisions, over employed personnel,
etc.

Types of Corporate Restructuring

1. Financial Restructuring: This type of restructuring may
take place due to a severe fall in the overall sales because
of the adverse economic conditions. Here, the corporate
entity may alter its equity pattern, debt-servicing
 schedule, the equity holdings, and cross-holding pattern.
All this is done to sustain the market and the profitability
of the company.
2. Organisational Restructuring: The Organisational
Restructuring implies a change in the organisational
structure of a company, such as reducing its level of the
hierarchy, redesigning the job positions, downsizing the
employees, and changing the reporting relationships. This
type of restructuring is done to cut down the cost and to
pay off the outstanding debt to continue with the business
operations in some manner.

Reasons for Corporate Restructuring

Corporate restructuring is implemented in the following
situations:

 Change in the Strategy: The management of the

distressed entity attempts to improve its performance by
eliminating its certain divisions and subsidiaries which do
not align with the core strategy of the company. The
division or subsidiaries may not appear to fit strategically
with the company’s long-term vision. Thus, the corporate
entity decides to focus on its core strategy and dispose of
such assets to the potential buyers.
 Lack of Profits: The undertaking may not be enough profit
making to cover the cost of capital of the company and
may cause economic losses. The poor performance of the
undertaking may be the result of a wrong decision taken
by the management to start the division or the decline in
 the profitability of the undertaking due to the change in
customer needs or increasing costs.
 Reverse Synergy: This concept is in contrast to the
principles of synergy, where the value of a merged unit is
more than the value of individual units collectively.
According to reverse synergy, the value of an individual
unit may be more than the merged unit. This is one of the
common reasons for divesting the assets of the company.
The concerned entity may decide that by divesting a
division to a third party can fetch more value rather than
owning it.
 Cash Flow Requirement: Disposing of an unproductive
undertaking can provide a considerable cash inflow to the
company. If the concerned corporate entity is facing some
complexity in obtaining finance, disposing of an asset is an
approach in order to raise money and to reduce debt.

Characteristics of Corporate Restructuring

 To improve the Balance Sheet of the company (by
disposing of the unprofitable division from its core
business)
 Staff reduction (by closing down or selling off the
unprofitable portion)
 Changes in corporate management
 Disposing of the underutilised assets, such as
brands/patent rights.
 Outsourcing its operations such as technical support and
payroll management to a more efficient 3rd party.
 Shifting of operations such as moving of manufacturing
operations to lower-cost locations.
 Reorganising functions such as marketing, sales, and
distribution.
 Renegotiating labour contracts to reduce overhead.
 Rescheduling or refinancing of debt to minimise the
interest payments.
 Conducting a public relations campaign at large to
reposition the company with its consumers.

Types of Corporate Restructuring Strategies

 Merger:
This is the concept where two or more business entities
are merged together either by way of absorption or
amalgamation or by forming of a new company. The
merger of two or more business entities is generally
done by exchange of securities between the acquiring
and the target company.
 Demerger:
Under this corporate restructuring strategy, two or
more companies are combined into a single company
to get the benefit of synergy arising out of such a
merger.
 Reverse Merger:
In this strategy, the unlisted public companies have the
opportunity to convert into a listed public company,
without opting for IPO (Initial Public offer). In this
 strategy, the private company acquires a majority
shareholding in the public company with its own name.
 Disinvestment:
When a corporate entity sells out or liquidates an asset
or subsidiary, it is known as “divestiture”.
 Takeover/Acquisition:
Under this strategy, the acquiring company takes
overall control of the target company. It is also known
as the Acquisition.
 Joint Venture (JV):
Under this strategy, an entity is formed by two or more
companies to undertake financial act together. The
entity created is called the Joint Venture. Both the
parties agree to contribute in proportion as agreed to
form a new entity and also share the expenses,
revenues and control of the company.
 Strategic Alliance:
Under this strategy, two or more entities enter into an
agreement to collaborate with each other, in order to
achieve certain objectives while still acting as
independent organisations.
 Slump Sale:
Under this strategy, an entity transfers its one or more
undertaking for lump sum consideration. Under Slump
Sale, an undertaking is sold for a consideration
irrespective of the individual values of the assets or
liabilities of the undertaking.
 Financial restructuring is the process of reshuffling or
reorganizing the financial structure, which primarily
comprises of equity capital and debt capital. Financial
restructuring can be done because of either compulsion
or as part of the financial strategy of the company.
This financial restructuring can be either from the assets
side or the liabilities side of the balance sheet. If one is
changed, accordingly the other will be adjusted.

The two components of financial restructuring are;

 Debt Restructuring
 Equity Restructuring

1. Debt Restructuring

Debt restructuring is the process of reorganizing the whole

debt capital of the company. It involves reshuffling of the
balance sheet items as it contains the debt obligations of the
company. Debt restructuring is more commonly used as a
financial tool than compared to equity restructuring. This is
because a company’s financial manager needs to always look at
the options to minimize the cost of capital and improving the
efficiency of the company as a whole which will in turn call for
the continuous review of the debt part and recycling it to
maximize efficiency.

Debt restructuring can be done based on different

circumstances of the companies. These can be broadly
categorized in to 3 ways.
1. A healthy company can go in for debt restructuring to change
its debt part by making use of the market opportunities by
substituting the current high cost debt with low cost
borrowings.
2. A company that is facing liquidity problems or low debt
servicing capacity problems can go in for debt restructuring so
as to reduce the cost of borrowing and to increase the working
capital position.
3. A company, which is not able to service the present financial
obligations with the resources and assets available to it, can
also go in for restructuring. In short, an insolvent company can
go for restructuring in order to make it solvent and free it from
the losses and make it viable in the future.

Equity restructuring is the process of reorganizing the

equity capital. It includes reshuffling of the shareholders capital
and the reserves that are appearing in the balance sheet.
Restructuring of equity and preference capital becomes a
complex process involving a process of law and is a highly
regulated area. Equity restructuring mainly deals with the
concept of capital reduction.

The following are the some of the various methods of equity

restructuring.

 Repurchasing the shares from the shareholders for cash can do

restructuring of share capital. This helps in reducing the liability
of the company to its shareholders resulting in a capital
reduction by returning the share capital. The other method that
 falls in the same category is to change the equity capital in
to redeemable preference shares or loans.
 Restructuring of equity share capital can be done by writing
down the share capital by certain appropriate accounting
entries. This will help in reducing the amount owed by the
company to its shareholders without actually returning equity
capital in cash.
 Restructuring can also be done by reducing or waiving off the
dues that the shareholders need to pay.
 Restructuring can also be done by consolidation of the share
capital or by sub division of the shares.

Reasons behind equity restructuring

The following are the reasons for which equity restructuring is
done:

 Correction of over capitalization

 Shoring up management stakes
 To provide respectable exit mechanism for shareholders in the
time of depressed markets by providing them liquidity through
buy back.
 Reorganizing the capital for achieving better efficiency
 To wipe out accumulated losses
 To write off unrecognized expenditure
 To maintain debt-equity ratio
 For revaluation of the assets
 For raising fresh finance
 CONCLUSION
Corporate restructuring entails any fundamental change in a
company's business or financial structure, designed to increase
the company's value to shareholders or creditor. Corporate
restructuring is often divided into two parts: financial
restructuring and operational restructuring. Financial
restructuring relates to improvements in the capital structure
of the firm. An example of financial restructuring would be to
add debt to lower the corporation's overall cost of capital. For
otherwise viable firms under stress it may mean debt
rescheduling or equity-for-debt swaps based on the strength of
the firm. If the firm is in bankruptcy, this financial restructuring
is laid out in the plan of reorganization. The second meaning,
operational restructuring, is the process of increasing the
economic viability of the underlying business model. Examples
include mergers, the sale of divisions or abandonment of
product lines, or cost-cutting measures such as closing down
unprofitable facilities. In most turnarounds and bankruptcy
situations, both financial and operational restructuring must
occur simultaneously to save the business.

Corporate financial restructuring involves restructuring the

assets and liabilities of corporations, including their debt-to-
equity structures, in line with their cash-flow needs to promote
efficiency, support growth, and maximize the value to
shareholders, creditors and other stakeholders. These
objectives make it sound like restructuring is done pro-actively,
that it is initiated by management or the board of directors.
While that is sometimes the case -- examples include share
buybacks and leveraged recapitalizations -- more often the
existing structure remains in place until a crisis emerges. Then
the motives are defensive -- as in defenses against a hostile
takeover -- or distress-induced, where creditors threaten to
enforce their rights.

REFERENCE
 http://people.stern.nyu.edu/igiddy/restructuring.htm
 http://bizcap.com/financial-restructuring/
 https://www.investopedia.com/terms/r/restructuring.asp