Corporate

Restructuring
What is Corporate
Restructuring
Corporate restructuring is the process of
l dismantling and reconstructing either a whole
organization or certain divisions of a corporation that
need special attention.
l This may require considerable movement of the
company’s liabilities and assets.
l Corporate restructuring often involves redesigning
and reorganizing one or more facets of the
organization. This process is undertaken for a
variety of reasons, the chief being to improve
efficiency and profitability in the organization.
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 Corporate Restructuring -
- Necessity
• Companies worldwide are refocusing, downsizing and
merging to become globally competitive.

• Developing core competence for global / domestic

competition, technological development through
collaboration and joint venture

• Divesting non profitable business

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When does an Organization
need Restructuring
l Company faces a financial crisis,
l Slump in the economy,
l Mergers, acquisitions, Buy-outs, takeovers,
l Under-performance,
l Sudden & tremendous growth

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Reason/Purpose
l Absence in growth segments of the market.
l Lack of economies of scale.
l Poor efficiency in operations.
l Changes in business structures . both domestic and
global.
l Declining competitiveness of the product, technology
and value creation process.
l High cost structure and high cost of capital.
Mismanagement of fixed and working capital.
l Lack of funds to support brand and distribution network.

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Reason/Purpose
l Changes in environment in areas like technology,
competition, regulations etc. It can prevent a competitor
from establishing a similar position in that industry.
l It offers a special timing advantage because it enables a
firm to leap ahead in the process of expansion.
l In a saturated market simultaneous expansion and
replacement (through a merger) makes more sense than
creation of additional capacity through internal
expansion.
l Changes in government policy regulating a given
industry
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Impetus for restructuring
l Stock market
l Activist shareholders
l Pension funds
l Increasing competition
l Global
l Technological
l Change in regulation

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Categories of Restructuring
l Operational restructuring
l Outright or partial sale of companies or product lines
l Downsize by closing unprofitable or non-strategic facilities.
l Remove non-core assets
l Become more focused on core activities

l Financial (or debt) restructuring

l – Actions by the firm to change its total debt and equity structure,
i.e, share repurchase, adding debt or lower overall cost of
capital.

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Characteristics of Corporate
Restructuring
(1) Includes the use of underutilized assets, like
patents or brands which have not been
properly utilized,
(2) retention or downsizing of staff,
(3) streamlining certain processes, division or
functions within the organization.

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Some Characteristics
(4) Sale of underutilized assets, such as patents or
brands
(5) Outsourcing of operations such as payroll and
technical support to a more efficient third part
(6) Moving of operations such as manufacturing to
lower-cost locations
(7) Reorganization of functions such as sales,
marketing, and distribution

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Some Characteristics
(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
company with consumers
(11) Forfeiture of all or part of the ownership share by pre
restructuring stock holders

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Types Of Restructuring

Restructuring

Asset Capital
Restructuring Organisation
Restructuring Restructuring

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Asset Restructuring Umbrella

Divesture/ Sale as a Itemized

Mergers/ Demerger / going concern- Asset/
Subsidiary JVs
Takeovers Spin off Slump Stock
sale sale

Restructuring
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Dimensions of restructurings

l Asset restructuring
l Acquisitions
l Divestitures /Spin offs
l Joint Ventures

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Acquisitions

l Management Buyouts
l Vaidyanathan- Capital First
l Blackstone- Intelenet Global
l Hostile Takeovers
l L&T - Mindtree
l Oracle –Peoplesoft
l India Cement- Raasi Cement
l Leveraged Buyouts
l Tata Corus
l Asset Buyouts 15
Management Buy Out(MBO)
l Involves the management team’s purchase of the bulk of the firm’s
shares.
l Create a win-win situation for shareholders who receive a premium
for their stock and management who retain control.

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LBO
l Borrowed funds are used to pay for all or most of the
purchase price.
l Can be of an entire company or divisions of a company
l The tangible assets of the company are used as
collateral for the loans
l Investors in LBOs are referred to as financial buyers
because they are primarily focused on relatively short-
to intermediate-term financial returns

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Divestitures
l Demergers (Splits) ( Bajaj, Reliance)
l Spin Offs (RPL, R Infra)
l Equity Carve outs
l Disinvestments

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Spin Offs
l A spinoff occurs when a subsidiary becomes an independent entity.
l The parent firm distributes shares of the subsidiary to its
shareholders
l Thus, spinoffs are unlikely to be used when a firm needs to finance
growth or deals.
l Like the carve-out, the subsidiary becomes a separate legal entity
with a distinct management and board.
l Spinoffs are usually about separating a healthy operation. In most
cases, spinoffs unlock hidden shareholder value. For the parent
company, it sharpens management focus.
l For the spinoff company, management doesn't have to compete for
the parent's attention and capital. Once they are set free, managers
can explore new opportunities.
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Carve Outs
l A parent firm makes a subsidiary public through an initial public
offering (IPO) of shares, amounting to a partial sell-off.
l A carve-out is a strategic avenue a parent firm may take when one of its
subsidiaries is growing faster and carrying higher valuations than other
businesses owned by the parent.
l A carve-out generates cash because shares in the subsidiary are sold to the
public, but the issue also unlocks the value of the subsidiary unit and
enhances the parent's shareholder value.
l The new legal entity of a carve-out has a separate board, but in most
carve-outs, the parent retains some control.
l Sometimes companies carve-out a subsidiary not because it's doing well,
but because it is a burden.
l Carve-outs can also create unexpected friction between the parent and
subsidiary as managers of the carved-out company are accountable to their
public shareholders as well as the owners of the parent company. This can
create divided loyalties. 20
Motives behind Divestitures
l Dismantling conglomerates
l Abandoning core business/Discard unwanted business
l Changing strategies
l Adding Value by Selling into a better fit
l Large Additional Investment required
l Harvest past successes
l Ward off takeover
l Meeting Government requirements

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Recent Examples in India
l GlaxoSmithKline selling its consumer
healthcare business, including its health food
drinks portfolio, to Hindustan Unilever
l USD 4.2 BN (Rs 31700 Cr)
l Brands like Horlicks, Boost, Maltova and Viva
l HUL has additionally paid Rs3,045 crore to
acquire the Horlicks brand for India from
GSK
l Under the deal, HUL will distribute GSK’s
brands like Eno, Crocin, Sensodyne
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Recent Examples in India
l L&T’s exit from its electrical and automation
business via a sale to Schneider Electric for
Rs 14000 cr for cash
l Revenue of business roughly Rs 5100 cr
l Deal expected to close by Q2 2020
l CCI gives nod to deal in 2019

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Divestures…
lBenefits of Divestitures
l Shedding Excess Flab
l Effective Market Regulation
l Financial Support

lIssues in Divestitures
l Market Reactions
l Government Interventions
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Slump Sale
l Under the Indian tax law, 'slump sale'* means the
transfer of one or more business undertakings** as a
result of the sale for a lump-sum consideration without
assigning values to individual assets and liabilities
l In the case of a slump sale, the sale is chargeable under
the head "capital gains".
l It has to be computed by deducting the following
amounts from the full value of the sale consideration: -
l The net worth* of the undertaking; and
l Expenditure incurred wholly and exclusively in connection with
such transfer.

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Joint Ventures (JV)
l JV is an entity formed between two or more parties to undertake
economic activity together.
l 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.
l The venture can be for one specific project only, or a continuing
business relationship such as the Sony Ericsson joint venture.
l This is in contrast to a strategic alliance, which involves no equity
stake by the participants, and is a much less rigid arrangement.
l Project Based JV: These are Joint Ventures entered into by
companies in order to accomplish a specific project.
l 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
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JV- Goals, Benefits
lGoals

l Synergies
l Transfer of technology/skills
l Diversification

lBenefits

l Complementary Benefits
l Acquiring and Sharing Expertise
l New Business / Product Development
l Capacity Expansion
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JV- Issues

lIssues in Joint Ventures

l Due Diligence
l Business Strategy
l Development of HR Strategies
l Implementatiion

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Dimensions of restructuring, II

l Restructuring ownership structure, leverage

l Share repurchases
l LBO’s, LCO’s( Not in India)
l Restructuring equity

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Capital Restructuring
l Leverage of the company
l Debt Restructuring
l Investment/FDI
l Divestitures

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Motives of Capital
Restructuring
l To enhance liquidity.
l To lower the cost of capital.
l To reduce risk.
l To avoid loss of Control.
l To improve Shareholder Value.

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Benefits/Issue of Capital
Restructuring
lBenefits of Capital Restructuring
l Greater Financial Muscle
l Access to Better / Greater Technologies
l Focus on Core Competencies

lIssues in Capital Restructuring

l Loss of Management Control

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Distress related restructuring

l Troubled debt restructuring

l Liquidations
l CDRs
l BIFR
l SARFAESI

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Organizational Restructuring

l Centralization/decentralization
l Organizational Culture
l Training and Redeployment
l Changes in HR Policies
l Rationalization of Pay Structure

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Symptoms indicating the need
for organizational restructuring
l Parts of the organization are significantly over or
under staffed.
l Organizational communications are inconsistent,
fragmented, and inefficient.
l Technology and/or innovation are creating
changes in workflow and production processes.
l Significant staffing increases or decreases are
contemplated.
l New skills and capabilities are needed to meet
current or expected operational requirements. 35
Symptoms indicating the need
for organizational restructuring
l Accountability for results are not clearly
communicated and measurable resulting in
subjective and biased performance appraisals.
l Personnel retention and turnover is a significant
problem.
l Workforce productivity is stagnant or
deteriorating.
l Morale is deteriorating

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Benefits of Organizational
Restructuring
l Lower cost
l Better formulation and implementation of
strategies
Issues in Organizational Restructuring
l Culture.

l Downsizing

l Loss of Employee Morale.

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Strategies for Org
Restructuring
l Smart-sizing
l the process of reducing the size of a company by laying off
employees on the basis of incompetence and inefficiency

l Networking
l process of breaking companies into smaller independant
business units for significant improvement in productivity and
flexibility
l 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.

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Strategies for Org Restructuring
l Virtual Corporation
l It is a company that has taken steps to turn itself inside out.
l a virtual corporation send the employees to customer's offices for
ascertaining what the customer needs and wants,
l Based on above customise products and services
l Futuristic concept wherein companies will be edgeless,
adaptable and perpetually changing.
l Verticalization
l It refers to regrouping of management functions for particular
functions for a particular product range to achieve higher
accountability and transparency.

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Strategies for Org
Restructuring
l Delayering- Flat organization
l Business Process Reengineering

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Hurdles of Business
Restructuring
l Culture
l Inadequate Focus and commitment of top
management
l Mind set/resistance to change
l Lack of involvement of employees
l Poor planning
l Resource Availability
l Cost and time
l Poor communication
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So what should an ideal
restructure take care of ?
An ideal restructuring initiative should take care of the
following points:
l Appropriate Timing based on prevailing socio-economic
and technological conditions.
l Functional Integration to create Synergy.

l Employees' and Internal Customers' involvement in the

Restructuring Initiative.
l Prioritizing activities.

l Pre-planning the revised organization structure and

design and working toward this goal in a systematic
manner.
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Tax issues Mapped
• For Transferor
• Carry forward of loss / depreciation
• Capital gains tax.
• Transfer pricing.
• Tax avoidance device
• Business closure
• Depreciation.

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Tax issues Mapped
For Transferee
• Carry forward of loss
• Production / asset holding criteria.
• Depreciation on tangible / intangibles.
• Continuity of tax exemptions / deductions.
• Restatement of value.
• Succession of business.

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Tax issues Mapped
For Shareholders
• Deemed dividend
• Capital gain / loss
• Consideration in kind / staggered consideration.
• Short term / long term capital assets
• Cost of acquisition

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