CORPORATE RESTRUCTURING

Definition: The Corporate Restructuring is the process of

making changes in the composition of a firm’s one or more
business portfolios in order to have a more profitable enterprise.
Simply, reorganizing the structure of the organization to fetch
more profits from its operations or is best suited to the present
situation.

The Corporate Restructuring takes place in two forms:

1. Financial Restructuring: The Financial Restructuring may
take place due to a drastic fall in the sales because of the adverse
economic conditions. Here, the firm may change the equity
pattern, cross-holding pattern, debt-servicing schedule and the
equity holdings. All this is done to sustain the profitability of the
firm and sustain in the market. Generally, the financial or legal
advisors are hired to assist the firms in the negotiations.

2. Organizational Restructuring: The Organizational

Restructuring means changing the structure of an organization,
such as reducing the hierarchical levels, downsizing the
employees, redesigning the job positions and changing the
reporting relationships. This is done to cut the cost and pay off the
outstanding debt to continue with the business operations in some
manner.

The need for a corporate restructuring arises because of the

change in company’s ownership structure due to a merger or
takeover, adverse economic conditions, adverse changes in
business such as bankruptcy or buyouts, over employed
personnel, lack of integration between the divisions, etc.

Kinds of Corporate Restructuring

• Financial Restructuring – re-organisation of capital, buy-back,

CDR, acquisitions, mergers, joint ventures and strategic alliances

• Technological restructuring – alliances for technical expertise •

Market Restructuring – product / market segments

• Organizational Restructuring – internal structures and

procedures
OBJECTIVES

•Growth

•Diversification

•Optimum utilization of capacities

•Improved competencies

•Synergistic operational advantages

•Cost reduction

•Consolidation and economies of scale

Modes of Corporate Restructuring :

1. Merger : Merger is the combination of two or more

companies which can be merged together either by way of
amalgamation or absorption. The combining of two or more
companies, generally by offering the stockholders of one
company securities in the acquiring company in exchange
for the surrender of their stock.

2. Reverse Merger: Reverse merger is the opportunity for the

private companies to become public company, without
opting for Initial Public offer (IPO).In this process the private
company acquires the majority shares of public company,
with its own name.
3.  Disinvestment: Disinvestment means the action of
an organization or government selling or liquidating an asset
or subsidiary.  It is also known as "divestiture". A company or
government organization will divest an asset or subsidiary as
a strategic move for the company, planning to put the
proceeds from the divestiture to earn a higher return on
investment.

4. Over/Acquisition : Takeover means an acquirer takes over

the control of the target company.  It is also known as
acquisition. Normally this type of acquisition is undertaken to
achieve market supremacy. It may be friendly or hostile
takeover. Friendly takeover: In this type, one company
takeover the management of the target company with the
permission of the board. Hostile takeover: In this type, one
company takeover the management of the target company
without its knowledge and against the wish of their
management.

5. Joint Venture (JV): A joint venture is an entity formed by

two or more companies to undertake financial activity
together. The parties are agree to contribute equity to form a
new entity and ready to share in the revenues, expenses,
and control of the company. It may be Project based joint
venture or Functional based joint venture. Project based
Joint venture:  The joint venture entered into by the
companies in order to achieve a specific task is known as
project based JV. Functional based Joint venture: The joint
venture entered into by the companies in order to achieve
mutual benefit is known as functional based JV.

6. Strategic Alliance : Any agreement between two or more

parties to  collaborate with  each other, in order to achieve
 certain objectives and allows to remain independent
organization is called strategic alliance.

7. Franchising: Franchising may be defined as an

arrangement where one party (franchiser) grants another
party (franchisee) the right to use trade name as well as
certain business systems and process, to produce and
market a good service according to certain specifications.
The franchisee usually pays a one –time franchisee fee plus
a percentage of sales revenue as royalty and gains.

8. Buy Back: Buy back means the repurchase of outstanding

shares by a company in order to reduce the number of shares on
the market. Companies will buy back shares either to increase
the value of shares still available or to eliminate any threats by
shareholders who may be looking for a controlling stake. The
Company may buy back its own shares from the open market
over an extended period of time, by utilizing the Free Reserve
amount and Securities Premium Account.
 Methods of financing merger and amalgamation

Mergers and Acquisitions are parts of the natural cycle of

business. A merger or acquisition can help a business
expand, gather knowledge, move into a new market
segment, or improve output. However, these opportunities
come with expenses for both sides.

Standard merger deals typically involve administrators,

lawyers, and investment bankers even before the total
acquisition cost is considered. Without a
virtual dataroom and a sizable amount of cash on hand, a
company will have to find alternate methods of Financing
M&A. Below is a detailed look at the best financing
options available today as well as information on the ones
to avoid.

Exchanging Stocks :-

This is the most common way to finance a merger or acquisition.

If a company wishes to acquire or merge with another, it is to be
assumed the company has plentiful stock and a solid balance
sheet. In the average exchange, the buying company exchanges
its stock for shares of the seller’s company. This financing option
is relatively safe as the parties share risks equally. This payment
method works to the buyer’s advantage if the stock is overvalued.
Here, the buyer will receive more stock from the seller than if
they’d paid in cash. However, there’s always the risk of a stock
decline, especially if traders learn about the merger or acquisition
before the deal is finalized.
Debt Acquisition:-

Agreeing to take on a seller’s debt is a viable alternative to

paying in cash or stock. For many firms, debt is a driving force
behind a sale, as subpar market conditions and high interest
costs make it impossible to catch up on payments. In such
circumstances, the debtor’s priority is to reduce the risk of
additional losses by entering into a merger or acquisition with a
company that can pay the debt. From a creditor’s standpoint, this
is a cheap way to acquire assets. From the seller’s point of
view, sale value is reduced or eliminated. When a company
acquires a large quantity of another company’s debt, it has
greater management capabilities during liquidation. This can
be a significant incentive for a creditor who wants to restructure
the company or take possession of assets such as business
contacts or property.

Paying in Cash:-
A cash payment is an obvious alternative to paying in stock. Cash
transactions are clean, instantaneous, and do not require the
same high level of management as stock transactions. Cash
value is less dependent on a company’s performance except in
cases involving multiple currencies. Exchange rates may vary
substantially, as seen in the market’s response to the British
pound after the UK voted to leave the European Union. While
cash is the preferred payment method, the price of a merger or
acquisition can run into the billions, making the cost too high for
many companies.

Initial Public Offerings:-

An initial public offering, or IPO, is an excellent way for a
company to raise funds at any time, but an impending
 merger or acquisition is an ideal time to carry out the
process. The prospect of an M&A can make investors
excited about the future of a company, as it points to a solid
long-term strategy and the desire to expand. An IPO always
creates excitement in the market and, by pairing it with an
M&A, a company can spur investors’ interests and increase
the early price of shares. Additionally, increasing an IPO’s
value with a merger or acquisition can increase existing
share prices.

Loans:-
It can be costly to borrow money during a merger or acquisition.
Lenders and owners who agree to an extended payment
arrangement will expect a reasonable rate for the loans they
make. Even when interest is relatively low, costs can quickly add
up during a multimillion-dollar M&A. Interest rates are a primary
consideration when funding a merger with debt, and a low rate
can increase the number of loan-funded transactions.