Professional Documents
Culture Documents
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 1/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
Table of contents
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 2/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
1. Introduction
2. Benefits
3. Need for Corporate Restructuring
4. The importance of Synergy
5. Global challenges prompting for Corporate
6. Inorganic Growth in lieu of Organic Growth
7. Types of corporate restructuring
8. Differences between Merger and Acquisition
9. Strategic Alliance
10. Joint Ventures
11. Instances of beneficial corporate restructuring
1. Introduction
When a company wants to grow or survive in a competitive environment, it needs to
restructure itself and focus on its competitive advantage.
A larger company can achieve economies of scale. A bigger size also enjoys a higher
corporate status. Such status allows it to take advantage of raising funds at lower cost.
Such reduction in the cost of capital results into higher profits.
Corporate Restructuring focuses on cost reduction and improving efficiency and
profitability.
Corporate Restructuring means rearranging the business of a company for increasing
its efficiency and profitability. Today, restructuring is not an option but a conscious
choice made by companies.
Every corporate restructuring exercise aims at eliminating disadvantages and to
combine advantages. It plans to achieve synergy benefits through a well-planned
restructuring strategy.
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 3/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
2. Benefits
Mergers, amalgamations and acquisitions are forms of inorganic growth strategy. Such corporate
restructuring strategies have one common goal viz. to create synergy. Such synergy effect makes
the value of the combined companies greater than the sum of the two parts. Basically, synergy
may be in the form of increased revenues and/or cost savings. Corporate Restructuring aims at
improving the competitive position of an individual business and maximizing its contribution to
corporate objectives.
Through mergers and acquisitions, companies hope to benefit from the following:
(1) Increase in Market Share – Merger facilitates increase in market share of the merged
company. Such rise in market share is achieved by providing an additional goods and
services as needed by clients. Horizontal merger is the key to increasing market share. (E.g.
Idea and Vodafone)
(2) Reduced Competition – Horizontal merger results in reduction in competition.
Competition is one of the most common and strong reasons for mergers and acquisitions.
(HP and Compaq)
(3) Large size – Companies use mergers and acquisitions to grow in size and become a
dominant force, as compared to its competitors. Generally, organic growth strategy takes
years to achieve large size. However, mergers and acquisitions (i.e. inorganic growth) can
achieve this within few months. (E.g. Sun Pharmaceutical and Ranbaxy Pharmaceutical)
(4) Economies of scale – Mergers result in enhanced economies of scale, due to which there
is reduction in cost per unit. An increase in total output of a product reduces the fixed cost
per unit.
(5) Tax benefits – Companies also use mergers and amalgamations for tax purposes.
Especially, where there is merger between profit making and loss-making company. Major
income tax benefit arises from set-off and carry forward provision u/s 72A of the Income-tax
Act, 1961.
(6) New Technology – Companies need to focus on technological developments and their
business applications. Acquisition of smaller companies helps enterprises to control
unique technologies and develop a competitive edge. (E.g. Dell and EMC)
(7) Strong brand – Creation of a brand is a long process; hence companies prefer to acquire
an established brand and capitalize on it to earn huge profits. (E.g. Tata Motors and Jaguar)
(8) Domination – Companies engage in mergers and acquisitions to become a dominant
player or market leader in their respective sector. However, such dominance shall be subject
to regulations of the Competition Act, 2002. (E.g. Oracle and I-Flex Technologies)
(9) Diversification – Amalgamation with companies involved into unrelated business areas
leads to diversification. It facilitates the smoothening of business cycles effect on the
company due to multiplicity of businesses, thereby reducing risk. (E.g. Reliance Industries
& Network TV18)
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 4/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
(10) Revival of Sick Company – Today, the Insolvency and Bankruptcy Code, 2016 has
created additional avenue of acquisition through the Corporate Insolvency Resolution
Process.
Notable mergers/demergers/acquisitions that took place are Myntra acquiring Jabong, RIL
acquiring Network TV18, Sun Pharma absorbing Ranbaxy; Wirpo demerger, Reliance
Industries demerger.
3. Need for Corporate Restructuring
Corporate Restructuring means re-arranging business of a company for increasing its
efficiency and profitability. Restructuring is a method of changing the organizational
structure (https://hirebook.com/orgchart) in order to achieve the strategic goals of the
organization. It involves dramatic changes in an organization.
The strategy adopted shall depend on the purpose or organizational goals and hence a
different strategy shall apply to different companies. Corporate Restructuring aims at
different things at different times for different companies and the single common
objective in every restructuring exercise is to eliminate the disadvantages and combine
the advantages.
The above statement is true in every sense. The various needs for undertaking a
Corporate Restructuring exercise are as follows –
(a) focus on core competence, operational synergy, cost reduction and efficient allocation of
managerial capabilities;
(b) balance utilization of available infrastructure and resources;
(c) economies of scale by expansion to exploit domestic and international markets;
(d) revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits
of a healthy company;
Recent Posts constant supply of raw materials and access to scientific research and
(e) acquiring
technological developments;
Blog, Income Tax, Top Rulings 2022
(f) capital restructuring by appropriate mix of loan and equity funds to reduce the cost of
servicing
10 Landmark and improve
Income Tax Casereturn on capital
Laws | 2022 employed;
| Expert Analysis and Explanations
(https://www.taxmann.com/post/blog/10-landmark-income-tax-case-laws/)
(g) improve corporate performance to achieve competitive advantage by adopting the radical
changes brought out by information technology.
4. The importance of Synergy
Blog, Income Tax, News
All mergers and acquisitions have one common goal, i.e., to create synergy that makes the value
of the combined companies greater than the sum of the two parts. The success of a merger or
acquisition depends on whether this synergy is achieved or not. Synergy may be in the form of
higher revenue streams and cost savings.
Synergy implies that combined result of two enterprises is better that simple addition of each of
them, i.e. 1+1 > 2. It means that merger leads to operational efficiencies. The combination of
operations creates integration, which in turn increases earnings potential and reduces cost.
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 5/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
Synergies can be expected to flow from highly focused operational efforts, rationalization and
simplification of processes, rise in productivity, better procurements, and eliminate duplication.
It leads to combining their resources, such as production facilities, marketing channels,
managerial skills etc. Synergy is based on an ability of an enterprise to utilize its resources for
better results in combination with another enterprise.
5. Global challenges prompting for Corporate
5.1 Restructuring
Industrial Policy of 1991, introduces liberalization, privatization and globalization in
the Indian economy. This led to relaxation of licensing, inflow of foreign investments,
foreign technology, boost to private section, Govt. disinvestments etc.
Due to these changes, traditional businesses became dynamic, Govt. protection to
private sector reduced, entry of multinationals in Indian markets etc. Hence, there was
considerable rise in number of suppliers and cut-throat competition.
Central Govt. notifies
In view Special
of such Court in Odisha
cut-throat for the there
competition, purpose
is of Income
a need Tax & Black
to align Money
business Act with
activities
a focus on maximizing shareholders’ wealth. This gives rise to various strategic
(https://www.taxmann.com/post/blog/central-govt-notifies-special-court-in-odisha-for-the-purpose-of-
decisions.
income-tax-black-money-act/)
Latest from Taxmann
Competition is an important driver for change, and hence corporate restructuring
becomes vital. Competition drives technological development, cost cutting and value
addition. Innovations and inventions happen out of necessity to meet challenges of
competition.
Globalization leads to increased competition. Such competition can be related to
product and service cost and price, target market, technological adaptation, quick
response, quick production by companies, etc. Such competition drives people to
change and adapt and face global challenges.
Thus, to be globally competitive and survive in the business with surplus, an enterprise
needs to restructure with inventions and innovations.
6. Inorganic Growth in lieu of Organic Growth
Liberalization, Privatization and Globalization of Indian economy led to relaxation of
licensing, inflow of foreign investments, boost to private section, Govt. disinvestments
etc. Due to these changes, traditional businesses became dynamic, rise in cut-throat
competition etc.
Aligning business activities in line with the prime objective of maximizing
shareholders’ wealth has driven large corporate entities into taking various strategic
decisions.Basically, organic growth strategy relates to business or financial
restructuring within the organization that results in higher customer base, increased
sales, better revenue etc. Organic growth does not result in any change of corporate
entity.
Inorganic growth strategy includes change in the corporate identity through
involvement/alliance/association with other entities.
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 6/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
In an organic growth strategy, there is change in the business model, along with
management styles, financial structure etc.
Mergers, demergers, disinvestments, takeovers, joint ventures, franchising, strategic
alliances, slump sale are some options that are adopted as a measure to achieve
inorganic growth strategy.
Rationale for inorganic growth strategy —
i. Orderly redirection of activities,
ii. redeployment of surplus cash in other enterprises,
iii. utilizing inter-dependence among businesses,
iv. risk reduction through diversification
(https://taxmann.social/aPDM)
v. development of core competencies
vi. economies of scale through vertical, horizontal integration etc.
7. Types of corporate restructuring
To achieve strategic and financial synergies, following types of restructuring can be
performed :
1. Merging of two or more companies.
2. Purchasing assets of another company
3. Acquisition of equity shares of another firm resulting in change of ownership
4. Financial re-engineering
5. Buying-back of shares
6. Issuing different types of debts to meet the need for fixed and working capital
7. Infusing foreign debts and equity
Further, to achieve internal reorganizing, following strategies-
Reducing the manpower
Closing uneconomical/non-value-adding units
Cost reduction programs:
Disposing off obsolete assets
Reorganizing the business processes
Different modes of Corporate Restructuring are as under:
(1) Merger
(2) Demerger
(3) Reverse Merger
(4) Disinvestment
(5) Takeovers
(6) Joint Venture
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 7/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
9. Strategic Alliance
Strategic Alliance is an agreement between two or more parties to collaborate/cooperate with
each other in order to achieve certain commercial objectives.
In a strategic alliance, all participating companies retain their independent existence.
In other words, no separate entity is created.
Strategic alliance is a partnership between enterprises for common benefits such as
cost reduction, technology sharing, product development, market access etc.
The basic idea is to pool resources and facilitate innovative ideas and techniques with
the common objective of sharing benefits. E.g. Flipkart and OLX.
Strategic alliances allow organizations to pursue opportunities at a faster pace. It
provides access to additional knowledge and resources that are held by the other party.
10. Joint Ventures
Joint Venture is a separate entity formed by two or more companies to undertake commercial
activities together. In a joint venture, a new enterprise is formed with participation in ownership,
control and management of two or more parties.
The parties agree to contribute equity to form a new entity and shares the revenues,
expenses and capital of the company. E.g. Vistara Airlines is a JV between Tata and
Singapore Airlines.
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 8/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 9/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
any.
Taxmann (https://www.taxmann.com/post/author/taxmann/)
Taxmann Publications has a dedicated in-house Research & Editorial
Team. This team consists of a team of Chartered Accountants, Company
Secretaries, and Lawyers. This team works under the guidance and
supervision of editor-in-chief Mr Rakesh Bhargava.
The Research and Editorial Team is responsible for developing reliable and
accurate content for the readers. The team follows the six-sigma approach
to achieve the benchmark of zero error in its publications and research
platforms. The team ensures that the following publication guidelines are
thoroughly followed while developing the content:
The statutory material is obtained only from the authorized and
reliable sources
All the latest developments in the judicial and legislative fields are
covered
Prepare the analytical write-ups on current, controversial, and
important issues to help the readers to understand the concept and its
implications
Every content published by Taxmann is complete, accurate and lucid
All evidence-based statements are supported with proper reference to
Section, Circular No., Notification No. or citations
The golden rules of grammar, style and consistency are thoroughly
followed
Font and size that’s easy to read and remain consistent across all
imprint and digital publications are applied
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 10/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
Reply
2. Dr. Jyoti Pradhan says:
April 28, 2022 at 11:22 pm (https://www.taxmann.com/post/blog/corporate-
restructuring-types-and-importance/#comment-9631)
Ver y good information!
Reply
Leave a Reply
Cancel reply (/post/blog/corporate-restructuring-types-and-importance/#respond)
Your email address will not be published. Required fields are marked *
Comment *
Name *
Email *
Save my name, email, and website in this browser for the next time I comment.
Post Comment
PREVIOUS POST
(https://www.taxmann.com/post/blog/pre-packaged-insolvency-resolution-process-ppirp/) « Pre-
packaged Insolvency Resolution Process (PPIRP) (https://www.taxmann.com/post/blog/pre-
packaged-insolvency-resolution-process-ppirp/)
NEXT POST
(https://www.taxmann.com/post/press-release/hnlu-and-taxmann-organises-a-two-day-
national-conference-on-calibrating-corporate-governance-in-new-economy/) HNLU and
Taxmann Organises a Two-Day National Conference on “Calibrating Corporate Governance in New
Economy” (https://www.taxmann.com/post/press-release/hnlu-and-taxmann-organises-a-two-
day-national-conference-on-calibrating-corporate-governance-in-new-economy/) »
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 11/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
Sign Up
To subscribe to our weekly newslet ter please log in/register on Taxmann.com
Login Now
Latest Books
(https://taxmann.social/5YOg)
❮ ❯
Share By
(http://www.facebook.com/sharer.php?u=https://www.taxmann.com/post/blog/corporate-
restructuring-types-and-importance/)
(https://twitter.com/share?url=https://www.taxmann.com/post/blog/corporate-
restructuring-types-and-importance/)
(http://www.linkedin.com/shareArticle?
mini=true&url=https://www.taxmann.com/post/blog/corporate-restructuring-types-and-
importance/)
(https://api.whatsapp.com/send?
phone=&text=https://www.taxmann.com/post/blog/corporate-restructuring-types-and-
importance/)
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 12/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
(https://www.taxmann.com/)
Ever ything you need on Tax & Corporate Laws. Authentic Databases, Books,
(https://play.google.com/store/apps/developer?id=TAXMANN)
(https://apps.apple.com/in/app/taxmann-app/id566257516)
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 13/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
Follow us on
(https://www.facebook.com/taxmannindia) (https://twitter.com/taxmannindia)
(https://www.linkedin.com/company/taxmann/) (https://www.youtube.com/user/TaxmannPublications?
sub_confirmation=1) (https://www.instagram.com/taxmannindia/) (https://t.me/taxmannprofessionals)
(https://news.google.com/publications/CAAqBwgKMJP7lQsw1p6tAw?hl=en-IN&gl=IN&ceid=IN%3Aen)
Offering
About Company
Budget
Catalouge
(ht tps://www.taxmann.com/BookStore/Catalogues/taxmannsubscriptionbrochure2023final.pdf)
(ht tps://www.taxmann.com/BookStore/Catalogues/level1taxmannacademybrochure775x10512pagesde
(ht tps://www.taxmann.com/BookStore/Catalogues/level2taxmannacademybrochure775x10512pagesde
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 14/15
30/12/2022, 18:38 Corporate Restructuring: Types and Importance
(ht tps://www.taxmann.com/BookStore/Catalogues/nismcataloguepgs11665x925june22new.pdf)
(ht tps://www.taxmann.com/BookStore/Catalogues/iibfxtaxmanncatalogue2022.pdf)
(ht tps://www.taxmann.com/BookStore/Catalogues/taxmannsincometaxpublications2022.pdf)
(ht tps://www.taxmann.com/BookStore/Catalogues/taxmannsfinanceact2022gst.pdf)
(ht tps://www.taxmann.com/BookStore/Catalogues/corporatelawsbooks775x105may22new1.pdf)
(ht tps://www.taxmann.com/BookStore/Catalogues/taxmannscastudentscatalogue2022.pdf)
(ht tps://www.taxmann.com/BookStore/Catalogues/taxmannscsstudentscatalogue2022.pdf)
Authors
Bookstore Support
Express Delivery
Secured Payment
Free Shipping in India on order(s) above Rs 500
Missed call number 8688939939
CA-Inter | Paper 6 | Auditing | CRACKER Page No. 14 to 16 (ht tps://www.taxmann.com/emailer/PDF/CrackerAud-
Ass[Pankaj-CAIPC-New]10thEDN-MISSING3PAGES.pdf)
Legal
https://www.taxmann.com/post/blog/corporate-restructuring-types-and-importance/ 15/15