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Corporate Restructuring

Today, restructuring is the latest buzzword in corporate circles. Companies are vying with each other in search of excellence and competitive edge, experimenting with various tools and ideas. The changing national and international environment is radically changing the way business is conducted. Moreover, with the pace of change so great, corporate restructuring assumes paramount importance.

The concept of restructuring involves embracing new ways of running an organisation and abandoning the old ones. It requires organisations to constantly reconsider their organisational design and structure, organisational systems and procedures, formal statements on organisational philosophy and may also include values, leader norms and reaction to critical incidences, criteria for rewarding, recruitment, selection, promotion and transfer.

The major reasons for restructuring are:

  • To induce higher earnings
  • To leverage core competencies
  • Divestiture and Networking
  • To ensure clarity in vision, strategy and structure
  • To provide proactive leadership
  • Empowerment of employees
  • Reengineering Process

Induce Higher Earnings: The two basic goals of corporate restructuring may include higher earnings and the creation of corporate value. Creation of corporate value largely depends on the firm’s ability to generate enough cash.

Leverage Core Competence: With the concept of organisational learning gaining momentum, companies are laying more emphasis on exploiting the rise on the learning curve. This can happen only when companies focus on their core competencies. This is seen as the best way to provide shareholders with increased profits.

Divestiture and Networking: Companies, while keeping in view their core competencies, should exit from peripherals. This can be realised through entering into joint ventures, strategic alliances and agreements.

Ensure Clarity in Vision, Strategy and Structure: Corporate restructuring should focus on vision, strategy and structure. Companies should be very clear about their goals and the heights that they plan to scale. A major emphasis should also be made on issues concerning time the frame and the means that influence their success.

Provide Proactive Leadership: Management style greatly influences the restructuring process. All successful companies have clearly displayed leadership styles in which managers relate on a one-to-one basis with their employees.

Empowerment: Empowerment is a major constituent of any restructuring process. Delegation and decentralised decision making provides companies with effective management information system.

Reengineering Process: Success in a restructuring process is only possible through improving various processes and aligning resources of the company. Redesigning a business process should be the highest priority in a corporate restructuring exercise.

Types of Restructuring

Business firms engage in a wide range of activities that include expansion, diversification, collaboration, spinning off, hiving off, mergers and acquisitions. Privatisation also forms an important part of the restructuring process. The different forms of restructuring may include:

  1. Expansion
  2. Sell-Off
  3. Corporate Control
  4. Change in Ownership

Expansion: Expansions may include mergers, acquisitions, tender offers and joint ventures. Mergers per se, may either be horizontal mergers, vertical mergers or conglomerate mergers. In a tender offer, the acquiring firm seeks controlling interest in the firm to be acquired and requests the shareholders of the firm to be acquired, to tender their shares or stock to it. Joint ventures involve only a small part of the activities of the companies involved.

Sell-Off: Sell-Off may either be through a spin-off or divestiture. Spin-Off creates a new entity with shares being distributed on a pro rata basis to existing shareholders of the parent company. Split-Off is a variation of Sell-Off. Divestiture involves sale of a portion of a firm/company to a third party.

Corporate Control: Corporate control includes buy-backs and greenmail where the management of the firm wishes to have complete control and ownership.

Change in Ownership: Change in ownership may either be through an exchange offer, share repurchase or going public.

An example: Essar Steel Announces Restructuring Plans

Essar Steel Limited recently announced its restructuring plan through which the company plans to reduce its interest burden. The company has also initiated several other steps including increasing production and lowering operating costs as a part of its restructuring program. The company also announced the development of a strategy addressing its debt burden-reduction and lengthening the maturity period.

Other restructuring programs initiated by the company included:

  • Raising equity through rights issue
  • Reduction in usage of power

The company, subsequent to its restructuring program, expects to be in a position to make net profits, declare dividends and enhance shareholder value.

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