See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/301661275

Corporate Restructuring : Creating Value for the Organizations "

Article · January 2007

CITATIONS READS
0 11,784

1 author:

Dr. Anurag Pahuja

50 PUBLICATIONS   106 CITATIONS   

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Impact of SHGs on Social, Economic and Political Empowerment of Women: A Case of Ghaziabad District View project

All content following this page was uploaded by Dr. Anurag Pahuja on 27 April 2016.

The user has requested enhancement of the downloaded file.

 “Corporate Restructuring : Creating Value for the Organizations ”

Abstract

In the context of liberalization and globalization of the economy, 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 and
creates value for the organization. The present paper seeks to examine how different forms of
restructuring create value for the organization and to what extent the rationale of
restructuring is right in the real corporate world.

Today, Indian Industry is finding itself in excel or exit environment. If an industrial unit
wants to survive, it has to excel & compete successfully both with the domestic &
multinational competitors in India as well as international markets. If one cannot do this, the
market forces world show such lethargic units the exit doors. This is because of the growing
competition in the corporate would, with competitive forces like threats of new entrants with
substitute products and services, bargaining power of supplier as well as buyers & rivalry
among the existing competitors. So continuous existence of an enterprise is much difficult, as
the surrounding environment is not static. For the continuous existence, ongoing
development & having a competitive edge, the key word is change. Change can be of any
type & in any form. Corporate restructuring has become an important means for achieving
such changes in India and elsewhere. Corporate restructuring is defined as a major,
synergistic realignment of the corporate work culture, vision, values, strategy, structure,
management systems, management styles, technologies, staff skills, etc. Such realignments
can, however, vary greatly, depending on choices made as to what to change, in what way,
and how much. Corporate restructuring is a change, which may occur, in the organizational
structure, the key strategies and control of ownership.

The ongoing process of liberalization in Indian economy and its rapid integration with the
global economy has led to a rash of restructuring measures taken in Indian corporate. A study
of 1994 found out that 81 public sector units had restructured. A business World report in
early 1999 indicated that most of the nation’s largest 200 companies had undergone or were
undergoing restructuring. What actually restructuring is? Restructuring is realignment of the
major instrumentalities of management for greater effectiveness. That is the restructuring is
1

Electronic copy available at: http://ssrn.com/abstract=2622939

progress by which a firm does an analysis of itself at a point of time and alters what it owes
and owns, refocuses itself to specific tasks of performance improvements.

Rationale of restructuring:

In the neoclassical perspective, all the decisions of the firm including those relating to
restructuring are made with the objective of maximizing the value of shareholder’s wealth.
Restructuring is a process by which a firm does an analysis of self to achieve consistent
growth & profitability and abandon the activities which are no longer in the interest of the
firm and its owners, by altering the firm’s capital structure, asset mix and the organization so
as to enhance the value of the firm. Thus, the rationale of corporate restructuring is-

To achieve consistent profitability & growth by transferring company’s strategic

capability and providing superior value to customers.
When company’s objectives are no longer compatible within the scope of the current
portfolio, then altering it.
Enhancing the shareholder’s value.

Thus the rationale of corporate restructuring is creating value through every possible means.
And this can be explained by taking acquisition as an example.

Acquisition, a form of corporate restructuring, tends to satisfy the criterion of value creation
for shareholders wealth when the value added by acquisitions exceeds the cost of the
acquisition as: -
Added value from acquisition = value of acquirer and acquired after Acquisition- their
aggregate value before.
Increase in acquirer’s share value = Added value – cost of acquisition.
(Cost of acquisition = acquisition transaction cost + acquisition premium)

The various forms/techniques of corporate restructuring include expansion, contraction or

divestment and change in ownership & corporate controls. Whatever be the technique, its
aim is to have positive impact on the value of the firm in the form of increased market price

Electronic copy available at: http://ssrn.com/abstract=2622939

of shares thereby in turn enhancing the value of the shareholder’s wealth, benefit the
management, employees, suppliers as well as customers.

Forms of Corporate 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:

CORPORATE RESTRUCTURING (FORMS)

EXPANSION CONTRACTION CORPORATE CONTROL &

CHANGES IN OWNERSHIP
Amalgamation Sell- off Going Private
Absorption Spin-off(Demerger) Equity Buy back
Tender Offer Split-ups Going Public
Asset Acquisition Equity carve outs Joint Ventures
Takeover MBO & MBIs Leveraged Buy outs
Table 1: Forms of Corporate Restructuring

EXPANSION: Expansion may include mergers, acquisitions, tender offers and joint
ventures.

Merger & Amalgamation: It refers to the fusion/combination of two or more companies. It

may be absorption when one company aquires another company and the acquired company
cease to exist. The examples are TOMCO Ltd. with HLL. And Ashoka Leyland absorbed
Ductron Casting Ltd. It may be consolidation when two or more companies combine to form
a new company and companies individually lose their identiy. The example is Brooke Bond
India & Lipton India Ltd. to form Brooke Bond Lipton India Ltd. Also, Hindustan
Computers Ltd., Hindustan Instrument Ltd., Indian Software Company Ltd. & Indian
Reprographics Ltd. Combined to form HCL Ltd.

3
Tender Offer: This involves making a public offer for acquiring the shares of a target
company with a view to acquire management control of that company. The example is India
Cements giving an open market offer for Raasi Cement shares.

Asset acquisition: This involves buying of assets of another company. The assests may be
tangible assets like a manufacturing unit or intangible assets like brands. HLL bought the
brands of Lakme which is an example of asset acquisition.

Takeover: A takeover generally involves the acquisition of a block of certain block of equity
capital of a company which enables the acquirer to exercise control over the affairs of the
company. The takeover of Shaw Wallace by UB group and Indal by Hindalco are important
examples.

Mergers, acquisitions and takeovers, major forms of expansion techniques, though have a
number of motives behind them yet all these motives directly or indirectly aim at enhancing
the value of shareholder’s wealth.

Mergers & acquisition which have become a major force in the financial & economic
environment all over the world are based on the principles of synergy and enjoy synergistic
gains as the principle says 2+2=5. The potential sources of synergistic gains are economies of
scale, strategic benefits, complimentary resources, utilization of tax shelters available and
application of superior management.

CONTRACTION: Apart from expansion techniques, contraction/divestment techniques are

there. The corporate divestment can take place through a number of forms:

Corporate sell-off: Sell-off is a transaction between two independent companies which

involves the sale of a division of plant or unit of one firm to another. From the perspective of
seller, it is contraction but for the buyer, it represents expansion. An example is Coromandel
Fertilizers Ltd. sold its cement division to India Cements Ltd.

Spin – offs: In a spin off, a division or business unit of a company is spun off into an
independent company. After spin-off, the parent company and spun off company are separate
4
corporate entities. Kotak Mahindra finance Ltd.formed Kotak Mahindra Capital corporation
by spinning off its investment banking division.

Split-ups: In a split up, all the divisions of the parent company are converted into separate
companies and parent company ceases to exist and the example is the Ahmedabad Advance
Mills was split up into two separate companies viz. the new Ahmedabad Advance Mills and
the Tata Metal Strips.

The split ups & spin offs are regarded as devices for enhancing corporate values
by raising efficiency & performance by sharpening focus and improved accountability.

The Corporate Divestment also includes equity carve outs, management buy-outs and its
variants such as management buy-ins. Several empirical studies have shown that voluntary
divestment create value for the divestor’s shareholders. The impact of sell-off
announcements, spin-off (demerger) decisions on divestors’ shareholders wealth is generally
positive & significant. But the divestment strategies though aiming at enhancing the
shareholder’s value are based on an entirely different principle of anergy which says 5-3=3.
They have the potential for creating value by sharpening corporate focus and shedding
business that fit better elsewhere.

CORPORATE CONTROL & CHANGES IN OWNERSHIP: Corporate control includes

buy-backs where the management of the firm wishes to have complete control and
ownership. Change in ownership may either be through an exchange offer, share repurchase
or going public. The processes of going public and formation of joint venture, the techniques
for change in control & ownership may enable a company to create value by exploiting
opportunities that may remain beyond the reach. Going private, leveraged buy-outs & buy
back of shares have the potential of increasing value by improving corporate governance,
sharpening managerial accountability, enhancing incentives to perform and preventing
dissipation of free cash flows.

Corporate restructuring creating value – Indian & Global scenario

There is mixed reaction from the history of corporate restructuring measures taken in Indian
& Global economy regarding value creation. The example of successful restructuring events
in corporate world of Indian & global economy includes the following:
5
- The diversified conglomerate, Tata group get itself reclassified into seven business
groups trimming it from eleven. These seven groups are material, engineering,
energy, chemicals, consumer goods, computing and communications & services.
Also, Tata Finance, the country’s premier NBFC has formed joint venture with
world’s leading travel company to form Tata finance Express so as to expand its
foreign exchange operations in Aisa-pacific countries.
- White goods giant Whirlpool has merged with Indian wing Whirlpool Washing
Machines with Expo Machinery & Kelvinator India to form Whirlpool India.
- Daewoo has increased its stake in DCM-Daewoo joint venture from 51 percent to 85
percent in order to find the expansion program after DCM was unable to bring in the
required quantum of funds.
- Ballarpur Industries Ltd (BILT), was in a tattered positon three years ago. The
management hired Mckinsey to restructure the company. Mckinsey advised
divestment from existing 14 divisions to four divisions that became autonomous
SBUs. There was a sharp cut in costs, through reduced office space & salaries and
economizing on operations at corporate headquarters.
- State Bank of India (SBI) is one of the public sector companies that has restructured
on the advice of Mckinsey. In the 1990s, SBI experienced falling market share &
lower rate of return on assets that was far more lower than that of private sector
banks. SBI developed vision statement (the philosophical change) that stressed world
class standards of efficiency, high and sustained earnings to maximize shareholder
value.
- Another example is of Mather & Platt (India) Ltd. Which will demerge into three
companies to be called Mather & Platt Pumps Ltd. (fluid engineering division),
Mather & Platt Fire Services Ltd. And Mather & Platt (Inida) Ltd. and the
shareholders have okayed this decision in AGM.
- An important example of mega merger is Reliance Group’s two giants, Reliance
Industries Ltd., India’s biggest petrochemical firm and Reliance Petroleum, the
largest private sector Oil refinery, merging to create India’s second largest company.
The duo, in terms of revenue, would be second only to Indian Oil Corporation Ltd.
- To quote the example of restructuring in global economy, Sony can be considered. A
few years back, Sony unveiled a major restructuring plan which included a 10% cut
in its group workforce. Also, the plan included making Sony Music Entertainment
6
 and two other units wholly owned subsidiaries. Sony Computer entertainment, the
maker of Sony’s popular play station video game machines was also to become a full
subsidiary.
- A successful example of Merger in global scenario is Air France and KLM merger
which has resulted in an increase in profits to 351 million from 111 million for Air
France and a loss of 133 million for KLM .
- AT&T Broadband, biggest cable company in the United States has decided to merge
with Comcast, after its spin-off from the parent company, AT&T. The deal is going to
create the biggest broadband company to be called AT&T Comcast Inc.
- Goldman Sachs & Company is an example of going public by offering $3.45 billion
offerings of common stock in the global economy.

Conclusion:

Few of the studies have revealed that restructuring does not result in better conditions or
sometime worsen the situation. A study by Vardhana Pawaskar revealed no significant
increase in post merger profits. The Corporate restructuring measures have also been failures
in a number of cases: Mergers & acquisitions sometimes have resulted in unrelated and
unfocussed diversification that caused value depletion rather than value addition. NEPC
group of Khemkas is the classic example of the M&As failure in India. The group’s lack of
focus led to the problems and plunged NEPC into a deep financial crisis.

As we know that human nature always wants change, a change for the better. Thus despite
certain negative results in the past, value creation is the buzzword today & the Global
Corporate is bound to enter in the new era of Corporate restructuring, be it by the way of
M&As, corporate divestments, MBOs or LBOs.

7
 References:

1. Chandra, Prasanna, “Fiancial Management: Theory and Practice”, Tata McGraw Hill
Publishing Company limited.
2. Kishore, Ravi M, “Financial Managemnt”, Taxmann Publications.
3. Sudarsanam, P.S, “The essence of mergers & acquisitions”, Prentice Hall Pvt. Ltd.
4. “Corporate Restructuring” retrieved from http://www.themanagementor.com
/EnlightenmentorAreas /finance/mgr/Restructer.htm
5. Khandwalla, Pradip N, “Creative Restructuring”, Vikalpa: The Journal for Decision
Makers Volume 26, Number 1, January-March 2001.
6. Pawaskar, Vardhana, “Effect of Mergers on Corporate Performance in India”
Vikalpa: The Journal for Decision Makers Volume 26, Number 1, January-March
2001.
7. Sisodiya, Amit Singh, Mannava, Sailaja, “Air France-KLM Merger: Cruise Control”,
Chartered Financial Analyst, March 2006, pp.38-40.

View publication stats