Strategic management

Corporate restructuring
 What is corporate restructuring
• Every business, whether large or small, will go
through a period of turbulence.
• In a world where economic and political trends
can be difficult to predict, the best way to
minimise disruption to your company or group
is to regularly review its corporate structure.
• Corporate restructuring is the process of
redesigning one or more aspects of a company.
• The process of reorganizing a company may
be implemented due to a number of different
factors,
– such as positioning the company to be more
competitive,
– survive a currently adverse economic climate,
– or poise the corporation to move in an entirely
new direction.
• This not only allows you to promptly identify
and deal with any weaknesses or
inefficiencies, but it will also give you the
chance to look for any new opportunities in
your market.
• For businesses that are struggling, corporate
restructuring can help you make debts and
liabilities more manageable and reduce the
stress you carry on your shoulders.
 Purpose of Corporate Restructuring

• To enhance the share holder value, The company should

continuously evaluate its:
• Portfolio of businesses,
• Capital mix,
• Ownership & Asset arrangements to find opportunities to
increase the share holder’s value.
• To focus on asset utilization and profitable investment
opportunities.
• To reorganize or divest less profitable or loss making
businesses/products.
• The company can also enhance value through capital
Restructuring, it can innovate securities that help to reduce
cost of capital.
• Corporate Restructuring entails a range of
activities including mainly
• Financial restructuring: Where businesses have
debts and tax considerations, it’s often
necessary to restructure financially to reduce
liabilities and increase profitability.
• Organisation restructuring: Over time, a
business or group’s organisational structure can
become inefficient either because of surplus
services or complex employee hierarchies.
 Reasons for Corporate Restructuring

• Financial distress: Your company is losing money as a result

of costs that are too high and growing debts. All this results
in an inability or difficulty to pay creditors.
• Expansion:  You’re buying another company, incorporating a
new business strategy or developing a different way of
working. As such, you need to review your structure to
ensure efficiency does not slip.
• Management: Expansion and growth have resulted in a
complex management hierarchy that can benefit from being
simplified, or perhaps entire portions or your business have
become redundant.
• Legal compliance: New laws have forced you to review your
process or introduce new ones that need to be adopted
quickly into your existing structure.
 5 Different Forms of Corporate Restructuring

1. Mergers & Acquisitions

• One of the best ways of increasing profitability in a business
quickly is to incorporate an existing company into yours.
• This can come in a variety of forms, from buying a business
outright to merging with one and absorbing their assets.
• Mergers and acquisitions (M&A) can allow you to
– rapidly increase your revenue,
– production capacity and
– market reach,
– all without the time and hard work of building a new company.
• horizontal mergers describe the process of two companies in
direct competition coming together,
• while vertical mergers could take place when a company buys a
supplier.
 2. Divestment and Spin-Offs
• If M&As exist for companies that want to grow,
divestment and spin-offs are useful for businesses that
are looking to consolidate.
• Where a business unit is no longer profitable or fulfilling a
strategic purpose, you may consider selling or closing it —
this is known as divestment.
• If you want to reduce your involvement in a business unit
without entirely stepping away from it, a spin-off can be a
simple solution.
• This involves restructuring the unit to become its own
standalone company which you still partly own. This can
be particularly useful if you want to achieve a high
valuation on part of your business.
 3. Debt Restructuring
• Debt restructuring is one of the most common motivators for
business restructuring.
• Owing creditors can put the very existence of your company at
risk, but there are often steps you can take to reduce your
liabilities.
• You may be able to restructure your debt and continue trading
by introducing a Company Voluntary Arrangement (CVA),
which is a legally binding agreement between you and your
creditors. If you think you’ll make profit again in the future, a
CVA can provide short-term relief from your debts in return
for a guarantee that you’ll honour them in the future.
• Alternatively, you may be able to clear part or all of your debts
by agreeing a corporate restructure to provide your creditors
with equity in your business.
 4. Cost Reduction
• If you’re facing growing debt in your business, it’s likely that your
running costs are too high.
– In order to reduce costs, you may consider liquidating redundant
companies in your business group
– to release assets,
– reducing the number of employees,
– or restructuring departments to remove unnecessary management
costs.
• 5. Legal Restructuring
• In some cases, corporate restructuring may be necessary not
because a business is struggling, but simply because there is a
shift in responsibilities at the top.
• This could include the incorporation of new investors or a change
in the ownership structure if a business unit leaves the group.