MEANING OF CORPORATE RESTRUCTURING

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.
Corporate Restructuring is a comprehensive process by which company can consolidate or
rearrange its organizational set up or business operations and strengthen its position so as to
achieve its short-term or / and long term objectives and establish itself as a synergetic,
dynamic, continuing as well as successful independent corporate entity in the competitive
environment.
 The Corporate Restructuring takes place in two forms :-

Corporate Restructuring

Organisational
Financial Restructuring
Restructuring
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.
 Need And Scope Of Corporate Restructuring
Corporate Restructuring is concerned with arranging the business activities of the corporate as a whole so as to
achieve certain predetermined objectives at corporate level.
The scope of corporate Restructuring encompasses enhancing economy (cost reduction)and improving
efficiency (profitability). When a Company wants to grow or survive in a competitive environment, it needs to
restructure itself and focus on its competitive advantage.
Following are some of the reason why corporate restructuring is needed and what is its scope :-
1. Reacting to change :- The business world is constantly changing and that makes it incredibly hard to
predict. However, a large part of business is also the need to be responsive and it is companies that are
unable to react to change that can often struggle. The need to develop new products and explore new
markets means change is a constant necessity, while reaching out to new customers is vital to maintaining
progress. Business restructuring to achieve this can be required, especially in instances where staying well
placed in the market is seen as essential.
2. Downsizing :- A workforce is the driving part of a company, and the correct
management of those individuals will be a key to business success. The changing
economy can lead to a need for new staff in new positions and the removal of other
positions. Pressure from competitors can also make the process of managing finances
difficult, so cutting costs can be an essential part of maintaining profit margins.
3. Changing technology :- Implementing new technology can also change the way that a
company is run and restructuring might be necessary to get the best from the technology.
Alternatively, new ways of working may also influence a business plan and could require
an overhaul of the old system before any techniques can be implemented.
Redesigning business practice to ensure profits is best done at an early stage to maximise
the potential of the changes. That means potential issues should be tackled as soon as
possible and that the implementation of new technology should be monitored very closely
in the opening stages.
4. New Management Methods :- Traditional management structures were bureaucratic
and hierarchical. Of late, management experts see wisdom in flatter organisation with
wider roles and responsibilities for each member of the team. Job flexibility, enlargement
and enrichment are key features of such new structures, but successful implementation
requires changes in the communication and reporting structures of the organization. While
new organizations can start with such new paradigms, old organizations have to
restructure themselves to keep up with these best practices to remain competitive.
5. Quality Management :- Competitive pressure force most companies to have a serious
look at the quality of their products and services, and adopt quality interventions such as
Six Sigma and Total Quality Management. Implementing new quality standards may
require changes in the organization. Most of the new quality applications strive to imbibe
quality in the actual work process rather than maintain a separate quality control
department to accept or reject output based on quality specifications.
In many cases, an organizational level audit precedes quality interventions, and such
audits highlight inefficiencies in the organizational structure that may impede quality in
the first place. For instance, reducing waste may require eliminating certain processes, and
thereby reallocation of personnel undertaking such activities.
6. New Work Methods :- Traditional organizational systems and controls cater to
standard 9am to 5pm office or factory based work. Newer methods of work, especially
outsourcing, telecommuting and flex time require new systems, policies, and structures in
place, besides a change in culture, and such requirements may trigger organizational
restructuring.
The presence of telecommuting employees, temporary employees, and outsourcing work
may require a drastic overhaul of perforamance management parameters, compensation
and benefits administration, and other vital systems. The newer work methods may, for
instance, require placing emphasis on the result rather than the methods, flexible reporting
relationships, and a strong communication policy.
7. Mergers and Acquisitions :- In today’s corporate world, where survival of the fittest is
the maxim, mergers and acquisitions are commonplace and any merger or acquisition
invariably heralds a restructuring exercise. The reasons for such restructuring
accompanying mergers and acquisitions are many. Some of the common reasons are :-
1. Reconciling the system and procedures of the merged organizations to ensure that the
new entity has consistency of approach.
2. Eliminating duplication of work or systems, such as two human resource of finance
departments
3. Incorporating the preferences of the new owners, and more.
Joint ventures may also require formation of matrix teams, special task forces, or a new
subsidiary.
8. Finance Related Issues :- Very often, small and medium scale businesses have informal
structures and reporting relationships, and an ad-hoc style of decision making. When such
companies grow and want to raise fresh funds, venture capitalists and regulations might
demand a more professional set up, with formal written down structures and policies. A
listed company may undertake a restructuring exercise to improve its efficiency and unlock
hidden value, and thereby show more profits to attract fresh investors.
Bankruptcy may force the business to shed excess flab such as workforce, land, or other
resources, sell some business lines to raise cash, and become lean and mean, to attract bail-
outs or some other rescue package. Companies may try to restructure out of court to avoid
the high costs of a formal bankruptcy.
9. Buy Outs :- At times, the restructuring exercise may be the result of thw whims and
fancies of the owners. For instance, the company have a new owner who wants to stamp his
or her personal authority and style onto the business.
Restructuring allows the new owner to :-
1. Reshuffle key personnel and provide power to trusted lieutenants.
2. Start with a clean state and thereby exert greater control.
3. Pre-empt any inefficiencies that caused the previous owner to sell out, and more.
With or without ownership change acting as a trigger, company owner’s may appoint a
management consultant to review the company and suggest macro-level changes, as a
routine exercise.
10. Statutory and Legal Compliance ;- At times, restructuring may be a forced
exercise, to conform to some legal or statutory requirements. For instance, the
government may mandate financial and healthcare institutions that deal with sensitive
personal data to monitor their computer networks. A new bill may require that private
computers networks adopt the same security measures that government networks adopt,
to gain immunity from liability lawsuits in the eventuality of cyber attacks.
Any organisational restructuring is basically a change initiative. Success depends on
managing resistance to change by convincing the remaining workforce of the need for
change and the possible benefits, an effective communication systems to lend clarity to
the change process, and effective leadership.
11. Growth and Expansion:- Corporate restructuring helps a firm to grow and expand.
For instance, merger may enable a company to grow faster as compared to firms that
undertake internal expansion.
12. Competitive Advantage :- Corporate advantage may enable an organisation to gain
competitive advantage in the market. For instance takeover or merger may enable a firm
to gain economies of large scale production and distribution. Therefore, a firm would be
in a better position to produce quality goods and at lower prices.
13. Corporate image :- Corporate restructuring may be undertaken to improve the
image of the firm to improve its performance. Improved performance enables a firm to
improve its image.
14. Concentration on core business :- Corporate restructuring may be undertaken to
enable a firm to focus on core business. In some cases, a firm may find it difficult to
manage growing business, and therefore, it may divest non-core business to
concentrate on core business.
15. Debt Servicing problem :- Some firms may face the problem of debt burden. They
may find it difficult to service the debt .i.e., repayment of loan instalments and interest.
Some firms may divest a part of the business so as to generate funds for the purpose of
repayment of debt.
16. Market share :- Corporate restructuring may be undertaken to increase market share.
For instance, firms may adopt the strategy of merger or takeover in order to increase
the market share. The merger or takeover may enable the firm to take the advantage of
goodwill of enjoyed by the merged firms or takeover firm.
17. Other reasons are :-
1. To reduce costs
2. To concentrate on key products or accounts
3. To improve the debt-equity ratio
4. To make better use of talent
5. To overcome significant problems in a company
6. To spin off a subsidiary company
7. To decrease or consolidate debt
8. To obtain tax advantages by merging a loss- making company with a profit-making
company.
9. To carry on the business of the company more economically or more efficiently
10. To focus on its core strength.
 SCOPE OF CORPORATE RESTRUCTING

Restructuring in the corporate world means, reorganization of all the important

structure of the company like legal, operational, ownership etc. this is done, to enhance
the profit of the company and to organize it in a better way according to the present
needs of the company.
It includes the following:
I. PORTFOLIO AND ASSET RESTRUCTURING: This type f restructuring can be
performed in the following ways:
i. Merging two or more companies or entities.
ii. Purchasing assets of anther firm.
iii. Acquisition of a part of an entity which leads to the change in ownership.
II. FINANCIAL ENGINEERING : This leads to changes in the existing capital structure
i. Buying back of shares
ii. Issuing different type of shares like non-voting or preference shares
iii. Issuing different type of debts to meet the needs of fixed and working capital.
iii. INTERNAL STREAMING AND REORGANIZING THE BUSINESS PROCESS: This
type of restructuring can be performed in the following manner.
iv. Reducing the head count
v. Closing uneconomical units
vi. Inducing programs to reduce costs
vii. Disposing off the assets which are not being used
viii. Reorganizing the business process.
 Aspects to be considered while planning or implementing
corporate restructuring strategies :-

1. Communications :- Remember that change is difficult and can leave the organization uneasy. For most
of your employees, ambiguity left by managers will lead to fear and uncertainty. Make regular
announcements to the entire organization to identify any key decisions and notable progress. Further it
is equally as important to communicate why the changes are needed as it is what the changes are.
Explain the needs, explain the goals.
2. Plan Ahead :- In order to best implement the changes, plan ahead. Look at the various impacts to your
business.
(i). Are other groups impacted by what you plan to change?
(ii). Does ypur financial reporting structure need to change ?
(iii). How will your customer =s be impacted ?
(iv). How will your people be impacted ?
3. Structure of Success :- If you’re struggling with technology growth, separate a team to focus only on
technology. If your customers feel neglected, create a team dedicated to taking care of customers. There
are many ways to create an organizational structure, and all are valid.
4. Other important aspect to be considered is :- The restructuring process requires various aspects to be
considered before, during and after the restructuring. They are :-
(i). Valuation and Funding
(ii). Legal and procedural issues
(iii). Taxation and Stamp duty aspects.
(iv). Accounting aspects
(v). Competition aspects etc.
(vi). Human and cultural synergies.
 FORMS OF RESTRUCTURING
1. Merger :- It is the absorption or fusion of one company by another. It is an arrangement whereby the
assets of two or more companies come under the control of one company. Thus, one of the two existing
company loses its identity and gets merged with another.
(i). Merger through Absorption :- Absorption is a combination of two or more companies into an
‘existing’ company’. All companies except one lose their identity in such a merger. For example, absorption
of Tata Fertilisers Ltd. (TFL) by Tata Chemicals Ltd . (TCL).
(ii). Merger through Consolidation :- A consolidation is a combination of two or more companies into a
‘ new company’. In this form of merger, all companies are legally dissolved and a new entity is created.
Here, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or
exchange of shares. For example, merger of Hindustan Computers Ltd. And Indian Reprographics Ltd. Into
an entirely new company called HCL Ltd.
 Types of Mergers
I. Horizontal Merger :- It is a merger of a two or more companies that compete in the same industry. It is
merger with a direct competitor and hence expands as the firm’s operations in the same industry.
Horizontal mergers are designed to achieve economies of scale and result in reduce the number of
competitors in the industry.
II. Vertical Merger :- It is merger which takes place upon the combination of two companies which are
operating in the same industry but at different stages of production or distribution system. If a company
takes over its supplier/ producers of raw material, then it may result in backward integration of its
activities. On the other hand, Forward integration may result if a company decides to take over the
retailer or Customer Company. Vertical merger provides a way for total integration to those firms which
are striving for owning of all phases of the production schedule together with the marketing network.
III. Co generic merger :- It is a type of merger, where two companies are in the same or related industries
but do not offer the same products, but related products and may share similar distribution channels,
providing synergies for the merger. The potential benefit from these mergers is high because these
transactions offer opportunities to diversify around a common case of strategic resources.
4. Conglomerate Merger :- These mergers involve firms engaged in unrelated type of activities i.e. the
business of two companies are not related to each other horizontally or vertically. In a pure conglomerate,
there are no important common factors between the companies in production, marketing, research and
development and technology. Conglomerate mergers are merger of different kinds of businesses under
one flagship company. The purpose of merger remains .
 DEMERGER
Demerger in relation to companies mean transfer, pursuant to a scheme of arrangement under section 391 to
394 of the Companies Act, 1956 by a demerged company of its one or more undertaking to any resulting
company. Demerger is term coined to reveal some sort of partition or separation of undertaking held by some
common corporate umbrella.
Demerger can take three forms :-
i. Spin-off :- In spin-off, company distributes its shareholding in subsidiary to its shareholders thereby not
changing the ownership pattern. For example, Air India formed Air India Engineering Services Limited
by spinning off its engineering department.
ii. Split-off :- Split-off is the form of demerger where shareholders of existing company form a new
company to takeover specific division of existing company.
iii. Split-up :- When existing company is dissolved to form few new companies, it is called as split-up.
 REVERSE MERGER :-
Reverse merger is said to have taken place when a healthy company merges with a financially weak
company. Reverse merger lures a large number of companies since they allow the companies to grab the
advantage of carry forward of losses and thus avail tax benefits.
 DISINVESTMENT :-
Disinvestment means the action of an organization or government selling or liquidating an asset or
subsidiary. It is also known as ‘disvestiture’.
Following are some reason for divestures :-
1. Sometime a firm may divest a business unit to raise cash.
2. Sometimes a subsidiary no longer falls within the firm’s strategic plans.
3. Sometimes a reverse synergy is created when business units are worth more separately than combined
under the firm.
4. Sometimes a firm simply cannot earn an appropriate rate of return on a business unit and will sell to a
buyer with better capabilities in that specific area.
 Takeover/ Acquisition :-
Takeover means an acquirer take over the control of the target company. It is also known as acquisition. Takeover
can be friendly or Hostile Takeover.
1. Friendly takeover :- In this type, one company takes over the management of the target company with the
permission of board.
2. Hostile takeover :- In this type, one company takes over the management of the target company without it’s
knowledge and against the wish of their management.
There are many ways in which control over a company can be acquired
3. By acquiring i.e. purchasing a substantial percentage of the voting capital of the voting capital of the target
company.
4. By acquiring voting rights of the target company through a power of attorney or through a proxy voting
arrangement.
5. By acquiring control over an investment or holding company, whether listed or unlisted that in turn holds
controlling interest in target company.
6. By simply acquiring management control through a formal or informal understanding or agreement with the
existing person in control of the target company.
EXAMPLE : Hindalco – Novelis.
 Joint venture(JV)
Joint venture is a venture in which an enterprise is formed with participation in the ownership, control
management of minimum of two parties. In joint venture, a business enterprise is formed for profit, in which
parties of joint venture share responsibilitis in an agreed manner, by providing risk capital, technology,
trademark, and access to market, etc. example :- 1. Maruti-Suzuki 2. Bajaj – Allianz
 Reasons for formimg a Joint Venture :-
a. Build on company’s strengths,
b. Spreading costs and risks,
c. Improving access to financial resources,
d. Economies of scale and advantages of size,
e. Access to new technologies and customers,
f. Access to innovative managerial practices.
 Strategic Alliance:-
Alliance means an agreement between two or more organization to cooperate with each other to accomplish
their common goals and to strive for the benefits of both of them. It si an understanding between firms whereby
resources capabilities and core competencies are combined to pursue mutual interests.
Strategic alliance (or teaming agreement) parties work together on a single project for a finite period of time.
They do not exchange equity nor do they create permanent entity to mark relationship. A Written memorandum
of understanding (MOU) is signed which indicate how parties plan to work together.
Stragetic alliances usually occur between :-
1. Strategic and their customers,
2. Competitors in the same business,
3. Non-competitors with complementary strengths.
 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 goods or services according to certain specifications.
Franchising allows the franchisor to :-
1. Expand rapidly,
2. Enhance business image,
3. Save operating costs,
4. have access to greater geographical location.
(a) Product Format Franchising :-
1. Franchisor’s is typically a manufacturer
2. License covers proprietary marks only
3. Franchisee ,ay or may not use same marketing efforts as franchisor
Example :- Ford, GM, Coca-Cola
(b). Business Format Franchising :-
4. Franchisor may or may not be a Manufacturer
5. License covers systems and Proprietary Marks.
6. Franchise Follows strict and uniform way to operate and promote Franchise.
Example :- Mc Donalds, Pizza Hut, Starbuck.
 Slump sale :-
Slump sale means the transfer of one or more undertaking as a result of the sale of lump sum consideration
without values being assigned to the individual assets and liabilities in such sales. If a company sells or
disposes of the whole or substantially the whole of its undertaking for a predetermined lump sum
consideration, then it results in a slump sale.