Learning Objectives

 Basics of corporate restructuring Kinds/forms of corporate restructuring

 Meaning, definitions and a brief • Portfolio restructuring
history of restructuring •Financial restructuring
 Motives behind corporate •Organizational restructuring
restructuring
•Technological restructuring
• Motives behind expansion
Choice of corporate restructuring
• Motives behind corporate control
•Expansion
• Motives behind contraction
• Motives behind change in •Contraction
ownership structure of •Corporate control
restructuring •Changes in ownership structure
 Significance of corporate Present scenario of corporate
restructuring restructuring
 Limitations of corporate restructuring
 Corporate Restructuring
• A change in the operational structures, investment structures,
financing structures and governance structure of a company.
• Objective of restructuring is to transform the company into an
enterprise that is of high value to its owners.
• Any change in the business capacity or portfolio that is carried
out by an inorganic route.
• Any change in the capital structure of a company that is not a
part of its ordinary course of business.
• Any change in the ownership of or control over the management
of the company or a combination thereof.
 Motives Behind Corporate
Restructuring
If we look at the motives behind corporate restructuring we will find four
separate sets of reasons for different choice of corporate structuring, namely,
expansion, corporate control, contraction and change in ownership structure.
Motives Behind Expansion
1. Growth
2. Technology
3. Product advantage and product differentiation
4. Government policy
5. Exchange rates
6. Political/economic stability
7. Differential labour costs, productivity
8. Diversification
Motives Behind Corporate Control
1. Improving leverage ratio
2. Utilization of surplus cash
3. Enhancement of voting power
4. Preventing under valuation
5. Anti takeover defence

Motives Behind Change in Ownership Structure

6. Maneuvering leverage
7. Alternation in the control structure
8. Providing fairness to minority shareholders
9. Changing the nature of firm
 Significance of Corporate
Restructuring
• Corporate restructuring is a strategic decision lending to the maximization
of company’s growth by enhancing its production and marketing
operations, reduced competition, free flow of capital, globalization of
business and so on.
• Some of the most common reasons of corporate restructuring are
discussed briefly hereunder:

1. Economics of scale

2. Operating economies

3. Synergy

4. Reduction in tax liability

5. Managerial effectiveness
6. Other reasons of corporate restructuring are
appended as follows:
i. To return to the shareholders of the surplus cash which is not
required in the near foreseeable future
ii. To enhance the earning per share of the company.
iii. To provide to shareholders/investors that the market is presently
undervaluing the share of the company in relation to its intrinsic value
and the proposed buy back will facilitate recognition of the true value.
iv. To increase the promoters’ voting power.
v. To maintain shareholders’ value in a situation of poor state of secondary
market by a return of surplus cash to the shareholders.
vi. Eliminating the takeover threats.
vii. An opportunity to grow faster, with a ready-made market share.
viii. To eliminate a competition by buying it out.
ix. Diversification with minimum cost and immediate profit.
x. To forestall the company’s own takeover by a third party.
 Kinds/Forms of Corporate
Restructuring
1. Portfolio Restructuring: Includes significant changes in the mix
of assets owned by a firm or the lines of business in which a firm operates,
including liquidation, divestitures, asset sales and spin-offs.
2. Financial Restructuring: Refers to the allocation of the corporate flow of
funds—cash or credit—and to the strategic or contractual decision rules that
direct the flow and determine the value added and its distribution among the
various corporate constituencies.
3. Organizational Restructuring: Organizational restructuring includes significant
changes in the organizational structure of a firm, including redrawing of
divisional boundaries, flattening of hierarchic levels, spreading of the span of
control, reducing product diversification, revising compensation, streamlining
processes, reforming governance and downsizing employment.
 Choice of Corporate
Restructuring
The term ‘corporate
restructuring’ is quite
wide covering various
aspects. It may be chosen
from among four broad
groups, namely:
1. Expansion
2. Contraction
3. Corporate control and
4. Changes in ownership
structures
1. Expansion
• Expansion basically implies expanding or increasing
the size and volume of business of the firm.
• The following methods can be used to help a company grow
without having to create a whole other business entity.
i. Mergers
A transaction where two firms agree to integrate their operations on a
relatively on co-equal basis is called merger.
ii. Amalgamation
An amalgamation is when two or more companies enter into the merger
agreement to form a completely new entity.
iii. Absorption
Absorption is when the merger occurs between two entities of dissimilar
size.
iv. Acquisition
• An acquisition is when a company (public or private) buys
up the stock of another company.
• For example, Coca-Cola purchased soft drinks brands such as Thums
Up, Limca and Gold Spot from Parle by paying R170 crores to Parle.
v. Acq-hire
An ‘Acq-hire’ (i.e., acquisition-by-hire) may occur especially when the
target company is quite small or is in the start-up phase.
vi. Tender Offer
A tender offer is an offer or invitation (usually announced in a newspaper
advertisement) by an acquiring company to the general shareholders
of a target company to purchase a majority of the equity at a premium
to market value at a specified price during a specified time, subject to
the tendering of a minimum and maximum number of shares.
vii. Joint Venture
Two or more companies come together and carry on
operations in both or single of its origin place. The profit and losses are
shared as per their agreement.
viii. Types of Mergers
• Horizontal Merger
When two companies from the same business class or market enter into a
merger agreement.
• Vertical Merger
A vertical merger occurs when two firms from different stages of the same
business class, activity or operation enter into a merger agreement.
These types of companies typically have buyer–seller or supply chain
relationships before the merger.
ix. Conglomerate Merger
A conglomerate merger arises when two or more firms in
different markets producing unrelated goods join together to
form a single firm.

2. Contraction
• Generally the size of the firm gets reduced.
• Contraction may take place in the form of divestitures (which includes
spin-off, split-off and split-ups), equity carve-out and asset sale.
i. Divestiture
The word divestiture may not be as popular as the word merger or
acquisition since there is only a few definitions mentioned in the
accounting textbooks.
ii. Sell-off
It is the sale of a division or subsidiary of a parent company
to a third party for cash or other assets or through initial public.

iii. Spin-offs
It is an event through which a new company is created and
separated from its parent company.
After the event there are two separate companies, each with their
own outstanding share capital.

iv. Split-offs
In the case of split-off, a new company is created in order to take
over the operations of an existing division or unit of a company.
v. Split-ups
A split-up involves transfer of property from a parent company
to its existing or newly created subsidiary companies and then
liquidation of the parent company through a distribution of the
subsidiary companies’ stock to the parent shareholders in exchange
for all its stock.
vi. Equity Carve-out
With a carve-out, a new independent company is created by detaching
part of the parent’s businesses and selling the shares of the new
company in a public offering.
vii. Asset Sale
An asset sale involves the sale of tangible or intangible assets of the
company to generate cash.
3. Corporate Control
• Involves obtaining control over the management of firm.
• As ownership and control are not always separated, the top managers
and promoter group who stand to lose from competition in the market
may use the democratic rules to benefit themselves for corporate
control.

i. Share Repurchase/Buyback of Shares

There are three methods of share repurchase:
a) Repurchase tender offer

b) Open market repurchase

c) Targeted repurchase
ii. Exchange Offers
An offer by a firm to give one type/class of security (like a
debenture or preference share), in exchange for another
type of security (like an equity share) either in the same firm or
another firm.

iii. Proxy Contest

Strategy that involves using shareholders’ proxy votes to replace the
existing members of a company’ board of directors.

iv. Takeover
• Transfer of control of a firm from one group of shareholders to another
group of shareholders.
• In short, in takeover the controlling interest of a firm changes from
hands of one group to another.
v. Hostile Takeover
• Takeover of a company against the wishes of current
management and the board of directors.
• This takeover may be attempted by another company or by high net worth
individual.

vi. Friendly Takeover

• An agreement between the managements of the two companies through
negotiations and the takeover bid may be with the consent of majority
shareholders of the target company.
• It is also known as negotiated takeover.

4. Changes in Ownership Structure

A company can also go for restructuring without purchasing new company or
selling existing company or part of it.
Following are the various techniques of obtaining corporate control:
i. Leveraged Buyout (LBO)
• An acquisition of a company or division of another
company financed with a substantial portion of borrowed funds.

• Company acquiring the target company will finance the acquisition

with a combination of debt and equity, much like an individual
buying a house with a mortgage.

• For example, Tata Steel’s acquisition of Corus is a classic example of

leveraged buyout. Typically, in such a buyout as much as 90% of the
funds required for the takeover are mobilized through borrowings
principally through junk bonds carrying high interest.
ii. Management Buyout (MBO)
• Occurs when a company’s managers buy or acquire a large
part of the company.
• Management teams work together with financial sponsors to part-
finance the acquisition.
• An MBO can occur for a number of reasons, for example:
a) the owners of the business want to retire and want to sell the
company to the management team they trust (and with whom they
have worked for years);
b) the owners of the business have lost faith in the business and are
willing to sell it to the management (who believes in the future of
the business) in order to get some value for the business and
c) the managers see a value in the business that the current owners do
not see and do not want to pursue.
iii. Master Limited Partnerships (MLPs)
• Limited to apply to enterprises that engage in certain
businesses, mostly pertaining to the use of natural resources, such as
petroleum and natural gas extraction and transportation.
• MLPs consist of a general partner, who manages the operations and
limited partners, who own the rest of the units for the partnership.
iv. Going Private
• A transaction or a series of transactions that convert a publicly traded
company into a private entity.
• Once a company goes private, its shareholders are no longer able to
trade their shares in the open market.
v. Employee Stock Option Plan (ESOP)
ESOP’s are ‘Employee Stock Option Plans’ under which employees receive
the right to purchase a certain number of shares in the company at a
predetermined price, as a reward for their performance.
 Restructuring Process
Strategic planning process consisting three important phases.
1. Diagnostic phase—diagnosis of the company through ‘strategic
appraisal’
2. Planning phase—preparation of the ‘strategic improvement plan’
3. Implementation phase—restructuring, including monitoring of
progress and revisions of the previous phases

4. The Company Diagnostic

Consists of five consecutive steps:
i. Identification of stakeholders in the company
ii. Pre-assessment of the current situation.
iii. Internal analysis
iv. External analysis
v. SWOT analysis
2. The Restructuring Plan
• The ‘strategic planning’ process consists of another four steps
during which concrete restructuring actions are formulated.
• Step 5 aims to put in place a framework to monitor to what extent the
restructuring plan is being implemented.
Step 1: Strategic planning
Step 2: Corporate planning
Step 3: Tactical planning (medium term)
Step 4: Financial implications
Step 5: Monitoring & control

3. Implementation
During the implementation of the restructuring plan, the action plan plays
a key role.
As this plan indicates what is to be done, when and by whom, it guides
the day-to-day actions of management.
 Limitations of Corporate
Restructuring
A number of limitations can be associated with corporate restructuring,
they are:
1. Work assurance
2. Retention of best management
3. Delay in deal finalization
4. Executive stress
5. Workers’ woes
6. Cultural mismatch
7. Inability to create value