Many enterprises undergo corporate restructuring at some point to improve competitiveness by cutting costs, enhancing efficiency, and boosting profits. This process involves a comprehensive valuation of firm assets to optimise the advantages of reorganisation. Successful business restructuring requires an accurate assessment of the company’s overall value or the value of its individual parts.
What is Corporate Restructuring?
Corporate restructuring involves reorganising a company’s management, finances, and operations to enhance efficiency and effectiveness. These changes can lead to increased productivity, improved quality of products and services, and reduced costs. They also enable a company to better serve its customers and shareholders. Restructuring may result in closing underperforming or unprofitable business units.
For some ventures, restructuring might be a last-ditch effort to retain solvency when a firm faces financial difficulties and needs to restructure its debts with creditors. This process involves reorganising the company’s debt and selling non-essential assets to stay afloat.
Corporate restructuring can be done informally (outside the court system) or through various legal strategies, depending on the severity of the situation.
When is Corporate Restructuring Used?
- Organisational Strategy
Companies may eliminate divisions or subsidiaries that do not align with their primary strategy to boost performance. Strategically, these divisions or subsidiaries may not fit the company’s long-term goals and are sold to potential buyers, allowing the company to focus on its core strategy.
- Economic Loss
When a venture fails to generate enough revenue to cover capital expenditures, it results in an economic loss. Poor management decisions or a reduction in profitability due to changing client requirements or rising costs can lead to bad performance.
- Reverse Synergy
Reverse synergy suggests that the value of a single unit may exceed the combined value of the parts. This motivates companies to sell assets, as selling a division to a third party might bring in more money than keeping it in-house.
- Cash Flow
Selling an unprofitable project can generate significant cash for an organisation. This strategy helps raise funds and reduce debt for a company struggling to secure financing.
Why Is Restructuring Important?
Restructuring through inorganic growth strategies, such as mergers, acquisitions, and amalgamations, can be a lifesaver for businesses on the brink of collapse. Creating synergy is the common objective of these strategies, where the combined value of firms is greater than the sum of their parts. This synergy effect can lead to higher revenues or lower costs.
- Market Share
Mergers allow companies to gain a larger market share. By offering more of what customers want, companies can increase their market dominance. Horizontal mergers are a common strategy to achieve this.
- Reduced Competition
Horizontal mergers also reduce competition, giving the merged entity a competitive edge.
- Scale in Growth
Mergers and acquisitions enable companies to grow rapidly and become dominant market players. Inorganic expansion through these strategies can achieve growth faster than organic means.
- Scale in Cost
Merging businesses can reduce the cost per unit of production. As total output increases, fixed costs per unit decrease, leading to economies of scale.
- Tax Advantages
Companies often pursue mergers and acquisitions for tax benefits. The set-off and carry-forward provisions of Section 72A of the Income Tax Act, 1961, offer significant tax advantages.
- Technology Adoption
Acquiring firms with unique technologies gives companies a competitive edge. Staying abreast of technological advancements is crucial for business success.
- Brand Adoption
Brand loyalty drives sales. Acquiring a well-known brand can be more beneficial than building a new one from scratch.
- Diversification
Some companies diversify their offerings by merging with businesses in unrelated fields. This reduces risk by balancing business cycles and smoothing revenue streams.
- Saving an Insolvent Company
The Insolvency and Bankruptcy Code, 2016, provides a new avenue for purchasing bankrupt companies, offering a fresh start.
Types of Corporate Restructuring
Corporate restructuring can be broadly categorised into two types: financial restructuring and organisational restructuring.
- Financial Restructuring
Financial restructuring is necessary when a company’s total sales decline significantly due to economic conditions. This involves adjusting equity structures, debt service schedules, and equity holdings to maintain market presence and profitability.
- Debt/Equity Swap
A debt/equity swap is a financial restructuring strategy where a company’s debt is exchanged for equity stakes. This approach is used when a company faces financial difficulties and cannot repay its debt in a reasonable time.
- Debt Loading
Leveraged buyouts, or debt loading, involve borrowing money to finance a buyout, increasing the company’s debt. This strategy is used to repurchase and retire shares, but it comes with challenges.
- Organisational Restructuring
Operational restructuring involves changes in a company’s organisational structure, such as reducing hierarchy levels, revamping job roles, shrinking the workforce, and modifying reporting connections. This helps reduce costs and pay off debt to keep the company operational.
- Corporate Portfolio Restructuring
Divestiture strategy involves selling off non-core assets. This helps companies focus on their main business and secure financing. The proceeds can be invested in the core business or other strategic ventures.
5 Corporate Restructuring Strategies to Consider
- Mergers and Acquisitions (M&A)
M&A involves merging two or more companies or one company taking over another. This strategy is used to create business synergies and improve financial health.
- Reverse Merger
Reverse mergers allow private firms to become publicly traded without an IPO. A private firm acquires a controlling stake in a publicly traded company, gaining control of the board of directors.
- Divestiture
Divestiture involves transferring ownership of non-core assets to another party. This helps companies avoid bankruptcy, reduce debt, and maintain a low debt-to-equity ratio.
- Joint Venture
A joint venture creates a new firm between two or more companies, sharing resources, costs, earnings, and control.
- Strategic Partnership
Strategic partnerships enable businesses to collaborate while maintaining their identities, generating commercial synergies.
Corporate restructuring is a vital strategy for companies looking to improve their competitiveness, efficiency, and profitability. By understanding and implementing the right restructuring strategies, companies can navigate financial difficulties, optimise their operations, and achieve sustainable growth.
