To expand or survive in a competitive climate, a firm must reorganise and concentrate on its competitive edge. A larger company can achieve economies of scale, and a larger company has a better corporate position. This leads to raising cash at a lesser cost. Because the cost of capital is lower, earnings are higher. The corporate restructuring aims to reduce costs while also increasing efficiency and profitability. Corporate restructuring is reorganising a company's operations to improve its efficiency and profitability. Restructuring is no longer an option, and it is an intentional decision taken by businesses.
Every company reorganisation tries to eliminate disadvantages while combining advantages. It intends to realise synergy advantages by implementing a well-thought-out restructuring approach.
Did you know?
Corporate restructuring can be understood as an expression by which a company can unite its business activities and make its position very effective for achieving its short-term and long-term goals.
Also Read: The Asset Reconstruction Industry in India
What Is Corporate Restructuring?
Corporate restructuring is considered critical for resolving any financial disasters and boosting a company's performance. The business entity's management authorises a financial and legal specialist for advice and support in the negotiation and transactions when they suffer financial difficulties.
Generally, a corporation will consider debt financing, operations downsizing or selling some of the business to possible investors. Likewise, the requirement to restructure a corporation is due to a shift in a company's ownership structure. Takeovers, mergers, serious economic situations, undesirable business developments like buyouts, bankruptcy, lack of integration between divisions, overworked people and other factors contribute to a difference in the company's ownership structure.
Some other examples that you'll see in the media might be a company seeking to boost margins that are restructuring and rotating assets by divesting factories and acquiring intellectual property. It eliminates labour costs while acquiring royalty streams with a high upfront cost but a low ongoing maintenance cost.
Corporate Restructuring Types
Financial Restructuring
In this type of restructuring, you will see a significant drop in overall sales due to a lack of proper economic conditions. The business entity's equity pattern, equity holdings, debt-servicing schedule and cross-holding pattern, etc., can all be altered here. Businesses do this to keep and make the market and the corporation profitable.
Organisational Restructuring
A change in a company's organisational structure, such as lowering its degree of hierarchy, redefining job positions, downsizing personnel and modifying reporting connections, is referred to as organisational restructuring. This restructuring form helps reduce costs and pay off the existing debt to continue with corporate operations somehow.
Corporate Restructuring Characteristics
- To enhance the company's balance sheet (by disposing of the unprofitable division from its core business)
- Reduction in personnel (by closing down or selling off the unprofitable portion)
- Corporate management changes
- Getting rid of underutilised assets like brands and intellectual rights.
- Outsourcing functions like technical assistance and payroll administration to a more efficient third party.
- Shifting operations to lower-cost locales, such as manufacturing activities.
- Marketing, sales and distribution operations.
- To save money, re-negotiate labour contracts.
- Debt rescheduling or refinancing to reduce interest payments.
- Conducting a large-scale public relations effort to reposition the firm in the eyes of its customers.
The Need for Corporate Restructuring
Corporate restructuring can be motivated by the need to modify a company's organisational structure or business model or make financial changes to the company's assets and obligations. It frequently entails both. Companies reorganise for several reasons, including the following:
- To reduce costs
- Focusing on important products or accounts
- To increase competitive advantage by incorporating new technologies and making better use of skills
- Separating a subsidiary business
- To merge with another company
- Debt reduction or consolidation
Reasons for Corporate Restructuring
The following scenarios need corporate restructuring:
Change in Plan
The distressed entity's management strives to enhance its performance by removing divisions and subsidiaries that do not correspond with the company's main strategy. It's possible that the division or subsidiaries don't look strategically aligned with the company's long-term goals. As a result, the corporation concentrates on its main strategy and sells such assets to possible purchasers.
Profitability
The project may not generate enough profit to pay the company's cost of capital, resulting in financial losses. The undertaker's bad performance might be the consequence of management making the wrong decision to start the division or a reduction in the undertaking's profitability owing to changing consumer requirements or rising prices.
Reverse Synergy
This notion differs from the concepts of synergy in that the value of a merged unit exceeds the worth of separate units individually. According to reverse synergy, an individual unit's worth may be greater than the combined unit's. This is one of the most typical causes for a company's assets to be sold. Instead of holding a division, the concerned organisation may determine that selling it to a third party will fetch a higher value.
Cash Flow Requirement
Disposing of a non-productive project might result in a significant cash inflow for the business. If a company has trouble securing financing, selling an asset is a viable option for raising funds and reducing debt.
Important Factors to Consider for Corporate Restructuring Strategies
- Issues of law and procedure
- Accounting perspectives
- Collaborations between people and cultures
- Financing and valuation
- Points of view on taxation and stamp commitment
- Points of view on the competition, etc.
Also Read: The Concept of Slump Sale Under GST and What It Entails
Corporate Restructuring Strategies
Merger
This is the notion of merging two or more corporate entities, either by absorption, amalgamation or forming a new company. The most common way for two or more corporate organisations to combine is to acquire and target companies to swap securities.
Demerger
In this corporate restructuring approach, two or more firms are united into a single entity to capitalise on the synergy generated by such a merger.
Reverse Merger
In this procedure, unlisted public corporations can change to listed public companies without an IPO (Initial Public offer). In Reverse Merger, a private business buys a major stake in a publicly-traded corporation.
Disinvestment
It is the process through which a corporation sells or liquidates an asset or subsidiary.
Takeover/Acquisition
The purchasing firm takes complete control of the target company under this method, also known as the purchase.
Joint Venture (JV)
In this technique, two or more firms create an entity to carry out financial transactions together. The joint venture is the name given to the new organisation. Both partners agree to participate in forming a new business in the proportions agreed upon and share the company's expenditures, income and control.
Strategic Alliance
In this approach, two or more entities agree to work to achieve certain goals while remaining distinct organisations.
Slump Sale
This technique involves an entity transferring one or more endeavours for a one-time payment. An undertaking is sold for consideration in a slump sale, regardless of the specific valuations of the undertaking's assets or liabilities.
Global Challenges Promoting Corporate Restructuring
- In the Indian economy, the 1991 Industrial Policy introduced liberalisation, privatisation and globalisation. This resulted in licence liberalisation, foreign investment and technology, a boost to the private sector and government disinvestments, among other things.
- Traditional firms grew more dynamic due to these developments, government protection for the private sector was diminished, multinationals entered Indian markets, etc. As a result, there was a significant increase in the number of providers and a fierce rivalry.
- In the face of such fierce competition, company operations must align with a focus on increasing shareholder value. As a result, several strategic decisions take place.
- As a result of the importance of competition as a catalyst for change, corporate restructuring becomes necessary. Technology advancement, cost reduction and value creation are all fueled by competition. Innovations are born out of a need to face competition's difficulties.
- Increased competitiveness is a result of globalisation. You can connect this type of rivalry to product and service cost and pricing, target market, technology adaptability, rapid reaction and company production, among other things. When confronted with global difficulties, people are compelled to alter and adapt due to such competitiveness.
As a result, a company must restructure using inventions and innovations to compete internationally and survive in the business excess.
Conclusion
Thanks to corporate restructuring, the corporation can continue to function in some capacity. The company's management takes all conceivable efforts to keep the organisation afloat. Even if the worst happens and the firm is forced to dissolve due to financial difficulties, there is still optimism that the sold components will work effectively enough for a buyer to purchase the weakened company and restore profitability.
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