Company Re-Structuring

Corporate restructuring is a crucial process aimed at improving financial crises and a company’s performance. When faced with financial challenges, the management of the affected corporate entity often seeks the guidance of financial and legal experts to advise and assist in negotiation and transactional matters.

Typically, the entity may explore various options, such as debt financing, operational streamlining, or divesting a portion of the company to interested investors. Moreover, the need for corporate restructuring can stem from changes in the ownership structure, which may occur due to factors like takeovers, mergers, adverse economic conditions, or significant changes in business dynamics such as buyouts, bankruptcy, insufficient integration between divisions, or excessive personnel.

Categories of Corporate Restructuring

Financial Restructuring:A significant decline in overall sales because of adverse economic circumstances may prompt this kind of restructuring.In such cases, the corporate entity may adjust its equity distribution, debt repayment schedule, equity holdings, and cross-holding arrangements. These adjustments are made to maintain market presence and sustain profitability.

Organizational Restructuring: Organizational restructuring involves altering the organizational structure of a company, such as by reducing hierarchical levels, redesigning job roles, downsizing the workforce, and modifying reporting relationships. This type of restructuring aims to reduce costs and settle outstanding debts to enable the continuation of business operations in some capacity.

Reasons for Corporate Restructuring

The following conditions lead to the implementation of corporate restructuring:

• Change in Strategy: The management of a distressed entity may seek to enhance performance by divesting in certain divisions or subsidiaries that don’t align with the company’s core strategy. These divisions or subsidiaries may not strategically fit with the company’s long-term vision. Therefore, the corporate entity decides to focus on its core strategy and divest its assets to potential buyers.
• Lack of Profits: An undertaking may fail to generate sufficient profits to cover the company’s cost of capital, resulting in economic losses. Poor performance may stem from management’s incorrect decisions to initiate a division or declining profitability due to evolving customer needs or rising costs.
• Reverse Synergy: In contrast to synergy, where the merged unit’s value surpasses the value of individual units combined, reverse synergy suggests that the value of an individual unit may exceed that of the merged unit. This often prompts the divestment of company assets. The entity may conclude that divesting a division to a third party can yield greater value than retaining ownership.
• Cash Flow Requirement: Divesting an unproductive undertaking can significantly bolster the company’s cash inflow. If the corporate entity faces challenges in obtaining financing, divesting an asset is a strategy to raise capital and reduce debt.

Features of Corporate Restructuring

• To enhance the company’s Balance Sheet (by divesting unprofitable divisions from its core business),
• Staff reduction (by closing or selling off unprofitable segments)
• Changes in corporate management
• Disposing of underutilized assets, such as brands and patent rights
• Outsourcing operations, such as technical support and payroll management, to a more efficient third party
• Shifting operations, such as relocating manufacturing operations to lower-cost locations
• Reorganizing functions, such as marketing, sales, and distribution
• Renegotiating labor contracts to reduce overhead
• Rescheduling or refinancing debt to minimize interest payments
• Conducting a public relations campaign to reposition the company with consumers.

Corporate Restructuring Methodologies

• Reverse Merger: Unlisted public companies can become listed without an IPO. In this scenario, a private company acquires a majority shareholding in a public company under its own name.
• Disinvestment: This occurs when a corporate entity sells or liquidates an asset or subsidiary.
• Merger: This involves combining two or more business entities through absorption, amalgamation, or forming a new company. Typically, securities are exchanged between the acquiring and target companies.A merger involves combining two or more companies into a single entity to leverage the synergy resulting from the merger.
• Joint Venture (JV): Two or more companies form an entity to undertake financial activities together, sharing expenses, revenues, and control.
• Takeover/Acquisition: The acquiring company gains overall control of the target company.
• Slump Sale: An entity transfers one or more undertakings for lump sum consideration, irrespective of individual asset or liability values.
• Strategic Alliance: Entities enter into an agreement to collaborate in achieving specific objectives while remaining independent organizations.

Advantages of Company Re-structuring

Corporate restructuring offers various advantages to businesses, such as: