Corporate Restructuring

by noteswa

Table of Contents

Corporate Restructuring

Definition

Etymologically the term” Restructuring” means ‘giving new structure or rebuild or rearrange’. In this perspective, ‘Corporate Restructuring’ is defined as a process of rearranging the organizational or business structure of the company for increased efficiency and profitable growth.

Corporate Restructuring is a comprehensive process by which a 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.

Corporate restructuring is defined as an activity that involves changes in the business, organizational, or financial structure of an organization.

Business restructuring involves changes in the composition of the organization’s structure to create a profitable enterprise.
Financial restructuring involves changing the equity and debt structure.
Organizational restructuring includes changes in the structure of the organization by reducing the number of employees and re-designating positions.

Forms of Corporate Restructuring

Corporate restructuring includes evaluating the business strategies, estimating the value of the business, and identifying the financial alternatives available for consideration.

There are various forms of corporate restructuring strategies, which are discussed as follows:

Expansion: Refers to expanding the operations through mergers and expansions, tender, offers, and joint ventures.
Sell-offs: Implies two types of sell-offs that are discussed as follows:
Spin-offs: Results in the creation of separate legal entity
Divestitures: Involves selling the portion of the organization to a third party
Corporate Control: Establishes restructuring through premium buy-backs, standstill agreements, and anti-takeover amendments.
In premium buy backs, a substantial stockholder’s ownership benefit is repurchased at the premium that is above the market price.
A standstill agreement is a voluntary contract in which shareholders agree that they will not take over the organization in future.
Anti-takeover amendments refer to the changes made in the corporate bylaws to prevent mergers and acquisitions.
Change in Ownership Structure: Includes share repurchases, and leveraged buy-outs, which are discussed as follows:
Share repurchases: Imply that an organization can buy back some portion of its outstanding shares of common stock. The control structure of the organization can be changed successfully when it is able to gain a substantial percentage of shares.
Leveraged Buy-outs: Refers to a situation when the private organization borrows from third parties. A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company

Corporate Restructuring in India

Nowadays, Indian corporate sector is focusing on retaining the competitiveness through restructuring. According to some researches, multinational organizations gain the market entry into other countries through mergers and acquisitions; whereas Indian organizations prefer the equity investment route. Liberalization and globalization of the Indian economy has influenced the local organizations to adopt these corporate strategies.

In India, the corporate restructuring trend started during the introduction of economic reforms in 1991, which removed the industrial licensing and other restrictions.

The following points show the examples of corporate restructuring:

State Bank of India (SBI) appointed Mckinsey & Company, which is a research organization, for making restructuring plans. The main reason for restructuring was the environmental changes in the organization. SBI aims to become a world-class bank through restructuring.
Hindustan Unilever Limited devised a project called Project Millennium to restructure large business units into separate organizations.
The corporate restructuring by Steel Authority of India (SAIL) aims at financial and asset restructuring. The restructuring strategies include the intensification strategies for steel plants and aim to focus on cost minimization.