Corporate Restructuring: Part I

Restructuring is typically a “Management” term for the act of reorganizing the proprietary, operational, or other structures of a Company for the purpose of making it better organized and ultimately Improving the top and bottom lines. Corporate restructuring is the process of rebuilding or reorganizing a portion of the company. This process may be implemented owing to a number of reasons, such as marketing position vis-à-vis competition, meet and sustain in an adverse economic climate, or change gears into an entirely new direction. Most businesses go through a phase of restructuring at some point, though not necessarily to address shortfalls. In some cases, the process of restructuring takes place for allocating resources for a new product campaign or the launch into a new market, to mention a few. In such an event, the restructure is a sign that the company is financially stable and has set goals for future growth and expansion.

Restructuring a corporate entity is often necessitated by the company having grown whereby the original structure can no longer be effective to manage the company efficiently. For instance some of the departments might have grown very fast and may call for spinning them off into subsidiaries and there may still be others which may be operating marginally with huge costs that can set the management think whether it will be better to outsource such work of such departments. In some cases taking up some activities by which the costs can be saved could be a good idea. The restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the company gain and grow.

Corporate restructuring may also be designed to manage the debts, improve profitability and efficiency. Negotiations with banks/term lending institutions, creditors are commonly used to reduce the burden of debt carried by a company. Large debt burden can greatly hinder company growth calling for modification of some or all debts. This may involve securing new loans at more favorable terms or negotiations with creditors. In some cases, equity infusion through IPO/Private equity may be used to restructure debts. In other cases, bankruptcy can be used as a tool for corporate restructuring. If a business is burdened by unsustainable levels of debt, the companies can go through a process of restructuring the debt that allows a company to renegotiate some of its financial obligations and often involves giving equity stake to some creditors in a restructured firm.

Along with any other restructuring, a company may need to restructure its operations to help eliminate wastes. For example, two divisions or departments of a company may perform related functions and in some cases duplicate efforts. Rather than continue to use financial and other resources to fund the operation of both departments, their efforts are combined. This helps reduce costs without impairing the ability of the company to achieve the same ends in a timely manner. Operational restructuring, may also involve downsizing, eliminating staff to reduce costs. Changes to the structure of a corporate workforce bringing in rationalization of human resources or to the processes can improve profitability.

In some cases, restructuring must take place in order for the company to continue operations where the company progressively witnesses sales decline and it no longer generates sustainable profits. The process of operational restructuring includes a review of the costs associated with each sector of the business and an analysis of ways to cut costs and increase the net profit. The process may also do away even in a phased manner with the out dated facilities used in production that are not doing well.

Another kind involves Equity restructuring. Here the Companies that have little debt compared to their equity are underleveraged or have a low gearing ratio .Such companies may adopt buy back of shares. This will have fewer stockholders to satisfy and pay dividends to. Converse to the situation is where the company has profitable projects on the anvil. Here is the opportunity to go for higher debts for projects leveraging the equity. The surplus or deficit of cash can also be used to determine whether high debt is required or whether the assets are required to be sold as the case may be.

Mergers and takeovers also provide inorganic growth and provides basis for restructuring. Companies find it advantageous to pursue joint operations with other Companies whose economic ventures are likely to work better together than apart in terms of the scale of operations, bargaining power with creditors etc. The business activities of both Companies involved in a merger are typically reorganized. In other cases, one firm may simply acquire another outright. Such acquisitions also lead to corporate restructuring.


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