Chapter 1

Corporate Restructuring

DefinitionMeaning and Definitions(a) The term ‘Restructuring’ as per Oxford dictionary means, “to

give a new structure to rebuild or rearrange”. (b) Sander defines as “Restructuring is an attempt to change the

structure of an institution in order to relax some or all of the short-run constraints. It is concerned with changing structures in pursuit of a long-run strategy.

(c) Crum & Goldberg define restructuring of a company as “a set of discrete decisive measures taken in order to increase the competitiveness of the enterprise and thereby to enhance its value”.

Contd.Corporate restructuring can be defined as any change in

the business capacity or portfolio that is carried out by an inorganic route.

orAny change in the capital structure of a company that is

not a part of its ordinary course of business.or

Any change in the ownership of or control over the management of the company or a combination of any two or all of the above.

Corporate RestructuringI. (a) Any change in the business capacity or portfolio carried

out by inorganic route

Tata Motors launched Sumo and later, Indica- leading to an expansion of its business portfolio. However, these products were launched from Tata Motor’s own manufacturing capacity in through an organic route. Hence, it would not qualify as ‘corporate restructuring’

Tata Motors’ acquisition of Jaguar Land Rover from Ford, through Jaguar Land Rover Limited is ‘corporate restructuring’

(b) Change in the business portfolio could also be in the nature of reduction of business handled by a company

In the case of Grasim and L&T, the demerger of L&T’s cement business into UltraTech Cement Limited was reduction of its business portfolio and thus, amounted to ‘corporate restructuring’ of L&T.

Contd.II. Any change in the capital structure of a company that is

not in the ordinary course of its business

Capital structure refers to debt equity ratio, i.e. the proportion of debt and equity in the total capital of a company.

Within a targeted or planned range if the debt/equity ratio fluctuates, such changes in the capital structure do not amount to ‘capital restructuring’.

Borrowing of a significant amount of term loan or an issue of five year non-convertible debenture do not qualify to be called ‘corporate restructuring’ .

An initial public issue, or a follow-on public issue or buy-back of equity shares would permanently alter the capital structure of a company, and thus, would amount to ‘corporate restructuring’.

Contd.III Any change in the ownership of a company or

control over its management

a) Merger of two or more companies belonging to different promoters

b) Demerger of a company into two or more with control of the resulting company passing on to other promoters

c) Acquisition of a companyd) Sell-off of a company or its substantial assetse) Delisting of a company

All these would qualify to be called exercises in ‘corporate restructuring’.

The Activities or Changes which are not termed ‘Corporate Restructuring’

I Initial creation of a corporate structure Its various examples are:

– Incorporation of a limited company– Conversion of a proprietary concern into a company– Conversion of a partnership firm into a company– Conversion of a private company into a public company

II. Change in the internal command structure or hierarchy

The command structure of an organization or its hierarchy simply means the reporting relationships among the employees, managers, top management and their various functions.

– Functional organization– Divisional organization– Matrix organization

Contd.III. Change in the business process

This is also called ‘reengineering’. ‘Reengineering, properly, is the fundamental rethinking and redesign of business processes to achieve dramatic improvement in critical, contemporary measures of performance, such as cost, quality, service and speed.’

It refers to the radical redesigning of business processes and not to the ownership and control or to the capital structure of the organization.

Reengineering is also outside the ambit of ‘corporate restructuring’.

Contd.

IV. Downsizing It is another form of organizational change in which the

business organization substantially cuts down on its manpower, recurring cost and/or capital expenditure, either as an objective itself or as a result of reengineering.

Downsizing is also outside the purview of ‘corporate restructuring’.

V. Other activities Activities such as outsourcing, enterprise resource

planning, total quality management, franchising alliances, networking alliances and licensing do not classify as corporate restructuring activities.

• Financial Restructuring:– Involves change in the capital structure and capital

mix of the company to minimize its cost of capital

– Also involves infusion of financial resources to facilitate mergers, acquisitions, joint venture, strategic alliances, LBOs, and stock buy-back

– Depends on availability of free cash flows, takeover threats faced by the company and concentration of equity ownership.

• Generate cash for exploiting available investment opportunities

• Ensure effective use of available financial resources

• Change the existing financial structure, in order to reduce the cost of capital

• Leveraging the firm

• Preventing attempts of hostile takeover.

• Involves divesting or acquiring a line of business perceived peripheral to the long term business strategy of the company.

• Represents the company’s attempt to respond to the marketing needs without losing sight of its core competencies.

• Purpose:

– Restructuring as a result of some strategic alliance – Responding to shareholder’s desire to downsize and

refocus the company’s operations – Responding to outside board’s suggestion to

restructure

• Restructuring strategy designed to increase the efficiency and effectiveness of personnel, through significant changes in the organizational structure

• Is a response changes in the business and related environments.

• Takes the form of divestiture and acquisitions.

Why Corporate Restructuring?• Increased Competition• Advent of a new and more efficient technology• Emergence of new markets• Emergence of new classes of consumers• Demographic changes• Business cycles• Change in fiscal and government policies• Liberalization, Privatization, and Globalization (LPG)• Cost Reduction• Divestment• Improving profits• Core Competencies • Enhancing shareholder value • Incompatible company objectives

• Inadequate commitment from the Top management• Resistance to change• Poor communication• Absence of requisite skills• Scepticism • Failure to understand the benefits of restructuring• Availability of resources• Organizational Workload• Non adherence to time schedule• Lack of clear and visible leadership

• Investors– Represent individuals, institutions and companies that

have financial stake in the company

– Investors concerned about immediate future and long-term returns

– Restructuring generates severe financial implications and this creates insecurity and uncertainty in the minds of the investors

• Customers – Restructuring often results in reallocation of resources,

introduction of new products or withdrawal of the existing products, changes in the after sales policy of the company, etc.

– Often result in erosion of customer base and confidence and adversely affect future business prospects.

– Focus on the needs and expectations of the customer by providing quality products and reducing the lead time needed

• Management – Restructuring results in changes in business processes,

introduction of changes that suit change in processes, changes in systems and in ensuring effective communication with all the stakeholders

– Helps release financial resources blocked in unproductive assets and low return assets and businesses

– Diverts core competencies to core areas reducing the risk of failure

– Provides an opportunity to the management to prove its ability to ‘manage the change’

• Employees:

– Restructuring impacts them psychologically, culturally and materialistically.

– ‘Patterned Mindset’, makes acceptance of new set of challenges difficult

– Creates fears in their mind leading to psychological turmoil

– Involves unlearning old skills and acquiring new skills

• Others Stakeholders:– Reduction in competition as weak and inefficient players

exit the market – Companies in a better position to seize new opportunities

and creating new businesses.– Contributes to the growth of the national economy– Government may have to provide resources and subsidies

to such companies which imposes burden on the national exchequer

– Leads to lot of social discontent and can create political instability

Choice of Corporate Restructuring

The term “corporate restructuring” is quite wide covering various aspects. It may be chosen from among four broad groups, viz.

(a) Expansion(b) Contraction(c) Corporate Control and (d) Changes in Ownership Structures