the main project corporate restructuring

CORPORATE RESTRUCTURING

1. INTRODUCTION TO CORPORATE RESTRUCTURING

Corporate restructuring is one of the most complex and fundamental phenomena that

management confronts. Each company has two opposite strategies from which to choose: to

diversify or to refocus on its core business. While diversifying represents the expansion of

corporate activities, refocus characterizes a concentration on its core business. Corporate

restructurings necessary when a company needs to improve its efficiency and profitability and

it requires expert corporate management. corporate restructuring strategy involves the dismantling

and rebuilding of areas within an organization that need special attention from the management

and CEO. The process of corporate restructuring often occurs after buyouts, corporate

acquisitions, takeovers or bankruptcy. It can involve a significant movement of an organization’s

liabilities or assets. A significant modification made to the debt, operations or structure

of accompany. This type of corporate action is usually made when there are significant problems

in a company, which are causing some form of financial harm and putting the overall business

in jeopardy. The hope is that through restructuring, a company can eliminate financial harm and

improve the business.

From this perspective, corporate restructuring is reduction in diversification. Corporate

restructuring is an episodic exercise, not related to investments in new plant and machinery

which involve a significant change in one or more.

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2. MEANING & NEED FOR CORPORATE RESTRUCTURING

Corporate restructuring is one of the means that can be employed to meet the challenges which

confront business.

Corporate restructuring is the process of redesigning one or more aspects of a company. The

process of reorganizing a company may be implemented due to a number of different factors,

such as positioning the company to be more competitive, survive a currently adverse economic

climate, or poise the corporation to move in an entirely new direction. Here are some examples

of why corporate restructuring may take place and what it can mean for the company.

Restructuring a corporate entity is often a necessity when the company has grown to the point

that the original structure can no longer efficiently manage the output and general interests of the

company. For example, a corporate restructuring may call for spinning off some departments

into subsidiaries as a means of creating a more effective management model as well as taking

advantage of tax breaks that would allow the corporation to divert more revenue to the

production process. In this scenario, the restructuring is seen as a positive sign of growth of the

company and is often welcome by those who wish to see the corporation gain a larger market

share. Corporate restructuring may also take place as a result of the acquisition of the company

by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or

a merger of some type that keeps the company intact as a subsidiary of the controlling

corporation. When the restructuring is due to a hostile takeover, corporate raiders often

implement a dismantling of the company, selling off properties and other assets in order to make

a profit from the buyout. What remains after this restructuring maybe a smaller entity that can

continue to function, albeit not at the level possible before the takeover took place In general, the

idea of corporate restructuring is to allow the company to continue functioning in some manner.

Even when corporate raiders break up.

Corporate restructuring is one of the means that can be employed to meet the challenges which

confront business.

Corporate restructuring involves restructuring the assets and liabilities of corporations, including

their debt-to-equity structures, in line with their cash flow needs in order to,

• Promote efficiency,

• Restore growth.

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3. OBJECTIVES OF CORPORATE RESTRUCTURING

Corporate restructuring is much more commonplace in the 21st century.

Corporate restructuring once was a much more rare occurrence than it is today. With technology,

communications and global networking evolving so rapidly, corporations must restructure almost

on an ongoing basis to keep up with the change. Some of the objectives of these restructuring

efforts include erasing debt, evolving with trends and responding to regulatory changes in

various industries.

1. Unloading Unprofitable Businesses

Some corporations have branches or businesses they own that are producing marginal profit or

even losing money. They may have purchased the company when it was doing well but trends

shifted, or perhaps it was part of another merger in which they acquired the weak business along

with a strong one. Whatever the reason, these parts of the business tend to be a drain on the

corporate profits and corporate resources. Corporations may restructure in order to put their best

resources into the parts of the business that make money and sell off or liquidate parts that don't.

2. Eradicating Debt

Many corporations have debt that threaten the viability of the business because the stock fell, the

price of materials rose or consumer demand faltered. These corporations must restructure in

order to pay the debts. This often includes employee layoffs, the selling of assets and a reduction

in benefits for employees who remain. The objective of this kind of corporate restructuring is to

rope the debt to equity ratio back to a number where the corporation can survive.

3. Responding to Changing Trends

Frequently a corporation's business model is based on a trend that has changed.For example, a

construction company may have to alter its business model to creating or retrofitting buildings

according to LEED standards. Likewise, a company whose business centered on telephones and

faxes has to face the change in how the world communicates. These changes often require

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corporate restructuring, selling old assets to buy new and putting people who understand the new

trends and technologies over those who have worked their way up in the old system.

4. Meeting Regulatory Change

Regulatory changes create a need for corporate restructuring. The deregulation of the banking

industry, for example, meant banks could suddenly sell products such as insurance and could

operate across state lines. This required a restructuring along with many mergers and

acquisitions. Regulatory changes resulting from the financial crisis of 2009 are leading to other

corporations' restructuring their businesses, particularly in financial services such banks,

mortgage companies and credit cards.

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4. PURPOSE OF CORPORATE RESTRUCTURING

Restructuring a business can make a business stronger.

When a company or organization is having financial difficulties, one of the tools available is to

implement a restructuring plan. Restructuring can mean anything from eliminating redundant

jobs to closing down departments and even entire facilities. Restructuring sometimes becomes

necessary for businesses to stay competitive. It is of paramount importance to have a business

restructuring plan prior to the restructure.

1. OOC Date

One aspect to include is the “out of cash” date for the business. At some point when a company

is in need of restructuring, it will run out of money unless there are changes made. Keeping the

OOC date at the forefront means you remain aware that the clock is running down.

2. Accounts

Another area to include in a business restructuring plan is overhauling the accounts receivable

department. Too often, a company will get into financial difficulty because of clients with

financial problems of their own. For this reason, having a strong accounts receivable policy will

make for a stronger restructuring process.

3. Personnel

Any business restructuring plan needs to examine where you can cut costs in terms of personnel.

Sometimes, this can be the hardest decision to make, but if a company is to survive, it must use

every cent to its fullest potential. If two workers are doing the job of one, someone needs to go.

If there are multiple locations to restructure, the plan should include the parent company. This

can mean letting people go from the executive level, where there are larger salaries and the more

costly retirement packages.

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4. Future

Your business restructuring plan needs to look to the future. This means putting core policies in

place geared toward survival and growth. To arrive at the restructuring necessary, the business

needs to operate at the most efficient level possible. This might include incorporating new

technologies that can eliminate redundant task processing.

5. Government

Just as businesses restructure, governments can do the same. Governments will often attack a

fiscal problem by going down the path of restructuring, and the same basic principles apply.

Businesses and governments both need to include fiscal responsibilities within the plans, as well

as an examination of the entire organizational structure, determining what you can eliminate or

consolidate.

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5. WHY BUSINESS FIRMS FAIL

Let’s see different reasons same makes failure to corporate:

• An imbalance of skills within the top echelon.

• A chief executive who dominates a firms operations without regard for the inputs of peers

• An inactive board of directors. The board of Directors lack of interest in the financial

position of the company may lead to insolvency.

• A deficient finance function within the firm’s management.

• The absence of responsibility for the chief executive officer.

Apart from the above mistakes the firm usually is vulnerable to several mistakes,

• Management may be negligent in developing effective accounting system

• The company may be unresponsive to change

• Management may be inclined to undertake an investment project that is

disproportionately large relative to firm size. If the project fails the probability of

insolvency is greatly increased.

• Finally the management may rely heavily on debt financing that even a minor problem can

place the firm in a dangerous position.

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6. FIVE PRINCIPLES OF CORPORATE RESTRUCTURING

Be Smart Get experts to help.

Restructuring is both an art and a science. Make sure to enlist help from experienced

restructuring specialists. From the financial and legal advisors to the claims and noticing agent,

these specialists should have experience in managing and dealing with the complexities of the

corporate restructuring process.

Be Quick Time is of the essence.

Recognized authorities in the restructuring industry can guide companies expeditiously in

negotiating and consummating transactions. From pre-planning to emergence, companies can

achieve their goals in a relatively quick period of time with strategic planning and agile

execution.

Be Prepared Organize information efficiently.

From the planning phase through execution, organization of company information is critical. All

key information should be clearly accessible to help expedite the process and easily locate the

required data. Data and other information needed during the process can include financial

statements, vendor listings, employee/retiree listings, contracts, real estate deeds, etc.

Be Transparent Disclosure is good.

Develop a strategic communications strategy to disclose forward progress to relevant

constituencies during the restructuring process– from employees and vendors to financial

institutions and the media. It is critical that you know what to say and how to say it, but it is also

vital to recognize the strategic relevance of your communications.

Be Sensitive Take stakeholders’ financial insecurities into consideration.

When dealing with financial matters of this scale, emotions run rampant. Be sensitive to the

needs of stakeholders and provide reassurance that their matter is one of significance and is

being addressed during the process.

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7. METHODS OF CORPORATE RESTRUCTURING

The important methods of Corporate Restructuring are:

1. Joint ventures

2. Sell off and spin off

3. Divestitures

4. Equity carve out (ECO)

5. Leveraged buy outs (LBO)

6. Management buy outs

7. Master limited partnerships

8. Employee stock ownership plans (ESOP)

1. Joint Ventures

Joint ventures are new enterprises owned by two or more participants. They are typically formed

for special purposes for a limited duration. It is a combination of subsets of assets contributed by

two (or more) business entities for a specific business purpose and a limited duration. Each of the

venture partners continues to exist as a separate firm, and the joint venture represents a new

business enterprise. It is a contract to work together for a period of time each participant expects

to gain from the activity but also must make a contribution.

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Reasons for Forming a Joint Venture

Build on company’s strengths

Spreading costs and risks

Improving access to financial resources

Economies of scale and advantages of size

Access to new technologies and customers

Access to innovative managerial practices.

2. Spin-off

Spinoffs are a way to get rid of underperforming or non-core business divisions that can drag

down profits.

Process of spin-off

1. The company decides to spin off a business division.

2. The parent company files the necessary paperwork with the Securities and Exchange

Board of India (SEBI).

3. The spinoff becomes a company of its own and must also file paperwork with the SEBI.

4. Shares in the new company are distributed to parent company shareholders.

5. The spinoff company goes public.

Sell-off:

Selling a part or all of the firm by any one of means: sale, liquidation, spin-off & so on. or

General term for divestiture of part/all of a firm by any one of a no. of means: sale, liquidation,

spin-off and so on.

3.Divestures

Divesture is a transaction through which a firm sells a portion of its assets or a division to

another company. It involves selling some of the assets or division for cash or securities to a

third party which is an outsider.

Divestiture is a form of contraction for the selling company. means of expansion for the

purchasing company. It represents the sale of a segment of a company (assets, a product line, a

subsidiary) to a third party for cash and or securities.

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Mergers, assets purchase and takeovers lead to expansion in some way or the other. They are

based on the principle of synergy which says 2 + 2 = 5! , divestiture on the other hand is based

on the principle of “anergy” which says 5 – 3 = 3!.

Among the various methods of divestiture, the most important ones are partial sell-off, demerger

(spin-off & split off) and equity carve out. Some scholars define divestiture rather narrowly as

partial sell off and some scholars define divestiture more broadly to include partial sell offs,

demergers and so on.

4. Equity Carve-Out

A transaction in which a parent firm offers some of a subsidiaries common stock to the general

public, to bring in a cash infusion to the parent without loss of control.

In other words equity carve outs are those in which some of a subsidiaries shares are offered for

a sale to the general public, bringing an infusion of cash to the parent firm without loss of

control. Equity carve out is also a means of reducing their exposure to a riskier line of business

and to boost shareholders value.

Features

It is the sale of a minority or majority voting control in a subsidiary by its parents to outsider

investors. These are also referred to as “split-off IPO’s”

A new legal entity is created.

The equity holders in the new entity need not be the same as the equity holders in the

original seller.

A new control group is immediately created.

5. Leveraged Buyout

A buyout is a transaction in which a person, group of people, or organization buys a company or

a controlling share in the stock of a company. Buyouts great and small occur all over the world

on a daily basis.

Buyouts can also be negotiated with people or companies on the outside. For example, a large

candy company might buy out smaller candy companies with the goal of cornering the market

more effectively and purchasing new brands which it can use to increase its customer base.

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Likewise, a company which makes widgets might decide to buy a company which makes

thingamabobs in order to expand its operations, using an establishing company as a base rather

than trying to start from scratch.

Features of Leveraged Buyout

Low existing debt loads;

A multi-year history of stable and recurring cash flows;

Hard assets (property, plant and equipment, inventory, receivables) that may be used as

collateral for lower cost secured debt;

The potential for new management to make operational or other improvements to the firm to

boost cash flows;

Market conditions and perceptions that depress the valuation or stock price.

6. Management buyout

In this case, management of the company buys the company, and they may be joined by

employees in the venture. This practice is sometimes questioned because management can have

unfair advantages in negotiations, and could potentially manipulate the value of the company in

order to bring down the purchase price for themselves. On the other hand, for employees and

management, the possibility of being able to buy out their employers in the future may serve as

an incentive to make the company strong.

It occurs when a company’s managers buy or acquire a large part of the company. The goal of an

MBO may be to strengthen the managers’ interest in the success of the company.

Purpose of Management buyouts

From management point of view may be:

To save their jobs, either if the business has been scheduled for closure or if an outside

purchaser would bring in its own management team.

To maximize the financial benefits they receive from the success they bring to the company

by taking the profits for themselves.

To ward off aggressive buyers.

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The goal of an MBO may be to strengthen the manager’s interest in the success of the company.

Key considerations in MBO are fairness to shareholders price, the future business plan, and legal

and tax issues.

7. Master Limited Partnership

Master Limited Partnership’s are a type of limited partnership in which the shares are publicly

traded. The limited partnership interests are divided into units which are traded as shares of

common stock. Shares of ownership are referred to as units.

MLPs generally operate in the natural resource (petroleum and natural gas extraction and

transportation), financial services, and real estate industries.

The advantage of a Master Limited Partnership is it combines the tax benefits of a limited

partnership (the partnership does not pay taxes from the profit – the money is only taxed when

unit holders receive distributions) with the liquidity of a publicly traded company.

8. Employees Stock Option Plan (ESOP)

An Employee Stock Option is a type of defined contribution benefit plan that buys and holds

stock. ESOP is a qualified, defined contribution, employee benefit plan designed to invest

primarily in the stock of the sponsoring employer. Employee Stock Option’s are “qualified” in

the sense that the ESOP’s sponsoring company, the selling shareholder and participants receive

various tax benefits. With an ESOP, employees never buy or hold the stock directly.

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8. ADVANTAGES AND DISADVANTAGES OF CORPORATE

RESTRUCTURING

Advantages of corporate restructuring

legal protection of the debtor from creditors

recovery of society based on the forgiveness of liabilities (debt elimination)

protection of assets (it is not possible for the creditors to proceed with the execution of

lien, distraint and legal proceedings are suspended and subsequently stopped)

providing time for the re-launch of the copmany (7-9 months)

maintenance of economic independence and legal personality of the debtor

preserving jobs etc.

unblocking of the debtor's bank accounts

the inability to count old liabilities with new liabilities that arose after the beginning of

the restructuring process (the company does not carry out old obligations after the

beginning of restructuring; others have to carry out obligations towards the restructured

company)

supervision of the administrator over the process of restructuring

after succesful restructuring, a company can operate without restrictions

greater satisfaction of creditors than during bankruptcy

relative and gradual satisfaction of creditors (distribution of liabilities over a longer

period of time)

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Disadvantages of corporate restructuring

During the restructuring process, the administrator approves the debtor's legal

actions (with the exception of common legal actions)

In case the restructuring plan is not approved, the company is

declared bankrupt (There is a possibility to replace a group disapproval with the

restructuring plan with a court decree)

In case the plan towards the creditor is not being fulfilled (even after additional

appeal) the plan becomes legally unenforceable towards this creditor

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9. CHARACTERISTICS OF CORPORATE RESTRUCTURING –

1. To improve the country’s Balance sheet ,(by selling unprofitable division from its core

business)

2. To accomplish staff reduction (by selling/ closing of unprofitable portion)

3. Changes in corporate mgt

4. Sale of underutilized assets, such as patents/brands.

5. Outsourcing of operations such as payroll and technical support to a more efficient 3rd

party.

6. Moving of operations such as manufacturing to lower-cost locations.

7. Reorganization of functions such as sales, marketing, & distribution

8. Renegotiation of labor contracts to reduce overhead

9. Refinancing of corporate debt to reduce interest payments.

10. A major public relations campaign to reposition the co., with consumers.

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10.TYPES OF CORPORATE RESTRUCTURING

Business firms engage in a wide range of activities that include expansion, diversification,

collaboration, spinning off, hiving off, mergers and acquisitions. Privatization also forms an

important part of the restructuring process. The different forms of restructuring may include:

Expansion: Expansions may include mergers, acquisitions, tender offers and joint ventures.

Mergers per se, may either be horizontal mergers, vertical mergers or conglomerate mergers. In a

tender offer, the acquiring firm seeks controlling interest in the firm to be acquired and requests

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EXPANSION

Mergers & Acquisitions

Tender Offers

Joint Ventures

SELL – OFFs

Spin-Off

Split- Off

Equity Crave -Out

CORPORATE CONTROL

Premium Buy Back

Anti -Take Over’s

Standstill Agreements

CHANGE IN OWNERSHIP

Exchange Offer

Share Repurchase

Going Private



the shareholders of the firm to be acquired, to tender their shares or stock to it. Joint ventures

involve only a small part of the activities of the companies involved.

Sell-Off: Sell-Off may either be through a spin-off or divestiture. Spin-Off creates a new entity

with shares being distributed on a pro rata basis to existing shareholders of the parent company.

Split-Off is a variation of Sell-Off. Divestiture involves sale of a portion of a firm/company to a

third party.

Corporate Control: Corporate control includes buy-backs and greenmail where the

management of the firm wishes to have complete control and ownership.

Change in Ownership: Change in ownership may either be through an exchange offer, share

repurchase or going public.

An example: Cesar Steel Announces Restructuring Plans

Cesar Steel Limited recently announced its restructuring plan through which the company plans

to reduce its interest burden. The company has also initiated several other steps including

increasing production and lowering operating costs as a part of its restructuring program. The

company also announced the development of a strategy addressing its debt burden-reduction and

lengthening the maturity period.

Other restructuring programs initiated by the company included:

Raising equity through rights issue

Reduction in usage of power

The company, subsequent to its restructuring program, expects to be in a position to make net

profits, declare dividends and enhance shareholder value.

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11.THE CHALLENGE OF CORPORATE RESTRUCTURING

Large-scale corporate restructuring made necessary by a financial crisis is one of the

most daunting challenges faced by economic policymakers. The government is forced

to take a leading role, even if indirectly, because of the need to prioritize policy goals,

address market failures, reform the legal and tax systems, and deal with the resistance

of powerful interest groups. The objectives of large-scale corporate restructuring are

in essence to restructure viable corporations and liquidate nonviable ones, restore the

health of the financial sector, and create the conditions for long-term economic

growth.

Successful government-led corporate restructuring policies usually follow a sequence.

First, the government should formulate macroeconomic and legal policies that lay the

foundation for successful restructuring. After that, financial restructuring must start to

establish the proper incentives for banks to take a role in restructuring and get credit

flowing again. Only then can corporate restructuring begin in earnest with the

separating out of the viable from nonviable corporations—restructuring the former

and liquidating the latter. The main government-led corporate restructuring tools are

mediation, incentive schemes, bank recapitalization, asset management companies,

and the appointment of directors to lead the restructuring. After achieving its goals,

the government must cut back its intervention in support of restructuring.

Tasks of Restructuring

Corporate restructuring on a large scale is usually made necessary by a systemic

financial crisis—defined as a severe disruption of financial markets that, by impairing

their ability to function, has large and adverse effects on the economy. The

intertwining of the corporate and financial sectors that defines a systemic crisis

requires that the restructuring address both sectors together.

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12. CATEGORY OF CORPORATE RESTRUCTURING

Corporate Restructuring entails a range of activities including Financial Restructuring and

Organization Restructuring.

Financial Restructuring

Financial Restructuring is the reorganization of the financial assets and liabilities of corporation

order to create the most beneficial financial environment for the company. The process of

financial restructuring is often associated with corporate restructuring, in that restructuring the

general function and composition of the company is likely to impact the financial health of the

corporation. When completed this reordering of corporate assets and liabilities can help the

company to remain competitive, even in a depressed economy. Just about every business goes

through a phase of financial restructuring at one time or another. In some cases, the process of

restructuring takes place as the means of allocating resources for new marketing campaign or the

launch of the new product line. When this happens, the restructure is often viewed as a

sign that the company is financially stable and has set goals for future growth and expansion.

Corporate Restructuring entails a range of activities including Financial Restructuring and

Organization Restructuring.

Organizational restructuring

Organizational restructuring has become a very common practice amongst the firms in

order to match the growing competition of the market. This makes the firms to change the

organizational structure of the company for the betterment of the business.

Some of the prime reasons for organizational restructuring are as follows:

Changing nature of the markets

The continuous innovations in technology, product, work processes, materials, organizational

culture and structure

Various actions of work force values, global competitors, demands and diversity

Ethical constraints and regulations

Individual transition and development of the business

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The most common features of organizational restructures are:

Regrouping of business

This involves the firms regrouping their existing business into fewer business units. The

management then handles theses lesser number of compact and strategic business units in an

easier and better way that ensures the business to earn profit.

Downsizing

Often companies may need to retrench the surplus manpower of the business. For that purpose

offering voluntary retirement schemes (VRS) is the most useful tool taken by the firms for

downsizing the business's workforce.

Decentralization

In order to enhance the organizational response to the developments in dynamic environment, the

firms go for decentralization. This involves reducing the layers of management in the business so

that the people at lower hierarchy are benefited.

Outsourcing

Outsourcing is another measure of organizational restructuring that reduces the manpower and

transfers the fixed costs of the company to variable costs.

Business Process Engineering

It involves redesigning the business process so that the business maximizes the operation and

value added content of the business while minimizing everything else.

Total Quality Management

The businesses now have started to realize that an outside certification for the quality of the

product helps to get a good will in the market. Quality improvement is also necessary to improve

the customer service and reduce the cost of the business.

The perspective of organizational restructuring may be different for the employees. When a

company goes for the organizational restructuring, it often leads to reducing the manpower and

hence meaning that people are losing their jobs. This may decrease the morale of employee in a

large manner. Hence many firms provide strategies on career transitioning and outplacement

support to their existing employees for an easy transition to their next job.

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13. BANK AND CORPORATE RESTRUCTURING

Weaknesses in financial and corporate sectors were at the heart of the Asian crisis. In a situation

where rapid financial liberalization had outpaced institutional capacities, vulnerabilities

accumulated and put at risk the solvency of large parts of the affected economies. Inadequate

regulation, weak supervision of financial institutions, poor accounting standards and disclosure

rules, outmoded laws, corporate recklessness and inferior governance all played their part.

Together, these factors seemed to legitimize investor panic that culminated in the disorderly

collapse of asset prices and exchange rates. Prompted in part by the terms of international

assistance packages, the affected economies have now embarked on the complex and time

consuming task of tackling these institutional deficits. This section reviews the progress made in

financial and corporate restructuring in the affected countries of Asia. To begin with, some

analytical background is provided and lessons from managing crises elsewhere are summarized.

Next, the approaches to restructuring that have been taken in Indonesia, Korea, Malaysia, and

Thailand are described. The Philippines, on the other hand, did not experience a systemic

banking crisis. Hence, the discussion of reforms in the Philippines is brief. Finally, progress to

date is evaluated.

RESTRUCTURING THE FINANCIAL SECTOR

Even after the foundation has been laid, corporate restructuring cannot begin to make

headway without substantial progress in restructuring the financial sector. The

draining of bank capital as part of the crisis will usually lead to a sharp cutback in

lending to viable and nonviable corporations alike, worsening the overall contraction.

Moreover, banks must have the capital and incentives to play a role in restructuring.

The first task of financial restructuring is to separate out the viable from the nonviable

financial institutions to the extent possible. To do this work, financing and technical

assistance from international financial institutions can be helpful, as in Indonesia

following the 1997 crisis.

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Nonviable banks should be taken over by the government and their assets eventually

sold or shifted to an asset management corporation, while viable banks should be

recapitalized. Banks should be directly recapitalized for normal operation or else, in

the absence of strong competitive pressures, they may impede recovery by

recapitalizing themselves indirectly through wide interest rate spreads. At the same

time the government should ensure that bank regulation and supervision is strong

enough to maintain a stable banking sector.

There is a degree of circularity here in that the separation of viable from nonviable

banks is helped by completion of the same task for corporations, which itself is aided

by financial restructuring. The best way to close this circle seems to be rapid

restructuring of the banks because a cutback in bank financing to corporations

amplifies the overall contraction, and has irreversible consequences—such as the sale

of assets too cheaply.

RESTRUCTURING THE CORPORATE SECTOR

Corporate restructuring can begin in earnest only when banks and market players are

willing and able to participate. As with the financial sector, the first task

is distinguishing viable from nonviable corporations. Nonviable corporations are

those whose liquidation value is greater than their value as a going concern, taking

into account potential restructuring costs, the "equilibrium" exchange rate, and interest

rates. The closure of nonviable firms ensures that they do not absorb credit or worsen

bank losses. However, the identification of nonviable corporations is complicated by

the poor overall performance of the corporate sector during and just after the crisis.

Viable and nonviable firms can be identified using profit simulations and balance

sheet projections, as well as best judgment.

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Liquidating nonviable corporations during a systemic crisis usually requires the

establishment of new liquidation mechanisms that bypass standard court-based

bankruptcy procedures. The bankruptcy code of the United States can be taken as the

standard minimal government involvement approach. In practice, however, this code

has a strong liquidation bias—some 90 percent of cases end in liquidation, and

reorganization takes a long time. Moreover, courts are usually unable to handle a large

volume of cases, lack expertise, and may be subject to the influence of vested

interests. Giving debtors protection from bankruptcy during mediation proceedings

allows corporations that are later judged to be viable to remain operating and enables

the orderly liquidation of nonviable corporations. If debtors are protected from

bankruptcy, however, monitoring of the corporations is needed to ensure that

incumbent managers do not hive off the most profitable assets. Liquidation can be

speeded up by special courts or new bankruptcy laws. Hungary introduced a tough

bankruptcy law in 1991 under which firms in arrears were required to submit

reorganization plans to creditors; if agreement was not reached, firms were liquidated.

Also, a standstill on payments to banks during negotiations allows cash-strapped

corporations to continue operation while their viability is being decided. Without

effective bankruptcy procedures, restructuring can be significantly slowed down, as

happened in many of the transition countries, in Mexico in 1995, and especially in

Indonesia after the 1997 Asian crisis.

The government must also decide on disposal of the assets of liquidated corporations.

Delays in asset disposal tie up economic resources, slow economic recovery, and

impede corporate restructuring.

Of course, the balance sheets of viable corporations must be restructured.

Restructuring will involve private domestic and foreign creditors, newly state-owned

creditors, and asset management corporations, as well as stakeholders such as unions

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and governments. Usually, balance sheet restructuring takes place through the

reduction of debt or through the conversion of debt into equity. Often minority

creditors slow debt restructuring by threatening to liquidate the debtor in an attempt to

force majority creditors to buy them out on favorable terms. This coordination

problem can be avoided by rules that allow less-than-unanimous creditor approval of

reorganization plans, which can be enforced by government moral suasion, by prior

creditor agreement to a set of principles, or through bankruptcy proceedings.

Early completion of relatively clear-cut transactions can jump-start the restructuring

program. Restructuring is often delayed by difficulties in valuing transactions because

of economic instability and unreliable corporate data.

Long delays in implementing bankruptcy reforms greatly slowed the large-scale

corporate restructuring efforts of the mid- and late 1990s. By early 2000, Mexico had

still not completed bankruptcy law reform, even though there had been a sharp drop in

bank claims on the private sector since the country's 1995 crisis. In East Asia,

ineffectual bankruptcy laws stymied corporate restructuring by allowing nonviable

firms to stay afloat, which not only precluded banks from collecting the underlying

collateral, but also acted as a disincentive for viable firms to repay their debt—further

hurting the banks. Delays in bankruptcy reform are due mainly to pressures from

groups and individuals who would be hurt by the liquidation of nonviable firms, as

well as by the time needed to bring up to speed legal systems faced with a sudden

increase in bankruptcy cases.

Transparency is one positive suggestion for bankruptcy reform: regular government

disclosure of all the aspects of restructuring can make clear the impediments put in the

way by vested interest groups, and thus lead to public pressure to accelerate reform.

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14. THE MAJOR REASONS FOR RESTRUCTURING

Changed Nature of Business

In today’s business environment, the only constant is change. Companies that refuse to change

with the times face the risk of their product line becoming obsolete. Because of this, businesses

experiment with new products, explore new markets, and reach out to new groups of customers

on a continuous basis. Businesses seek to diversify into new areas to increase sales, optimize

their capacity, and conversely shed off divisions that do not add much value, to concentrate on

core competencies instead.

All such initiatives require restructuring. For instance, expansion to an overseas market may

require changes in the staff profile to better connect with the international market, and changes in

work policies and routines to ensure compliance with export regulations. Starting a new product

line may require changes in the system of work, hiring new experts familiar in the business line

and placing them in positions of authority, and other interventions. Hiving off unprofitable or

unneeded business lines may require changes to retain specific components of such divisions that

the main business may wish to retain.

Downsizing

One common reason for restructuring a company is to downsize the workforce. The changing

nature of economy may force the business to adopt new strategies or alter their product mix,

making staff redundant. Similarly, cutthroat competition and pressure on margins from

competitors who adopt a low price strategy may force the company to adopt lean techniques, just

in time inventory, and other measures to cut input costs and achieve process efficiency.

In such situations, the organization will need to redo job descriptions, rework its team, group,

and communication structures and reporting relationships to ensure that the remaining workforce

does the job well. Very often, downsizing-induced restructuring leads to a flatter organizational

structure, and broader job descriptions and duties.

New Work Methods

Traditional organizational systems and controls cater to standard 9 AM to 5 PM office or factory

based work. Newer methods of work, especially outsourcing, telecommuting, and flex time

require new systems, policies, and structures in place, besides a change in culture, and such

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requirements may trigger organizational restructuring.

The presence of telecommuting employees, temporary employees, and outsourcing work may

require a drastic overhaul of performance management parameters, compensation and benefits

administration, and other vital systems. The newer work methods may, for instance, require

placing emphasis on the results rather than the methods, flexible reporting relationships, and a

strong communication policy.

New Management Methods

Traditional management science recommends highly centralized operations, and the top

management adopting a command and control style. The new behavioral approach to

management considers human resources a key driver of strategic advantage, and focuses on

empowering the workforce and providing considerate leeway to line managers in conducting

day-to-day operations. The top management intervenes only to set strategy and ensure

compliance; strategic business units receive autonomy in functioning.

Traditional management structures were bureaucratic and hierarchical. Of late, management

experts see wisdom in flatter organizations with wider roles and responsibilities for each member

of the team. Job flexibility, enlargement and enrichment are key features of such new structures,

but successful implementation requires changes in the communication and reporting structures of

the organization. While new organizations can start with such new paradigms, old organizations

have to restructure themselves to keep up with these best practices to remain competitive.

Quality Management

Competitive pressures force most companies to have a serious look at the quality of their

products and services, and adopt quality interventions such as Six Sigma and Total Quality

Management. Implementing new quality standards may require changes in the organization.

Most of the new quality applications strive to imbibe quality in the actual work process rather

than maintain a separate quality control department to accept or reject output based on quality

specifications.

In many cases, an organizational level audit precedes quality interventions, and such audits

highlight inefficiencies in the organizational structure that may impede quality in the first place.

For instance, reducing waste may require eliminating certain processes,

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Technology

Innovations in technology, work processes, materials and other factors that influence the

business, may require restructuring to keep up with the times. For instance, enterprise resource

planning that links all systems and procedures of an organizational by leveraging the power of

information technology may initially require a complete overhaul of the systems and procedures

first.

Such technology-centric change may be part of a business process engineering exercise that

involves redesigning the business processes to maximize potential and value added, while

minimizing everything else. Failure to do so may result in the company systems and procedures

turning obsolete and discordant with the times.

Mergers and Acquisitions

In today’s corporate world, where survival of the fittest is the maxim, mergers and acquisitions

are commonplace and any merger or acquisition invariably heralds a restructuring exercise. The

reasons for such restructuring accompanying mergers and acquisitions are many. Some of the

common reasons are:

Reconciling the systems and procedures of the merged organizations to ensure that the new

entity has consistency of approach.

Eliminating duplication of work or systems, such as two human resource or finance departments.

Incorporating the preferences of the new owners, and more.

Joint ventures may also require formation of matrix teams, special task forces, or a new

subsidiary.

Finance Related Issues

Very often, small and medium scale businesses have informal structures and reporting

relationships, and an ad-hoc style of decision-making. When such companies grow and want to

raise fresh funds, venture capitalists and regulations might demand a more professional set up,

with formal written-down structures and policies. A listed company may undertake a

restructuring exercise to improve its efficiency and unlock hidden value, and thereby show more

profits to attract fresh investors.

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Bankruptcy may force the business to shed excess flab such as workforce, land, or other

resources, sell some business lines to raise cash, and become lean and mean, to attract bail-outs

or some other rescue package. Companies may try to restructure out of court to avoid the high

costs of a formal bankruptcy.

Induce Higher Earnings

The two basic goals of corporate restructuring may include higher earnings and the creation of

corporate value. Creation of corporate value largely depends on the firm’s ability to generate

enough cash.

Divestiture and Networking

Companies, while keeping in view their core competencies, should exit from peripherals. This

can be realized through entering into joint ventures, strategic alliances and agreements.

Provide Proactive Leadership

Management style greatly influences the restructuring process. All successful companies have

clearly displayed leadership styles in which managers relate on a one-to-one basis with their

employees.

Empowerment

Empowerment is a major constituent of any restructuring process. Delegation and decentralized

decision making provides companies with effective management information system.

Reengineering Process

Success in a restructuring process is only possible through improving various processes and

aligning resources of the company. Redesigning a business process should be the highest priority

in a corporate restructuring exercise.

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15. FORMS OF CORPORATE RESTRUCTURING

Corporate restructuring changes the way a company approaches finances, technology or its

business focus.

Corporate restructuring is a general term used to describe major changes within a company.

These changes usually affect basic business practices, redetermining who makes the major

decisions in a company or how certain parts of its business plan are approached. The type of

restructuring depends on the elements of the business being affected and the reasons that the

restructuring is occurring.

Internal Restructuring

Corporate restructuring occurs based on the needs of the company. Internal restructuring

typically occurs as a result of business analysis that shows a need for greater efficiency in the

way business departments communicate and complete tasks. Sometimes a particular segment of

the business will start to fail, and the company will need to reallocate resources in order to

support it. Sometimes a business may have expanded to much, and needs to refocus on its core

abilities. At other times a business may need to restructure its financial position in order to

continue making profits. Often, restructuring plans are necessary simply to meet the constantly

change demands of technology that competitors are embracing. Not all reasons for restructuring

are negative, and many benefit employees as well as executives in the company.

Financial Restructuring

Financial restructuring deals with all changes the businesses makes to its debts and equity,

including mergers, acquisitions, joint ventures and other deals. Generally these occur when a

company joins or is bought by another company. Ownerships of the company, or at least some

interest in the company, is transferred to another organization or group of investors. Actual

business practices may remain unchanged.

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Technological Restructuring

Technological restructuring occurs when a new technology has been developed that changes the

way an industry operates. This type of restructuring usually affects employees, and tends to lead

to new training initiatives, along with some layoffs as the company improves efficiency. This

type of restructuring also involves alliances with third parties that have technical knowledge or

resources.

Restructuring Methods

Restructuring methods are typically divided into expansion, refocusing, corporate control, and

ownership structure. The last two, corporate control and ownership structure, apply mostly to

financial changes and affect ownership. Corporate control, for instance, is a method where the

company buys back enough shares to be able to make its own decisions again. Expansion occurs

with acquisition, mergers, or joint ventures. Refocusing can take many forms, including business

splits, sell offs of certain ventures, and general consolidation practices.

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16. THE EFFECTS OF A CORPORATE RESTRUCTURING

STRATEGY

Corporate restructuring is a legal maneuver employed by a company with too much debt and not

enough income or a business model that is proving unsuccessful. The effects of restructuring are

varied and range from nervous nail-biting from shareholders to employees wondering about job

security. A corporation with a well-honed restructuring strategy can mitigate these initial worries

and emerge a leaner company with a profitable business plan.

Find the Specific Problem

A corporate restructuring strategy must determine and effectively target the specific

challenge or problem the corporation is facing. This allows the corporation's rebuilding

efforts the best chance for success without hindering any parts of the company that are

currently working well. At its best, a restructuring is a highly targeted surgical strike that

fixes the problem without dismantling the whole company to do it. A restructuring strategy

that lacks direction can often cause more harm for a corporation by worsening an existing

problem and weakening functioning departments or business strategies.

Management Understanding

All levels of management must have an understanding of the corporation's overall

restructuring strategy. This allows managers to prepare employees for possible changes

within departments, and to develop new operational strategies to meet shifting corporate

priorities. Managers may also have to prepare for the possibility of difficult business

decisions resulting from corporation restructuring. Department sizes many shrink, causing

employee layoffs along with pay cuts for managers. Departments may also merge with other

departments in a corporation as a result of the restructuring. Managers must understand how

the corporation's new leadership structure operates in order to ensure that productivity stays

at a high level.

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Effects on Investors

Corporate restructuring makes investors nervous. This can cause a stock sell-off that

decreases the overall value of the corporation and exacerbates the underlying reason for the

restructuring. A corporation undergoing a restructuring must develop a proactive strategy to

communicate to investors all the positives that will come with reorganization. Investor funds

are a key component in the restructuring process. If a corporation loses a large number of

investors, it may experience difficulty raising capital needed to bring its restructuring plan to

fruition.

Improving Organizational Direction

A company emerging from a successful restructuring should have an improved

organizational direction with increased focus and streamlined operational costs. The

company's new direction should revolve around a set of specific business goals identified in

the very beginning stages of restructuring. Business goals could be as simple as turning a

profit, or as complex as dividing the corporation into several new companies, all with

specific business models and different product offerings.

Find the Specific Problem

A corporate restructuring strategy must determine and effectively target the specific

challenge or problem the corporation is facing. This allows the corporation's rebuilding

efforts the best chance for success without hindering any parts of the company that are

currently working well. At its best, a restructuring is a highly targeted surgical strike that

fixes the problem without dismantling the whole company to do it. A restructuring strategy

that lacks direction can often cause more harm for a corporation by worsening an existing

problem and weakening functioning departments or business strategies.

Management Understanding

33


All levels of management must have an understanding of the corporation's overall

restructuring strategy. This allows managers to prepare employees for possible changes

within departments, and to develop new operational strategies to meet shifting corporate

priorities. Managers may also have to prepare for the possibility of difficult business

decisions resulting from corporation restructuring. Department sizes many shrink, causing

employee layoffs along with pay cuts for managers. Departments may also merge with other

departments in a corporation as a result of the restructuring. Managers must understand how

the corporation's new leadership structure operates in order to ensure that productivity stays

at a high level.

Effects on Investors

Corporate restructuring makes investors nervous. This can cause a stock sell-off that

decreases the overall value of the corporation and exacerbates the underlying reason for the

restructuring. A corporation undergoing a restructuring must develop a proactive strategy to

communicate to investors all the positives that will come with reorganization. Investor funds

are a key component in the restructuring process. If a corporation loses a large number of

investors, it may experience difficulty raising capital needed to bring its restructuring plan to

fruition.

Improving Organizational Direction

A company emerging from a successful restructuring should have an improved

organizational direction with increased focus and streamlined operational costs. The

company's new direction should revolve around a set of specific business goals identified in

the very beginning stages of restructuring. Business goals could be as simple as turning a

profit, or as complex as dividing the corporation into several new companies, all with

specific business models and different product offerings.

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17.CONCLUSION

Corporate restructuring on a large scale is potentially one of the most challenging tasks faced by

economic policymakers. The need for large-scale restructuring arises in the aftermath of a

financial crisis when corporate distress is pervasive. The successful completion of restructuring

requires a government to take the lead in establishing restructuring priorities, addressing market

failures, reforming the legal and tax systems.

For instance, in a Banking sector, the best way is to rebuild the financial company around

currently profitable and cash positive business units (like credit cards and short term personal

loans), while cutting all the unprofitable units (like Auto finance or long term business loans).

Some general lessons regarding large-scale corporate restructuring that can be drawn from the

experience of the countries examined in this pamphlet are as follows:

Governments should be prepared to take on a large role as soon as a crisis is judged to be

systemic.

Measures should be taken quickly to offset the social costs of crisis and restructuring.

Restructuring should be based on a holistic and transparent strategy encompassing corporate

and financial restructuring.

Restructuring goals should be stated at the outset, and sunset provisions embedded into the

enabling legislation for new restructuring institutions based on these goals.

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A determined effort to establish effective bankruptcy procedures in the face of pressures from

vested interest groups is essential.

Large-scale post-crisis corporate restructuring takes a minimum of five years to complete, on

average. Finally, crisis can ultimately boost long-term growth prospects both by weakening

special interests that had previously blocked change, and through the successful completion of

corporate restructuring.

18. WEBLIOGRAPHY

WEB SITES

www.valueadder.com

www.wisegeek.com

www.equitymaster.com

www.investopedia.com

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the main project corporate restructuring

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