Corporate restructuring refers to the act of changing ownership, business mix, asset mix & alliance with a view to enhancing the shareholder’s value and interest. Corporate restructuring may involve ownership restructuring, business restructuring, and asset restructuring for the purpose of making it more efficient and more.
Here we will be discussing what is corporate restructuring. and its meaning, definition, importance, objectives, and types in detail below
► What is Corporate Restructuring?
- Corporate restructuring is the process of changing or redesigning existing one or more aspects of a company.
- A company can affect ownership restructuring through mergers & acquisitions, leveraged buyouts, buyback of shares, spin-offs, joint ventures & strategies.
- Business restructuring consists of activities of reorganization of business units or divisions. It includes diversification into new businesses, outsourcing, divestment, brand acquisitions
- Asset restructuring involves the acquisition or sale of asset & their ownership structure. For Example, Sale & lease back of assets, securitization of debts, receivable factoring, etc.
◉ Meaning of Corporate Restructuring
Corporate restructuring means changing the ownership, between mixed assets, mixed business, and alliances with a view to enhancing shareholder value.
- Corporate restructuring refers to the changes in ownership, business mix, assets, and alliances with a view to enhancing shareholder value.
- Corporate restructuring simply means an action taken by corporate management to significantly modify the structure or the operations of the company.
◉ Definition of Corporate Restructuring
- Corporate restructuring is an action taken by the corporate entity to modify its capital structure or its operation significantly.
- Corporate restructuring can be defined as the action of redesigning one or more aspects, or methods of the existing structure of a company.
► Objectives of Corporate Restructuring
- To evaluation of current endowments and performance.
- To fine-tune available skills, technology, and plant.
- To the assessment of changes in a business environment.
- To identification of new business opportunities. Securing a competitive edge for the corporation.
- To organize surplus cash from one business to finance profitability growth in another.
- To unload loss-making businesses.
- To respond to changing trends.
- To meet regulatory change.
- To order redirection of the firm’s activities.
- To obtain tax benefits by merging a loss-making company with a profit-making company.
► Importance (Reasons) of Corporate Restructuring
- To survive in the market.
- To increase market share.
- To use the latest technology.
- To increase financial strength.
- To overcome insolvency.
- To diversify their business.
- To make a presence worldwide.
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► Types of Corporate Restructuring (Methods)
- Expansion Techniques
- Divestment Techniques
- Other Technique
◉ Expansion Techniques
- Strategic Alliances
- Intellectual Property Rights
- Holding Companies
- Takeover by Reverse Bid
✔ Merger Corporate Restructuring
A merger refers to the consolidation of two or more companies to form an all-new entity with a new name.
- Mergers help companies in uniting their strengths, and resources, and overcoming weaknesses.
- The merger also helps in the reduction of trade barriers and competition.
The takeover means a company taking over the management of another company. It is a form of acquisition of a whole company rather than a merger.
✔ Joint Venture
A Joint venture is a legal entity formed between two or more parties to undertake economic activity together.
The parties agree to create a new entity by both contributing equities, and they then share in the revenues, expenses, and control of the enterprise.
Eg. Maruti Suzuki, Bajaj Allianz, Standard & Charted Bank.
✔ Strategic Alliance:
Is a flexible arrangement between firms whereby they agree to work together to achieve a specific goal. Such arrangements are looser in nature than the JV and can be separated easily.
This type of partnership with another business creates synergy in the business operations.
These Alliances bring combine efforts in a business effort involving anything from getting a better price for goods by buying in bulk together, to scaling business together, with each of you providing part of the product.
The basic idea behind alliances is to minimize risk while maximizing.
✔ Franchising Corporate Restructuring
Franchising is the arrangement between two parties where the first party grants the second party the right to utilize its business processes, produce and market a service or goods or simply use its trademark.
The franchiser collects a one-time payable franchise fee as well as a percentage of sales from the franchiser.
✔ Intellectual Property Rights
Intellectual Property is the creation of the minds of an individual which has commercial and moral value.
Intellectual property rights grant exclusive rights to an author for utilizing and benefiting from their creation.
✔ Holding companies
The holding company controls the subsidiary company by acquiring substantial voting powers by acquiring equity shares carrying voting rights.
When it holds 100% shares of a subsidiary company, then it is called a wholly-owned subsidiary Holding company is also called a parent company.
More than 50% of the shares of the subsidiary are held by the parent company either directly or indirectly.
✔ Takeover by Reverse Bid
Normally a large company takes over a small company. But when a small company acquires a big company in a takeover manner, such a situation is called a takeover by the reverse bid.
It happens when substantial shares of the big company are in the hands of a small company. It is possible when a small company is a cash-rich company and a big company is a sick company.
◉ Divestment Techniques
- Sell Off (Hive Off)
- Demerger (Spin-Off)
- Slump Sale
- Management Buyout
- Leverage Buyout
✔ Sell-offs (Hive Off)
A sell-off is a transaction between two independent companies. The investor may benefit from the cash proceeds, which could be put to more profitable use in the businesses within the group, or used to mitigate finances.
Sell-off may also add to the investor by eliminating negative synergy, or by realizing managerial resources preempted by the divested.
✔ Demerger (Spin-off)
The spin-off company is distributed to the shareholders of the parent company; they own shares in two companies rather than just one.
The parent company does not receive any proceeds from the demerger, as the demerged company’s shares are directly distributed to the parent company.
A corporate spin-off or demerger divides a company into two or more independent firms. It creates an opportunity to improve managerial efficiency with fresh compensation.
✔ Slump Sale Corporate Restructuring
Slump Sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without value being assigned to individual assets and liabilities in such sale.
✔ Management Buyout
A management buyout (MBO) is a form of acquisition where a company’s existing managers buy or acquire a large part of the company.
Here existing management purchases the company’s publicly held shares, which turn the form of the company into private.
Usually, mgt. Will have to pay a premium over the current market price to entire public shareholders to go along with the deal.
If mgt. has to borrow heavily to finance the transaction, it is called a Leveraged Buyout (LBO)
✔ Leveraged Buyout
Acquisition of one company by another, typically with borrowed funds. Usually, the acquired company’s assets are used as collateral for the loans of the acquiring
The loans are paid back from the acquired company’s cash flow. Another possible form of leveraged buyout occurs when investors borrow from banks, using their own assets as collateral to acquire the other company.
Typically, public stockholders receive an amount in excess of the current market value for their shares.
✔ Liquidation Corporate Restructuring
Liquidation is a process when a company is insolvent and unable to pay its overdue. The operations of the company are closed and the division of the assets between shareholders and creditors takes place as per the priority of their claims.
◉ Other Technique
- Going Private
- Share Repurchase
- Management Buy-In
- Reverse Merger
- Equity Carve-out
✔ Going Private:
Here entity is converted into a new company whose stock is publicly held into a Private company. The transformation of a public company into a private company is called “Going Private”.
✔ Share Repurchase
Share Repurchase change the book capital structure of the firm by reducing the amount of common stock. Share repurchases are cash offers given for outstanding shares of common stock.
✔ Management Buy-in
A management buy-in (MBI) is a process when a manager or a management team from outside the company raises the necessary finance, buys it, and becomes the company’s new management.
The management buy-in team method often competes with other purchasers in the search for a perfect business. Generally, the MBI team is led by a manager with significant experience at the managing director level.
✔ Reverse Merger
A reverse merger is a merger in which a private company becomes a public company by acquiring it.
A reverse merger saves a private company from the complicated process and expensive compliance of becoming a public company.
✔ Equity Carve-Out
Equity carve-out is also known as the “Split of IPO” method (Initial Public Offering) where some portion of the common stock of a wholly-owned subsidiary.
An IPO of the equity of a subsidiary resembles a seasoned equity offering of the parent in that cash is received from a public sale of equity.
Equity carve-out offers outsiders, and investors, to take part in the sale of a minority or a majority voting control in a subsidiary along with its parent organization.