Corporate Restructuring Strategies

Prepared By

Sushil Kumar Sourabh MalhotraSumit SharmaGaurav Verma

Corporate Restructuring

Process by which a firm does an analysis of itself and alters what it owes and owns, refocuses itself to specific task of performance improvements

Involves activities to make more balanced and profitable

It is a structured decision making exercise undertaken to evaluate the current endowments of company , and fine tuning of the available skills , machinery , and technology to meet the challenges of tomorrow

Restructuring Involves

Sale of underutilized assets , such as patents or brands

Outsourcing of operations such as payroll and technical support to a more efficient third party

Moving of operations such as manufacturing to lower – cost locations

A major public relations campaign to reposition the company with consumers

Reorganization of functions such as sales, marketing and distribution

Essentials of Restructuring

Ensure the company has enough liquidity to operate during implementation of a complete restructuring

Produce accurate working capital forecasts

Provide open and clear lines of communication with creditors who mostly control the company’s ability to raise the financing

Detailed business plan and considerations

Reasons for Restructuring

Change in fiscal and government policies Concept of Customer Delight Cost Reduction Divestment Core Competencies Information Technology Revolution Liberalization, Privatization & Globalization (LPG) Enhancing shareholder value Consistent growth and profitability Restructuring capital structure Bifurcation of Business

Types of Restructuring

Financial Restructuring

Portfolio Restructuring

Organizational Restructuring

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

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

Types of financial restructuring

Debt restructuring:When a company is in crisis, it may try to renegotiate with its creditors to reduce or eliminate some of its debts. Faced with the possibility that the distressed company may default on a loan, creditors will often work to adjust the terms of repayment, including lowering interest rates and/or extending the repayment schedule. Debts may also be forgiven, in part, often in exchange for the creditor gaining some equity — part ownership — in the company.

Equity Restructuring:Companies that have little debt in comparison to their equity — that is, they are are underleveraged or have a low debt-to-equity ratio — may use some of their equity to buy back stock. This returns more control to the company, which will have fewer stockholders to satisfy and pay dividends to. If the company has excess cash, it can use it to repurchase shares; alternatively, if it doesn't have extra cash available, it may sell off some assets that are not bringing in profits or borrow money for the buyback.

Financial Restructuring Purpose

Generating 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

Portfolio Restructuring

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

Portfolio Restructuring 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

Responding to strategies adopted as a response to exercising call or put options

Organizational Restructuring

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

Strategies for Restructuring

Includes Hardware Restructuring Software Restructuring

Hardware Restructuring : Focuses on Identifying the core competencies of the business Flattening the organizational layers to improve organizational responsiveness Initiating downsizing to reduce excess workforce reduction in overheads Benchmarking against the toughest competitors in order to adopt best practices

Strategies for Restructuring

Software RestructuringInvolves cultural and process changes, in order to establish a collaborative environment that facilitates growth and restructuring

Focuses on Adopting an open and transparent communication mechanism Building an environment of guidance and coaching Building an environment of trust Raising the aspiration levels of individuals Empowering people & encouraging decentralized decision making Helping individuals develop foresight, i.e. understanding changes and getting ready for the anticipated changes Training people to accept new ideas and challenging assignments

Strategies Options in Corporate Restructuring

Adopting an open and transparent communication mechanism Process of eliminating existing inefficiencies Aims at Improving operations Alter the relative strength of the organization to face competition Facilitate creating of competitive advantage Provide better customer satisfaction Generate profits in a free market economy Help the organization differentiate itself from competitors Ensure it delivers value to the customers

Implications of Corporate Restructuring

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

CustomersRestructuring 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.

Implications of Corporate Restructuring

Customers 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

Implications of Corporate Restructuring

Management Helps release financial resources blocked in unproductive assets and low return assets and businesses Provides an opportunity to the management to prove its ability to ‘manage the change’

Employees Restructuring impacts them psychologically, culturally and materialistically

Implications of Corporate Restructuring

Employees Creates fears in their mind leading to psychological turmoil ‘Patterned Mindset’, makes acceptance of new set of challenges difficult Involves unlearning old skills and acquiring new skills

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