The process of corporate restructuring is considered very important to eliminate all the financial crisis and enhance the company's performance. The management of the concerned corporate entity facing the financial crunches hires a financial and legal expert for advisory and assistance in the negotiation and the transaction deals.
Usually, the concerned entity may look at debt financing, operations reduction, any portion of the company to interested investors. In addition to this, the need for corporate restructuring arises due to the change in the ownership structure of a company. Such change in the ownership structure of the company might be due to the takeover, merger, adverse economic conditions, adverse changes in business such as buyouts, bankruptcy, lack of integration between the divisions, over-employed personnel, etc.
Types of Corporate Restructuring
Financial Restructuring: This type of restructuring may take place due to a severe fall in the overall sales because of adverse economic conditions. Here, the corporate entity may alter its equity pattern, debt-servicing schedule, equity holdings, and cross-holding pattern. All this is done to sustain the market and the profitability of the company.
Organisational Restructuring: Organisational Restructuring implies a change in the organisational structure of a company, such as reducing its level of the hierarchy, redesigning the job positions, downsizing the employees, and changing the reporting relationships. This type of restructuring is done to cut down the cost and to pay off the outstanding debt to continue with the business operations in some manner.
Reasons for Corporate Restructuring
Corporate restructuring is implemented in the following situations:
Change in the Strategy: The management of the distressed entity attempts to improve its performance by eliminating certain divisions and subsidiaries which do not align with the core strategy of the company. The division or subsidiaries may not appear to fit strategically with the company's long-term vision. Thus, the corporate entity decides to focus on its core strategy and dispose of such assets to the potential buyers.
Lack of Profits: The undertaking may not be enough profit-making to cover the cost of capital of the company and may cause economic losses. The poor performance of the undertaking may be the result of a wrong decision taken by the management to start the division or the decline in the profitability of the undertaking due to the change in customer needs or increasing costs.
Reverse Synergy: This concept is in contrast to the principles of synergy, where the value of a merged unit is more than the value of individual units collectively. According to reverse synergy, the value of an individual unit may be more than the merged unit. This is one of the common reasons for divesting the assets of the company. The concerned entity may decide that by divesting a division to a third party can fetch more value rather than owning it.
Cash Flow Requirement: Disposing of an unproductive undertaking can provide a considerable cash inflow to the company. If the concerned corporate entity is facing some complexity in obtaining finance, disposing of an asset is an approach in order to raise money and to reduce debt.