You are on page 1of 10

Corporate Restructuring

- Nishit Suman (SRCC) Roll No.3

Meaning

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.

Characteristics

Changes in corporate management. Sale of underutilized assets, such as patents or brands. Outsourcing of operations such as payroll and technical support to a more efficient third party. Reorganization of functions such as sales, marketing and distribution. Refinancing of corporate debt to reduce interest payments. A major public relations campaign to reposition the company with consumers.

Types Of Corporate Restructuring


The term corporate restructuring encompasses three distinct but related, groups of activities. We will briefly look at each of the three major categories of restructuring in the section which follow as :
Expansions Contractions Ownership & Control

Expansions
Expansions include mergers, consolidations, acquisitions and various other activities which result in an enlargement of a firm or its scope of operations. A Merger involves a combination of two firms such that only one firm Survives. Mergers tend top occur when one firm is significantly larger than the other and the survivor is usually the larger of the two.
For example: In the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created.

Types of Merger

Horizontal - involves two firms in similar


businesses.

Vertical - involves two firms involve in different


stages of production of the same end product or related end product.

Conglomerate - involves two firms in


unrelated business activities such as Joint Ventures, consolidations & acquisitions etc.

Acquisition

An acquisition is the purchase of one business or company by another company or other business entity.
The effort is to gain control may be a prelude to a subsequent merger to establish a parent subsidiary relationship, to break up the target firm and dispose of its assets or to take the target firm private by a small groups of investors. There are a number of strategies that can be employed in corporate acquisitions like friendly takeovers, hostile takeovers etc.
For Example : Tata Steel, Indias largest private producer of steel, purchased the Dutch firm Corus for $13.2 billion.

Contractions

Contraction, as the term implies, results in a smaller firm rather than a larger one. If we ignore the abandonment of assets, occasionally a logical course of action, corporate contraction occurs as the result of disposition of assets. The disposition of assets, sometimes called sell-offs, can take either of three board form: * Spin-offs * Divestitures * Carve outs

Spin-offs : Company distributes its shareholding


in subsidiary to its shareholders thereby not changing the ownership pattern.
Example : Dabur Indias pharmaceutical business from its FMCG business in 2003-04.

Divestitures : Its the reduction of some kind


of asset for either financial or ethical objectives or sale of an existing business by a firm.
For Example : Philips for example, divested its chip division called NXP because the chip market was so volatile and unpredictable.

Carve outs : When a parent company sells a


minority (usually 20% or less) stake in a subsidiary for an IPO or rights offering.
Example : Microsoft and Expedia , American Express and First Data & Cadbury Schweppes and ITNET.

Ownership and Control


The third major area encompassed by the term corporate restructuring is that of ownership and control. It has been wrested from the current board, the new management will often embark on a full or partial liquidation strategy involving the sale of assets. The leveraged buyout preserves the integrity of the firm as legal entity but consolidates ownership in the hands of a small groups. In the 1980s, many large publicly traded firms went private and employees a similar strategy called a leveraged buyout or LBO. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

You might also like