Corporate restructuring is an action taken by the business body to change its capital structure or operations in a fundamental way. In general, corporate restructuring occurs when a company is experiencing sizeable problems and is in financial turmoil.
The need for restructuring may be triggered by a change in the ownership structure of a company. This change in ownership structure may be due to an acquisition or merger, new adverse economic conditions, or business disruptions such as purchasing failures, customer bankruptcies, lack of integration between divisions, overstaffing, etc.
Types of corporate restructuring
Financial: This type of restructuring occurs when there is a sharp drop in earnings due to adverse economic conditions. In this case, the entity may alter its capital model, debt service schedule, equity holdings and cross-shareholding model. All of this is done to maintain the company’s market and profitability.
Organizational: Organizational restructuring involves a change in the company’s organizational structure, such as reducing its salary level, redesigning jobs, reducing the workforce and changing hierarchical relationships. This type of restructuring is carried out to reduce costs and pay off outstanding debt in order to be able to continue business operations.
Corporate restructuring is carried out in the following situations:
Strategic change: the management of the distressed company attempts to improve its results by eliminating certain divisions and subsidiaries that do not fit the company’s core strategy. The division or subsidiaries do not seem to fit strategically with the company’s long-term vision. Therefore, the company decides to focus on its core strategy and divest those assets in favor of potential buyers.
Lack of earnings: The company may not make enough profit to cover the company’s cost of capital and financial losses may occur. The company’s poor performance may be the result of an erroneous decision made by management when starting the division or the company’s declining profitability due to changing customer needs or rising costs.
Reverse synergy: This concept contrasts with the principles of synergy, in which the value of a merged unit is greater than the value of the individual units collectively. Under reverse synergy, the value of an individual unit may be greater than the value of the merged unit. This is one of the most common reasons for divesting company assets. The company in question may decide that by selling a division to a third party it can realize more value rather than retaining ownership.
Need for cash flow: The disposal of an unproductive company can provide a considerable cash inflow for the company. If the company in question faces some complexity in obtaining financing, disposing of an asset is one approach to raise cash and reduce debt.