Benefit analysis of Different business Restructuring propositions28th February 2021
Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Other reasons for restructuring include a change of ownership or ownership structure, demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning, or buyout. Restructuring may also be described as corporate restructuring, debt restructuring and financial restructuring.
Types of Corporate Restructuring
There are generally two different forms of corporate restructuring; the reason for restructuring will determine both the type of restructuring and the corporate restructuring strategy:
Financial restructuring may occur to changes in the market or legal environment and are needed in order for the business to survive. . For example, a corporate entity may choose to restructure their debt to take advantage of lower interest rates or to free up cash to invest in current opportunities. .
Organizational restructuring is often implemented for financial reasons as well but focuses on altering the structure of the company rather than its financial arrangements. Legal entity restructuring is one of the most common types of organizational restructuring. Two common examples of restructuring are in the sales tax and property tax arenas. The first involves creation of a leasing company for operating assets that can allow for sales and income tax savings. In the second example, for property taxation, restructuring can change the method of taxation or create a revaluation opportunity to improve reporting positions.
Change in business strategy: A company may choose to eliminate subsidiaries or divisions that do not align with its core strategy and long-term vision and raise capital to support advancing the core strategy. Additionally, corporate strategy can be to maximize tax opportunities or improve flexibility.
Improvement of profits: If a company isn’t properly deploying its assets to maximize profit, restructuring may be pursued to get the company on a more solid financial footing. The direction the company takes in its restructuring will be determined by the corporate strategy that best employs the resources available.
Cash flow requirements: Divestment of underperforming or unprofitable divisions or subsidiaries can provide liquidity that the corporate entity cannot access otherwise. The sale of some assets can provide both an influx of cash and reduction of debt, giving the corporate entity easier access to financing and/or more favorable terms.
Reverse synergy: Just as companies sometimes seek mergers and acquisitions to create business synergies, the reverse is also true. Sometimes, the value of a merged or conglomerate unit is less than the value of its individual parts. Some divisions or subsidiaries may have more value in a sale than they do as a part of the larger corporate entity.
Characteristics of Corporate Restructuring:
- Reapproaching his duties, such as professional financial help, to an increasingly productive outsider.
- Workers decrease the number of lay-offs (by cut-off or auction-off)
- Developments in the management of businesses.
- Discarding, for example, brands/patents protection, underused tools.
- Renewal of resources, such as the promotion, transaction, and dissemination of information.
- Overhead reduction renegotiation of work agreements.
- The rearrangement or renegotiation of the intrigue installment limitation obligation.
- Transfer of tasks, for instance, move the assembly to reduce costs.
- Push a marketing campaign as a brand revival to its clients everywhere.
- Cash management and cash generation during crisis
- Impaired Loan Advisory Services (ILAS)
- Retention of corporate management in the form of “stay bonus” payments or equity grants
- 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
- Reorganization of functions such as sales, marketing, and distribution
- Renegotiation of labor contracts to reduce overhead
- Refinancing of corporate debt to reduce interest payments
- A major public relations campaign to reposition the company with consumers
- Forfeiture of all or part of the ownership share by pre-restructuring stock holders (if the remainder represents only a fraction of the original firm, it is termed a stub)
- Improving the efficiency and productivity through new investments, R&D and business engineering.
Financial Restructuring: Debt Loading
Alternatively, a corporation may load the balance sheet with debt to finance the buyout of existing shareholders. This debt loading strategy often is referred to as a leveraged buyout. Companies use the debt loading strategy to enable one founder to buy out the shares of his co-founders. The corporation repurchases and retires the shares and then uses its cash flow to pay down the debt. Of course, incurring additional debt has other consequences.
Financial Restructuring: Debt Swap
When corporations use a financial restructuring strategy, they change the company’s capital structure. They may replace debt with equity. When a company swaps out its debt, it eliminates existing shareholders. In lieu of a liquidation or bankruptcy, the debt holders take over the company’s assets and obtain a claim on future earnings in the form of newly issued shares. Debt holders often accept this arrangement when the elimination of the interest and principal payments significantly strengthens the company’s financial position. Shareholders typically receive nothing.
A divestiture strategy is a type of portfolio restructuring strategy. Companies sell, shut down or spin off unprofitable, money-losing divisions and subsidiaries or those that no longer fit its strategy. Portfolio restructuring allows a corporation to refocus on its core activities and raise much needed capital. It can use the proceeds of these transactions to strengthen its core business or acquire other businesses that closely fit its strategy and contribute to a profitable bottom line.
Money related Restructuring
This form of reconstruction may occur due to a serious fall in general transactions in the light of unfavorable financial conditions. The corporate substance can change its concept of value, its adjustment plan for obligations, the value property and its cross-holding design. This is to help the business and the organization’s advantage.
Organizational reform proposes an alteration of an organization’s authoritative structure.
Divesting in assets
There are different ways a company can reduce its size. The methods by which a division is isolated from its operations are as follows:
A corporation sells, liquidates or spins a subsidiary or a division under divestitures. The divestiture standard is usually the direct selling of the divisions to an external buyer. The selling company collects cash compensation and ownership of the division is passed to the new purchaser.
With equity carvings, a new and independent business is formed by diluting the equity interest in the division and the sale to external shareholders. The new subsidiary’s shares are sold in a general public offer, and the new subsidiary, with operations and management removed from the corporation, becomes a distinct legal entity.
The corporation establishes a new entity under by-products, which is different from the initial business of equity carve-outs. The critical difference is that the shares are not sold in public. Instead, the stakes are allocated proportionately to existing shareholders. This ensures that the same investment base as the original company is entirely separate from operations and management. Since the new subsidiary’s stocks are sold to its shareholders, this exchange does not reimburse the corporation for cash.
With split-offs, shareholders receive new trading stocks for their existing stocks in the company by the company’s subsidiary. The rationale here is that the shareholders leave the company to accept the new subsidiary stocks.
A business is broken down under liquidation and properties or units are sold piece by piece. Liquidations are commonly synonymous with bankruptcies.