Business

Strategy,
Unit I Corporate
Restructuring-
Introduction
 ▪ There are primarily two ways of growth
of the business organization, i.e.
organic and inorganic growth.
▪ Influenced by Business Environment
Corporate ▪ Business Strategy
Growth & ▪ increase efficiency
▪ consolidate
Business Strategy ▪ increase market share
▪ turn around
▪ increase market capitalization
▪ entry barrier
 ▪ Corporate Restructuring is defined as
the process involved in changing the
organization of a business
▪ Corporate Restructuring as a Business
CORPORATE Strategy: the process of significantly
RESTRUCTURING changing a company’s business model,
management team, or financial
structure to address challenges and
increase shareholder value.
 ▪ (i) to focus on core strengths, operational
synergy and efficient allocation of managerial
capabilities and infrastructure.
▪ (ii) consolidation and economies of scale by
expansion and diversion to exploit extended
domestic and global markets.
The various needs ▪ (iii) revival and rehabilitation of a sick unit by
for undertaking a adjusting losses of the sick unit with profits of a
healthy company.
Corporate
Restructuring ▪ (iv) acquiring constant supply of raw materials
and access to scientific research and
exercise are as technological developments.
follows: ▪ (v) capital restructuring by appropriate mix of
loan and equity funds to reduce the cost of
servicing and improve return on capital
employed.
▪ (vi) Improve corporate performance to bring it
at par with competitors by adopting the radical
changes brought out by information technology.
 ▪ Opening up of the Indian economy
▪ Impetus for foreign investment
▪ Interest of foreign companies in
exploring business relationships with
Motivations for India
Corporate ▪ Panacea for corporate turbulences
Restructuring ▪ Tax planning tool
▪ Back door listing
▪ Commercial advantages
 ▪ Strategic Synergies
▪ Growth in market share.
▪ Diversification
▪ Product range width
▪ Global platform
Advantages ▪ Market penetration
▪ Enhancement of technical know-how
▪ Financial Synergies
▪ Available liquidity
▪ Capital Structure flexibility
▪ Tax and cost advantages
▪ Corporate restructuring is basically a business
decision.
▪ In the words of Justice Dhananjaya Y. Chandrachud,
▪ "Corporate restructuring is one of the means that can be employed to meet the
challenges and problems which confront a business. The law should be slow to
retard or impede the discretion of corporate enterprise to adapt itself to the
needs of changing times and to meet the demands of increasing competition.
The law as evolved in the area of mergers and amalgamations has recognized
the importance of the Court not sitting as an appellate authority over the
commercial wisdom of those who seek to restructure the business.“
▪ Ion Exchange (India) Ltd., In Re (2001) 105 Comp Cases 115 (Bom).
 ▪ Strategic rationale

▪ Speculative rationale

▪ Property Acquisition
Some Underlying
Rationales ▪ Management failure rationale

▪ Financial necessity rationale

▪ Political rationale
 ▪ Mergers, amalgamations, and acquisitions
are forms of inorganic growth strategy. Such
corporate restructuring strategies have one

Benefits common goal viz. to create synergy.

▪ 2+2=5
▪ Through mergers and acquisitions, companies hope to benefit from the
following:
▪ (1) Increase in Market Share – Merger facilitates increase in market share of the
merged company. Such rise in market share is achieved by providing an
additional goods and services as needed by clients. Horizontal merger is the key
to increasing market share. (E.g. Idea and Vodafone)
▪ (2) Reduced Competition – Horizontal merger results in reduction in
competition. Competition is one of the most common and strong reasons for
mergers and acquisitions. (HP and Compaq)
▪ (3) Large size – Companies use mergers and acquisitions to grow in size and
become a dominant force, as compared to its competitors. Generally, organic
growth strategy takes years to achieve large size. However, mergers and
acquisitions (i.e. inorganic growth) can achieve this within few months. (E.g. Sun
Pharmaceutical and Ranbaxy Pharmaceutical)
▪ (4) Economies of scale – Mergers result in enhanced economies of scale, due to
which there is reduction in cost per unit. An increase in total output of a product
reduces the fixed cost per unit.
▪ (5) Tax benefits – Companies also use mergers and amalgamations for
tax purposes. Especially, where there is merger between profit making
and loss-making company. Major income tax benefit arises from set-off
and carry forward provision u/s 72A of the Income-tax Act, 1961.
▪ (6) New Technology – Companies need to focus on technological
developments and their business applications. Acquisition of smaller
companies helps enterprises to control unique technologies and develop
a competitive edge. (E.g. Dell and EMC)
▪ (7) Strong brand – Creation of a brand is a long process; hence
companies prefer to acquire an established brand and capitalize on it to
earn huge profits. (E.g. Tata Motors and Jaguar)
▪ (8) Domination – Companies engage in mergers and acquisitions to become a
dominant player or market leader in their respective sector. However, such
dominance shall be subject to regulations of the Competition Act, 2002. (E.g.
Oracle and I-Flex Technologies)
▪ (9) Diversification – Amalgamation with companies involved into unrelated
business areas leads to diversification. It facilitates the smoothening of business
cycles effect on the company due to multiplicity of businesses, thereby reducing
risk. (E.g. Reliance Industries & Network TV18)

▪ (10) Revival of Sick Company – Today, the Insolvency and Bankruptcy