INTRODUCTION TO CORPORATE RESTRUCTURING

Many enterprises experience corporate restructuring at some point.

Companies often undergo restructuring to improve their competitiveness
by cutting costs, improving efficiency, and boosting profits.
The financial aspects of corporate restructuring strategies may be aided
by extensive valuations of firm assets, which can help optimize the
advantages of reorganization.
However, a successful business restructuring is an intensive and
complicated endeavor, which is best served by an accurate assessment of
the company's overall value or the value of the individual parts.
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Corporate restructuring is the process of reorganizing a company's management,
finances, and operations to improve the efficiency and effectiveness of the company.
Changes in this area can help a company increase productivity, improve the quality of
products and services, and reduce costs. They can also help a company better serve the
needs of its customers and shareholders. Restructuring businesses may also result in the
closure of underperforming or unprofitable business units.
For some ventures, a company restructure may be a final effort to retain solvency when a
firm is in financial trouble and has to restructure its debts with its creditors. To keep the
business afloat, the procedure entails reorganizing the company's debt and selling off
non-essential assets.
Companies can either have their restructuring done informally (outside the court system)
or through one of the various legal corporate restructuring strategies, depending on the
severity of their condition.
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Types of Corporate Restructuring
Typically, there are two types of corporate restructuring, and the cause for
restructuring will influence both the kind of restructuring and the corporate
restructuring strategy:-
a) Financial Restructuring
b) Organizational Restructuring
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a) Financial Restructuring
This form of restructuring a business may be necessary if the company's total sales
see a significant decline owing to the current economic climate. The business entity
has the option to adjust its equity structure, debt service schedule, equity holdings,
and cross-holding pattern in this location. All of this is being done to keep the
market and the company's profits strong.
i. Debt/Equity Swap 
Restructuring a company's finances can be accomplished by using a debt-for-equity
swap. An equity stake, such as stock in the firm, is exchanged to cancel a company's
debt to a lender under a debt/equity swap arrangement. A renegotiation of debt is
another way to look at it.
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Companies implementing a debt/equity swap are typically in rocky financial
waters, such as cash flow issues or company losses.
A lender may be ready to exchange a debt obligation for an equity holding in a
firm if it is evident to the lender that the company would be unable to repay its
current debt in a reasonable length of time.
However, this type of corporate restructuring would only happen if the lender
feels that the debt cancellation would allow the firm to stay viable.
ii. Debt Loading
The company can also borrow money to pay for the buyout, which would put more
debt on the books. Leveraged buyouts are another name for this approach to
increasing debt.
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One founder can buy out the other founders' shares by using a tactic known as "debt
loading." Cash flow is used to pay down debt by repurchasing and retiring shares.
Of course, taking on more debt comes with its own set of challenges.
b. Organizational Restructuring
Changes in a company's organizational structure, such as decreasing its hierarchy
level, revamping job roles, shrinking the workforce, and modifying reporting
connections, are all examples of operational restructuring. Reduce costs and pay off
debt through a reorganization like this to keep the company's operations going.
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Corporate Portfolio Restructuring
A portfolio restructuring approach that involves divesting assets is known as a
divestiture strategy. Divisions and subsidiaries that are no longer profitable or that
no longer suit a firm's overall strategy are sold or spun off. Restructuring a
company's portfolio helps it to refocus on its main business and obtain much-needed
financing. With the money it earns from these deals, it may invest in its leading
company. It also may invest in other companies that fit in with its strategy and help
it achieve a positive net income.
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Corporate Restructuring Strategies to consider
The ideal way to restructure a corporation depends on its specific conditions and
attributes, as well as the purpose for the reorganization. The following are five
company reorganization strategies used to create profitability:
1. Mergers and Acquisitions (M&A)
A merger is when another firm takes over an existing company, or a new company
is formed by merging two or more existing companies. Though firms in financial
trouble commonly employ M&A transactions, there's generally a potential for
business synergies that may be generated by uniting the two businesses rather than a
result of financial insolvency.
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2. Reverse Merger
Reverse mergers allow private firms to become publicly traded without the necessity
for an initial public offering (IPO). In a reverse merger, a private firm acquires a
controlling stake in a publicly-traded company and gains control of the board of
directors as a result.
3. Divestiture
Divestiture is the act or process of transferring ownership of a company's non-core
assets to another party. With the sale of one or more of a company's subsidiaries,
divisions, or other business units, a company undergoes a significant reorganization.
There are times when it's best for an organization to sell off an unprofitable company
line rather than continue to invest in it. In order to avoid bankruptcy, decrease debt, and
maintain a low debt-to-equity ratio, companies may use a divestment plan.
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4. Joint Venture
A joint venture is the creation of a new firm between two or more companies. Each
of the participating firms agrees to provide specific resources and to split the costs,
earnings, and control of the new company formed as a result of the collaboration.
5. Strategic Partnership
With the strategic alliance, businesses may work together while maintaining their
own identities in order to generate commercial synergies.
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Need for Corporate Restructuring
Corporate Restructuring means re-arranging business of a company for increasing its
efficiency and profitability. Restructuring is a method of changing the organizational
structure in order to achieve the strategic goals of the organization. It involves
dramatic changes in organization.
The strategy adopted shall depend on the purpose or organizational goals and hence a
different strategy shall apply to different companies. Corporate Restructuring aims at
different things at different times for different companies and the single common
objective in every restructuring exercise is to eliminate the disadvantages and
combine the advantages.
The above statement is true in every sense. The various needs for undertaking a
Corporate Restructuring exercise are as follows –
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(a) focus on core competence, operational synergy, cost reduction and efficient
allocation of managerial capabilities;
(b) balance utilization of available infrastructure and resources;
(c) economies of scale by expansion to exploit domestic and international markets;
(d) revival and rehabilitation of a sick unit by adjusting losses of the sick unit with
profits of a healthy company;
(e) acquiring constant supply of raw materials and access to scientific research and
technological developments;
(f) capital restructuring by appropriate mix of loan and equity funds to reduce the
cost of servicing and improve return on capital employed;
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(g) improve corporate performance to achieve competitive advantage by adopting
the radical changes brought out by information technology.
The importance of Synergy
All mergers and acquisitions have one common goal, i.e., to create synergy that
makes the value of the combined companies greater than the sum of the two parts.
The success of a merger or acquisition depends on whether this synergy is achieved
or not. Synergy may be in the form of higher revenue streams and cost savings.
Synergy implies that combined result of two enterprises is better that simple
addition of each of them, i.e. 1+1 > 2. It means that merger leads to operational
efficiencies. The combination of operations creates integration, which in turn
increases earnings potential and reduces cost.
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Synergies can be expected to flow from highly focused operational efforts,
rationalization and simplification of processes, rise in productivity, better
procurements, and eliminate duplication.
It leads to combining their resources, such as production facilities, marketing
channels, managerial skills etc. Synergy is based on an ability of an enterprise to
utilize its resources for better results in combination with another enterprise.
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Global challenges prompting Corporate restructuring
Industrial Policy of 1992, introduces liberalization, privatization and globalization
in the Kenyan economy. This led to relaxation of licensing, inflow of foreign
investments, foreign technology, boost to private section, Govt. disinvestments
etc.
Due to these changes, traditional businesses became dynamic, Govt. protection to
private sector reduced, entry of multinationals in Kenyan markets etc. Hence,
there was considerable rise in number of suppliers and cut-throat competition.
In view of such cut-throat competition, there is a need to align business activities
with a focus on maximizing shareholders’ wealth. This gives rise to various
strategic decisions.
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Competition is an important driver for change, and hence corporate
restructuring becomes vital.
 Competition drives technological development, cost cutting and value
addition. Innovations and inventions happen out of necessity to meet
challenges of competition.
Globalization leads to increased competition. Such competition can be related
to product and service cost and price, target market, technological adaptation,
quick response, quick production by companies, etc.
Such competition drives people to change and adapt and face global
challenges. Thus, to be globally competitive and survive in the business with
surplus, an enterprise needs to restructure with inventions and innovations.
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Class Activity
Write a note on retrenchment as turnaround strategy.