Corporate Restructuring

Corporate restructuring can be defined as crucial actions an enterprise or a corporate organization takes to make changes in the capital structure or operation strategy. Usually, corporate restructuring is brought into action when the entity experiences significant financial jeopardy. The complete corporate restructuring process is crucial to disallow all the financial jeopardy and aims at a better corporate performance. It is performed by the company’s financial and legal experts. This article will discuss the complex concept of corporate restructuring.

What is Corporate Restructuring?

Corporate restructuring, in simple words, refers to the changes or modifications brought into action with the motive to enhance the concerned corporate entity to achieve a crisis-free financial situation and performance. The corporate restructuring process usually concerns the modification in debt financing, reduction in operations, or any other part of the company, where investors are interested in reducing the finances to maintain financial stability without compromising the performance. Furthermore, the concerned corporate entities need a corporate restructuring due to several other reasons like a change in ownership structure or equity distribution. Corporate restructuring is a crucial process that centres on the benefits of the financial conditions of corporate entities. There are several possible reasons for the changes in the ownership structure:

• Takeover 
• Adverse economic situation 
• Bankruptcy
• Poor integration between divisions
• Merger

Corporate restructuring is not a single-step function or task; it is a structured process that is further divided into subcategories.

There are two types of corporate restructuring:

1. Financial Restructuring
2. Organizational Restructuring

Financial Restructuring

The financial restructuring of the organization mostly happens due to a considerably serious fall in sales figures. In the financial restructuring, the concerned corporate entity may change its equity distribution, cross-holding pattern, and debt servicing schedule. The motive behind financial restructuring is to sustain adverse economic conditions. 

Organizational Restructuring

Organizational restructuring refers to a change in the organizational structure of a concerned entity. This organizational change can reduce its hierarchy levels, downsize employees, job position redesigning, and change the reporting relationship. Organizational restructuring is done to reduce the cost to the company and pay off the debt to sustain business operations. 

Why do Corporate Entities need Restructuring?

Corporate entities face the need for corporate restructuring due to several reasons. Some of them are listed below:

Strategy change

Strategy change refers to improving the performance of a distressed corporate entity by eliminating certain subsidiaries and divisions that do not align with the entity’s strategy. The corporate entity decides to implement its core strategy and eliminate these assets turned liabilities, as they do not appear fit to go with the entity’s long-term vision.

Profit lacking 

The lack of profit-making directly affects the cost of company capital and results in economic losses. This poor performance of the undertaking is a possible result of Management’s wrong decisions.

Reverse synergy

Reverse Synergy refers to a concept where the value of a unit merged into the entity comes out to be more than the value of individual, collective units. This is one of the common aspects of a corporate entity for the investment of the company assets. In this case, the corporate entity decides to divest this division to some third party, which eventually fetches more value than owning that division.

Requirement of cash flow

The disposing of poor performance undertaking can help the entity with an improved cash flow. 

Characteristics of Corporate Restructuring

Below-mentioned is a list of some characteristics of corporate restructuring:

• With a motive to improve the balance sheet of the entity
• Reduction of staff
• Desirable changes in management
• Outsourcing of operations such as payroll management and technical support
• Shifting the operations to lower-cost locations
• Reorganize marketing, distribution, and sales
• Overhead labour cost reduction by negotiating contracts

Important aspects of Corporate Debt Restructuring

• Procedural and legal issues
• Accounting
• Funding and valuation
• Cultural and human synergies
• Stamp duty and taxation aspects
• Competitors

Corporate Restructuring Strategies

There are eight categories of corporate restructuring strategies:

• Merger
• Demerger
• Disinvestment
• Reverse merger
• Acquisition or takeover
• Strategic alliance
• Joint venture
• Low sales

Conclusion

In this article, we have discussed the concept of corporate restructuring. With businesses focused on surviving in the industry with several financial fluctuations and market ups and downs, corporate restructuring is a need of the hour. There are several corporate restructuring strategies like mergers, demergers, reverse mergers, liquidation, company acquisition, and others. We have discussed financial and organizational restructuring, with detailed information on different methods and benefits of Corporate Restructuring.