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Analysis of Corporate Restructuring in India

Narendra Kumar

| Updated: Sep 15, 2017 | Category: Mergers and Acquisitions


Mergers and Acquisitions in India: A Strategic Impact Analysis for Indian Companies(Corporate Restructuring).

What is Corporate Restructuring?

There are primarily two ways of growth of the business organization, i.e. organic and inorganic growth.

Corporate Growth can be Organic or Inorganic

A company is thought to be growing organically if the growth is through the internal sources without any change in the corporate entity. Organic growth can be usually done through capital restructuring or business restructuring. In Inorganic growth, the rate of growth of the business is that by a collective increase in output and business reach by achieving or accomplishing almost all the innovative businesses by way of mergers, acquisitions and take-overs and any other corporate restructuring strategies that would create change in the corporate entity.

Why are inorganic growth strategies regarded as fast-track corporate restructuring strategies for growth?

Inorganic growth strategies such as mergers, acquisitions, takeovers, and spin-offs are considered as vital engines which give assistance to companies to enter into new markets, expand their customer base and cut competition, consolidate and grow in size quickly, to employ new technology with regard to products, people, and processes. Therefore, inorganic growth strategies are observed as fast-track corporate restructuring strategies for the growth of the business.

Meaning or Defining of Corporate Restructuring

Corporate Restructuring is defined as the procedure that is involved in changing the organization of a business. Corporate Restructuring includes making dramatic changes to business by cutting out or integration of departments. It suggests rearranging the business for increased proficiency and profitability. In other words, it is a comprehensive process, by which a company can consolidate its business operations and strengthen its position for achieving corporate objectives-synergies and continuing as a competitive and successful entity.

Company Restructuring Involves

Restructuring chiefly comprises of layoffs or bankruptcy, even though restructuring is generally made to minimalize the impact on the employees, if possible. Restructuring contains the company’s sale or merger with a diverse company. The Companies practice restructuring as the business strategy to ensure their long-term viability

Need & Scope of Corporate Restructuring

Objectives of the Corporate Restructuring

Corporate Restructuring is concerned about placing business activities of corporates as the whole in order to accomplish certain prearranged objectives. The objectives encompass the following:

  • Orderly redirection of the firm’s activities;
  • Positioning extra cash flow from 1 business to finance profitable growth in another;
  • Misusing inter-dependence amongst current or potential businesses within the corporate portfolio; — risk reduction; and
  • Development of core competencies.

The Scope of Corporate Restructuring

The scope of Corporate Restructuring encompasses:

  1. Enhancing economy (cost reduction): The status allows it to leverage the same to its own advantage by being able to raise larger funds at lower costs.
  2. Improving efficiency (profitability): Reducing the cost of capital translates into profits.

Note: 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.

Needs for Corporate Restructuring

The needs for undertaking Corporate Restructuring are as follows:

(i) To focus on basic strengths, operational synergy & other effective allocation of managerial capabilities and infrastructure too.

(ii) Consolidation and economies of scale by expansion and diversion to exploit extended domestic and global markets.

(iii) Revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a healthy company.

(iv) Acquiring the constant supply of raw materials and access to scientific research and technological developments.

(v) Capital restructuring by a suitable combination of loan and equity funds to decrease the cost of servicing and improve return on capital employed.

(vi) Improve corporate performance to bring it on par with competitors by adopting the radical changes brought out by information technology.

Important aspects to be considered while planning or implementing corporate restructuring strategies

They are:

  • Valuation & Funding
  • Legal and procedural issues
  • Taxation and Stamp duty aspects
  • Accounting aspects
  • Competition aspects etc.
  • Human and Cultural synergies

Types of Corporate Restructuring Strategies

Various types of corporate restructuring strategies include 1. Merger 2. Demerger 3. Reverse Mergers 4. Disinvestment 5. Takeovers 6. Joint venture 7. Strategic alliance 8. Franchising 9. Slump Sale

1. Merger

The merger is the combination of two or more companies which can be merged together either by way of amalgamation or absorption or by the formation of a new company. The combining of two or more companies is generally by offering the stockholders of one company securities to the acquiring company in exchange for the surrender of their stock.

Kinds of Merger:

Mergers may be –

  • Horizontal Merger: It is a merger of two or more companies that compete in the same industry. It is a merger with a direct competitor and hence expands the firm’s operations in the same industry.
  • Vertical Merger: It is a kind of merger that takes place on the combination of 2 companies that are operating in the same industry but at diverse stages of production or distribution system. If any company takes over its supplier/producers of raw materials, then it may result in backward integration. On other hands, forward integration also results if a company agrees to take over the retailer or Customer Company.
  • Congeneric Merger: It is the type of merger, where two companies are in the same or related industries but do not offer the same products, but related products and may share similar distribution channels, providing synergies for the merger.
  • Conglomerate Merger: These mergers involve firms engaged in an unrelated type of activities i.e. the business of two companies are not related to each other horizontally or vertically. In a pure conglomerate, there aren’t any important common factors between companies in production, marketing, research and development, and technology. Conglomerate mergers are the merger of various types of businesses under 1 flagship company.

2. Demerger

The demerger is a type of corporate restructuring wherein an entity’s business actions are separated into 1 or more mechanisms.

3. Reverse Merger

The reverse merger is the opportunity for the unlisted companies to become a public listed company, without opting for Initial Public offer (IPO). In this process, the private company acquires majority shares of the public company with its own name.

4. Disinvestment

It is the act of the organization or company or government for selling or liquidating an asset or subsidiary, this is known as “divestiture”.

5. Takeover/Acquisition:

Takeover occurs when an acquirer takes over the control of the target company. It is also known as an acquisition.

The Types of Takeover:

It may be a friendly or hostile takeover.

Friendly takeover: In this type, one company takes over the management of the target company with the permission of the board.

Hostile takeover: In this type, one company takes over the management of the target company without its knowledge and against the wish of their management.

6. Joint Venture (JV)

A joint venture is an entity formed by two or more companies to undertake financial act together. The parties agree to contribute equity to form a new entity and share the revenues, expenses, and control of the company. It may be a Project based joint venture or Functional based joint venture.

Project-based Joint venture: The joint venture entered into by the companies in order to achieve a specific task is known as project-based JV.

Functional based Joint venture: The joint venture entered into by the companies in order to achieve mutual benefit is known as functional based JV.

7. Strategic Alliance

Any agreement between two or more parties to collaborate with each other, in order to achieve certain objectives while continuing to remain independent organizations is called a strategic alliance.

8. Franchising

Franchising is to be defined as an arrangement wherein 1 party (franchiser) allows another party (franchisee) the right to use its trade name along with definite business systems and procedure, to produce and market the goods or services along with certain specifications. The franchise generally pays a one-time franchise fee plus a % of sales revenue in terms of royalty and gains.

9. Slump sale

Slump sale means the transfer of 1 or more undertaking because of the sale for lump sum consideration deprived of values being allocated to each and every individual assets and liabilities in such sales.

Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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