Mergers and Acquisitions

Analysis of Corporate Restructuring in India

The process of business restructuring is frequently described as being scientific. It is comparable to a medical procedure where the patient’s recovery is the main objective. A troubled company’s rehabilitation is the same goal as corporate restructuring. Restructuring is a phrase used to describe the process of changing an organization’s structure to better achieve its goals. Restructuring enables a firm to adapt its business strategy in response to any internal or external influences, allowing it to stay competitive and expand its market share. It aids the organisation in more effectively and efficiently achieving its goals.

Corporate restructuring is the process involved in altering how a particular firm is organised. Even dramatic adjustments like combining or demerging different organisational units might result from corporate restructuring. It is done in an effort to boost the company’s productivity and profitability. In other words, it is a thorough procedure that enables a firm to streamline its operations, strengthens its position to realise its corporate goals, and keeps it a competitive and fruitful institution. The process of corporate restructuring aids in changing the organisational structure of the corporation. It is used as a tool when a business is having serious problems and is in danger of going bankrupt. Corporate restructuring aids in resolving the company’s financial issues and enhances performance.

Corporate restructuring permits the management of a struggling firm to retain the services of any legal or financial professional who can assist it in negotiations and business transactions.

What Is 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 integrating of departments. It suggests rearranging the industry 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.

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 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 takeovers 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 vital engines which assist companies in entering into new markets, expanding their customer base and cutting competition, consolidating and growing in size quickly, employing 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.

What Does Company Restructuring Involve?

Restructuring chiefly comprises 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.

Scope of Corporate Restructuring

Cost-cutting measures, maximising economies of scale, expanding efficiency, and creating higher profits are all included in the scope of corporate restructuring. A company may occasionally need to restructure itself and concentrate on competitive advantage in order to develop or even survive. The purpose of corporate restructuring is to eliminate the disadvantages and consolidate the positives. Different techniques and tactics may be used at different periods for different firms. Corporate restructuring is therefore used as a growth strategy as well as a technique for correcting problems.

Objectives of the Corporate Restructuring

Corporate Restructuring is concerned with placing the business activities of corporates as a whole 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 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 a 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 the 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
• Taxation¹ 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

A merger is the combination of two or more companies that can be merged either by way of amalgamation or absorption or by forming 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 surrendering 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 systems. If any company takes over its supplier/producers of raw materials, then it may result in backward integration. On the other hand, forward integration also results if a company agrees to take over the retailer or Customer Company.
• Congeneric Merger: It is a type of merger where two companies are in the same or related industries but do not offer the same products. However, related products may share similar distribution channels, providing synergies for the merger.
• Conglomerate Merger: These mergers involve firms engaged in unrelated types 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 unlisted companies to become publicly listed companies without opting for an 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 to sell or liquidate an asset or subsidiary; this is known as “divestiture”.

5. Takeover/Acquisition:

A 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 its management.

6. Joint Venture (JV)

A joint venture is an entity formed by two or more companies to undertake financial acts 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 a 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 a project-based JV.

Functional-based Joint venture: The joint venture entered into by the companies in order to achieve mutual benefit is known as a 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 procedures 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 undertakings because of the sale for lump sum consideration deprived of values allocated to each asset and liability in such sales.

What is the Reason for Corporate Restructuring?

The following circumstances call for the implementation of corporate restructuring:

• Change in plan: The management of the distressed organisation tries to enhance performance by eliminating subsidiaries and divisions that don’t support the company’s main plan. The division or subsidiary might not seem to strategically match with the long-term goals of the business. As a result, the corporate body chooses to concentrate on its primary strategy and sell such assets to prospective purchasers.
• Lack of Profits: The project could not generate enough revenue to pay the firm’s capital expenses which could result in financial losses. The underwhelming performance of the undertaking may be attributable to the management’s bad choice to establish the division or to a reduction in the profitability of the undertaking as a result of changing consumer demands or rising expenses.
• Reverse synergy: This idea runs counter to the synergy principles, which state that the value of a combined unit is greater than the sum of the importance of the separate units. The value of a single unit could exceed the value of the combined team, according to reverse synergy. This is one of the typical justifications for selling off firm assets. The involved entity may determine that selling a division to a third party can bring in more money than keeping it in-house.

Cash Flow Need: Selling a project that isn’t profitable might bring in a lot of cash for the business. Selling an asset is one method for raising money and lowering debt if the concerned business entity has trouble securing financing.

FAQs

1. https://incometaxindia.gov.in/Pages/default.aspx