Corporate restructuring involves reordering a company’s management, finances, and activities to increase the organization’s effectiveness and efficiency. Corporate restructuring usually occurs when a company wants to boost production, enhance the quality of its goods and services, and cut expenses to meet the needs of its shareholders and clients. Sometimes, restructuring a company may result in the close down of some units that need to operate better or are not lucrative to the company. Thus, the essence of restructuring by most businesses is to secure their long-term sustainability. Typical catalysts for restructuring include
A reduction of profit margins
If an organization continuously records poor trade performance and fails to deliver returns that successfully fulfill the expectations of its shareholders, a corporate restructuring is needed to save the company from collapse.
Low cash flow
For continued business success, cash flow is essential to cover operation costs and pay employees. However, where a business struggles to maintain cash flow, it often looks to reform its operational and financial procedures.
Change in the business environment:
Business operations occur in a dynamic, ever-changing environment. Restructuring is necessary when a company’s financial and operational resources are under pressure due to external factors – like innovations that redefine the market or new consumer trends.
Debt
Restructuring may occur when a company is unable to pay its long or short-term debt.
Other reasons could be a depreciation of their corporate value or a decline in the company’s market share.
Classification of Corporate Restructuring
Financial Restructuring
Generally, financial restructuring occurs when there is a dramatic decline in the company’s overall sales. In such a situation, the company may modify its equity holding, debt servicing schedule, and cross-holding pattern to maintain profitability and sustain its market position.
Organizational Restructuring
Organizational restructuring refers to a change in the company’s organizational structure, such as changes in corporate management, redefining the job roles, eliminating some positions, rearranging the employees’ reporting lines, changing the reporting relationships, or even reducing the hierarchy level. This restructuring option is used when there is a need to reduce expenses and settle outstanding debts to maintain corporate operations.
Types of Corporate Restructuring
Internal Restructuring
This is typically used when a company has a high debt load and wants to maintain its company brand independently of any external interference. Typical methods of internal restructuring include:
Buy-out
occurs when certain interest groups inside a company buy the interest in shares of others in the company through outright purchase or by obtaining a controlling equity interest. It could be in the form of a management buy-out, shareholders buy-out, or even employee buy-out.
Arrangement on sale
This occurs when members in a general meeting pass a special resolution to wind up company operations and appoint a liquidator who is authorized to sell the whole or part of the company undertaking or assets to another corporate body in consideration of either shares, cash, debentures to members in accordance to their right.
Arrangement and compromise
Arrangement occurs when there is any modification to the rights or obligations of members of the company, debenture holders, creditors, or any class of them. Compromise, on the other hand, is simply an agreement made between a company and its creditors, members, or a class of them to accept less than they are entitled to in complete and final satisfaction of the company’s obligations to them.
External Restructuring
Includes mergers and acquisitions and take over, among others.
Mergers & Acquisitions
Mergers occur when two or more companies join together to form a new company, while an acquisition entails purchasing one company by another without creating a new company.
Takeover
A takeover is similar to an acquisition but has a negative connotation because the acquired/target company may not desire to be acquired. Takeover involves the acquisition of 30% to 50% of the company shares or votes of the acquired company.
Why is Restructuring Important?
- Restructuring helps companies become more competitive on a global scale. Restructuring, for example, mergers, boosts its ability to compete and maximizes its contribution.
- Corporate restructuring helps companies lower their financial burden by changing their financial strategy. For example, when a company closedown unprofitable ventures.
- Restructuring aids in the development of the company’s core competencies.
- Corporate restructuring may allow companies to effectively minimize their anticipated tax liabilities with the help of professionals. Hence, the potential tax advantages of corporate restructuring are one of the main justifications for doing so.
- Corporate restructuring enhances cost saving and promotes efficiency. For example, by consolidating multiple companies, there will be a reduction in compliance costs, such as those related to preparing annual accounts, VAT reports, and corporate tax returns. Furthermore, processes and the number of employees involved may decrease, consequently reducing administrative costs.
In conclusion, corporate restructuring is undoubtedly one of the most effective and efficient ways to avoid an untimely company dissolution and saves companies from financial difficulties. Theoretically, a successfully restructured company will be more effective, better organized, and laser-focused on its core business.