CORPORATE RESTRUCTURING

Against the backdrop of economic liberalization and globalization, restructuring is the latest catchphrase in the corporate world. Companies compete with each other for excellence and competitive advantage, experimenting with different tools and ideas. The changing domestic and international environment is fundamentally changing the way business is conducted.

Today, Indian Industry is finding itself in excel or exit environment. If an industrial unit wants to survive, it has to excel & compete successfully both with the domestic & multinational competitors in India as well as international markets. If one cannot do this, the market forces world show such lethargic units the exit doors. This is because of the growing competition in the corporate would, with competitive forces like threats of new entrants with substitute products and services, bargaining power of supplier as well as buyers & rivalry among the existing competitors. So continuous existence of an enterprise is much difficult, as the surrounding environment is not static. For the continuous existence, ongoing development & having a competitive edge, the key word is change. Change can be of any type & in any form. Corporate restructuring has become an important means for achieving such changes in India and elsewhere. Corporate restructuring is defined as a major, synergistic realignment of the corporate work culture, vision, values, strategy, structure, management systems, management styles, technologies, staff skills, etc. Such realignments can, however, vary greatly, depending on choices made as to what to change, in what way, and how much. Corporate restructuring is a change, which may occur, in the organizational structure, the key strategies and control of ownership.

There are two forms of corporate restructuring

• Financial Restructuring
  • Financial restructuring is a form of company restructuring method and is normally taken into consideration when an enterprise merges or is acquired by using every other employer.
  • In this form of restructuring, agencies often do not face financial problems. The business enterprise is reorganized because of the sale of stocks or the sale of belongings in an acquisition.
  • While the stocks are offered, the overall proportion capital of the employer is received. In an asset sale, most effective sure belongings are obtained by using the selling business enterprise. Economic restructuring also can occur as a part of the M&A method.
• Debt Restructuring
  • Debt restructuring is typically utilized by a business enterprise to trade its strategy to repay a debt.
  • A business enterprise can also restructure its commercial enterprise divest a selected subsidiary of the figure corporation or improve extra capital to repay a debt a creditor or lender would usually allow the enterprise to restructure itself after they ought to repay a debt on this shape of restructuring the parties would input into an settlement that could bind the company’s debtors the quantity of non-performing belongings (NPAs) and horrific money owed has made the government deliver inside the IBC due to this code the quantity of horrific debts has significantly decreased.

Strategies for corporate restructuring

• A high-quality restructuring strategy for a particular company may be entirely based on the objectives of the restructuring and the exact circumstances and characteristics of that company. Below are the five examples of corporate restructuring strategies:
  • Mergers and Acquisitions
    • Merger means the combination of two or more legal entities.
    • The primary reason for the merger is economies of scale and scope.
    • In this form of corporate restructuring, companies or organizations enter into a merger agreement that sets out the terms of the merger. There are many complex procedures in the merger process.
    • A company merges with another company only to improve its business.
    • An acquisition is the process by which one company acquires another company. This process is also called takeover. 
    • The takeover process is either a friendly takeover or a hostile takeover.
    • There are three parties, the buyer, the seller and the target company. 
    • Acquisitions of private companies are usually made for increased benefits such as synergies, economies of scale, and economies of scale.
    • Both of these processes require professional advice from a transaction expert.
    • Mergers and acquisitions increased in India over the last few years, some of the biggest examples,
      • Zee and Sony India merger – These two entertainment giants have agreed to a multibillion merger. This has the potential to make the merged group into one of the largest platforms in the country. Both the companies are expected to benefit from the merger, which will accelerate the business growth and encourage shareholders to participate in its future endeavours.
      • Vodafone and Idea merger – The famous 2G scam and entry of Jio in the market pushed existing firms in the telecommunication sector to the brink of bankruptcy and exit from the market. As, a result of increasing competitiveness Vodafone and Idea, who were struggling, decided to merge into single entity called Vi. The agreement was beneficial for both the firms and is estimated to be worth 24 billion dollars.
      • Tata Groups acquisition of Air India – Tata acquired Air India through Talace after successful bid of rupees eighteen thousand crores for 100% stake in Air India.
      • Zomato’s acquisition of UberEATS – Zomato has acquired the Indian branch of UberEATS, for roughly around Three hundred and fifty million dollars. The objective of this acquisition was to reduce the losses incurred by UberEATS in India.
  • Reverse Mergers
    • In a reverse merger, the private company gets various types of benefits as public corporation acquires a non-public organization, because of this the private company does not need to go through the entire technique for making use of its shares to be listed in market.
    • This form of company restructuring is to enhance the private organizations commercial enterprise without going via the complete manner of making use of a preliminary public offering.
    • Few examples or reverse mergers in India,
      • Godrej Soaps – Godrej soaps, in 1994, did a reverse merger with its loss-making subsidiary unit ‘Gujarat Godrej’ and named it Godrej Soaps Ltd.
      • ICICI Bank – ICICI did a reverse merger with ICICI Personal Financial Services Ltd. and ICICI Capital Services Ltd., and renamed the combined entity ICICI Bank.
      • New York Stock Exchange – World famous and oldest stock exchange of the world had a reverse merger with Archipelago Holdings to go public in 2006.
  • Divestiture
    • Also known as divestment, when a company or government disposes or liquidate some or all of its assets by closing them down, or selling, exchanging, or through bankruptcy.
    • It is done to reduce the financial burden, or to raise money to facilitate long term goals of growth and development.
  • Joint Venture
    • Joint Venture refers to a kind of business which comes into existence when two firms or businesses combine resources and meet their different skills to achieve a common business goal.
    • The ownership and profits are shared in a specific ratio between the parent companies or businesses.
    • Few of the world’s famous ventures are,
      • CARADIGM – it is a venture between Microsoft Corporation and General Electric, launched to integrate a Microsoft healthcare intelligence product with various GE health related technologies.
      • Samsung and Spotify – In 2018, Spotify and Samsung made an agreement to make it easier to use Spotify on Samsung devices.
      • UBER and Volvo – This ventures goal was to produce driverless cars, with the partnership of 50-50.
  • Strategic Alliance
    • Also known as Strategic partnership.
    • It allows two or more firms to collaborate to carry out business.
    • Companies may enter into a strategic alliance to expand into a new market, improve its products, or create a more competitive environment.
    • This kind of alliance can be short or long term and the agreement may be formal or informal.
    • One of the classic example of strategic partnership is deal between Starbucks and Barnes&Noble. Both share the costs of space and do their best to benefit both the companies.
    • Strategic alliance between ICICI Bank and Vodafone, to launch a mobile money transfer and payment service called ‘m-pesa’.
    • Microsoft India and TATA Consultancy Services (TCS) entered into a strategic alliance to launch a virtualization center of excellence (CoE), which is designed to help users experience the right approach to applying and managing virtualization across IT architectural layers.

Corporate Control and Changes in Ownership

• Corporate control includes buy-backs where the management of the firm wishes to have complete control and ownership. Change in ownership may either be through an exchange offer, share repurchase or going public. The processes of going public and formation of joint venture, the techniques for change in control & ownership may enable a company to create value by exploiting opportunities that may remain beyond the reach. Going private, leveraged buy-outs & buy back of shares have the potential of increasing value by improving corporate governance, sharpening managerial accountability, enhancing incentives to perform and preventing dissipation of free cash flows.

Reasons for Corporate Restructuring

Corporate restructuring can be done for a variety of reasons, but majority of them are based on the objective of maximising the use of current assets and open up additional strategies. Few of the reasons of restructuring,

1. Improvement of profits – if a company is not properly utilising its asset and resources to maximize profits, restructuring may be suggested or adopted to get the company on a more prominent financial path.
2. Changes in Business strategy – a company might prefer to eliminate its divisions or subsidiaries that does not fulfil their core strategy and long-term vision and raise resources to help in advancement of company.
3. Reverse Synergy – it implies that the value of a single unit may be greater than the combined value. This is a frequent motive of a company to sell its assets.
4. Cash flow requirements – divestment of underperforming divisions can provide liquidity, the sale of some assets can also provide inflow of cash and reduction in debt of a company.

Benefits of Corporate Restructuring

The main objective of restructuring is to improve the company’s competitive position and its contribution in corporate objectives. Through corporate restructuring the companies hope to benefit in following ways,

1. Increase in Market Share – Restructuring like mergers and acquisition facilitates an increase in market share of the combined companies, this rise in share is attained by providing additional resources as needed by customers or clients.
2. Reduced Competition – Mergers and acquisition leads to a reduction in competition, and competition is considered as the main and most common reason for restructuring.
3. Tax Benefits
4. New Technology – Merging and acquiring small companies helps big companies to utilize unique technologies and develop a competitive edge over the others.
5. Diversification – Merging and acquiring companies unrelated to each other leads to diversification. It facilitates the smoothening of business cycle effects on the company due to multiplicity of businesses, thereby reducing risk.
6. Economies of Scale – Restructuring enhances economies of scale, which results in reduction in cost per unit, and an increase in total output will reduce the fixed cost per unit.
7. Large Size – Growing in size and becoming dominant force in a market is a common practice, which is attained through mergers and acquisitions.
8. Strong Brand – Creating a world known brand is a time taking process, hence companies prefer to restructure and acquire the existing firms and capitalize on it to earn profits.

Few Beneficial Corporate Restructuring examples

1. Tata Steel Ltd. acquired a foreign group Corus Group Plc. that drastically improved the production strategies for Tata. Through this acquisition, Tata could combine its low-cost production process with high quality of Corus. It lead to utilization of wide network of retailing and distribution, and research and development.
2. Dr. Reddy’s Laboratory Ltd., since its establishment in 1984, has acquired ample amount companies such as BASF, Alliance with Glaxo Smith Kline, Dow Pharma and many more.

Bharti Airtel Ltd. acquired Zain telecom, an Africa based business, through buyout. Airtel formed a SPV (Special Purpose Vehicle) and formed/structured the deal though it and the deal was majorly financed through borrowed funds