Introduction

Restructuring is the corporate management term for the act of reorganizing the legal,
ownership, operational, or other structures of a company for the purpose of making it more
profitable, or better organized for its present needs. Alternate reasons for restructuring include a
change of ownership or ownership structure, demerger, or a response to a crisis or major change
in the business such as bankruptcy, repositioning, or buyout. Restructuring may also be described
as corporate restructuring, debt restructuring and financial restructuring.

Need for Restructuring

When a business is doing poorly and losing money, the problem isn't always with the quality of
the product or service being given, and it isn't always because the people in charge aren't
working hard enough. Sometimes, trouble in business is purely a matter of an inefficient
corporate set-up that drains money and resources and keeps a business from being as successful
as it needs to be. When this is the case, a corporate restructuring may be all that is needed to take
a business from the red to the black.

The restructuring usually takes place when a business is struggling and losing money. A third-
party will be brought in to assess the way that the business is being run, and then make
recommendations based on what they found that will help make the business run more
efficiently. A strong corporate restructuring firm will have experts in a wide variety or areas that
can examine all aspects of a business to help find solutions.

One of the first aspects that a restructuring firm will take a look at is the legal definition and
ownership of the company through a lawyer that is experienced in business law. Filing the
correct paperwork to have a company correctly classified can save a company huge percentages
of money in taxes and business fees.

The next aspect a corporate restructuring firm will look at is the day-to-day operations of a
company. Experts with industry experience will look at the processes and procedures of a
company to see if any changes can be made that will cut down on inefficiencies that lead to lost
money.

A good corporate restructuring firm will not just identify problems of where money is being lost,
but also come up with solutions that a company can implement in order to fix those problems.
They will also help a company through the process of restructuring by developing forecasts of
what to expect and making sure the company is able to secure the capital available to make those
changes.

In this economic climate, it is essential for businesses to run as well as they possibly can. A
corporate restructuring can help save money, and help save a company from having to lay off
workers.

Corporate restructuring can help restore, preserve and enhance the value of an organization. You
can get help from restructuring specialists who can advice you well on it.
Purpose and Importance of Corporate Restructuring

Corporate Restructuring refers to the changes in the ownership pattern, changes in

the assets mix and alliances ,changes in the business mix etc with a view to enhance
the shareholder value.

> Purpose of Corporate Restructuring:

- To enhance the shareholder’s value

- To utilize the assets properly
- To get profitable investment opportunities
- To diverse the business
- To reduce cost of capital by designing innovative securities through corporate
restructuring

Importance of Corporate Restructuring:

It plays an important role in the external and internal growth of the organization.

Types of Corporate Restructuring:

- External Corporate Restructuring

- Internal Corporate Restructuring

■ External Corporate Restructuring:

1. Merger
e.g.: AOL and Time –Warner

2. Acquisition:
e.g.: Tata steel buys Corus

3. Reverse Merger [for going public]

4. SPAC [Special Purpose Acquisition Company]

5. Divestiture:
It means sales of assets /divisions/subsidiaries etc
eg: Ford’s Divestiture of Jaguar brand to Tata Motors

6. De-merger or spin off:

eg: RIL (Reliance India Lmt.) demerges into 5 companies
a) RIL (Reliance India Lmt)
b) RCom (Reliance Communication)
c) RCap (Reliance Capital)
d) Rel Energy (Reliance Energy)
e) Global Fuel Management

7. Equity Curve Outs:

This is also known as IPO (Initial Public Offering).Here the parent company sells a
percentage of the equity to the public stock market. The percentage may differ
(sometimes it is just less than 20% or just less than 50% etc)
eg: Brick and Mortar Company’s Dot com business

8. Buy-backs of shares:
It is usually done to increase the shareholding percentage of the promoters. It helps
to increase the confidence of the investors in the company. It also helps the company
to increase the share price.
eg: DLF buys back shares with open offer

■ Internal Corporate Restructuring:

It may happen through the sale of stocks to the staffs of the company or to the
employees of the company.
eg:
• Infosys (India) sells its stocks to the employees of the company the employees also
get special offers related to the shares.
• Virginia Geotechnical Services (VGS) also offers the stocks of the company to the
internal staffs and the employees.

Symptoms

Operational Symptoms

 Continuously reducing employee productivity.

 Delays in supply chain or distribution chain

 Weak market feedback on products, prices and promotional policies.

 High employee turnover.

  Increasing confusion in divisional, individual and territorial performance accounting,
appraisal etc.

 High asset maintenance and repairs.

 Decline in market development efforts.

 Institutional overlaps and confusion

Strategic Symptoms

 Growing mismatch between strategy formulations by owners and managers.

 Decline in market leadership.

 Imbalance between short-term tactics and long-term strategies.

 Slowed down growth in overall industry.

Financial Symptoms

 Increasing operating costs and cost of finances.

 Falling share-price in the market, without a near future scope for correction.

 Declining earning ratios.

 Increasing costs of licenses, copy-rights, and patents.

 imbalance between core cost and support cost.

Market, Economy-level and Global Symptoms

 Substantial change in Government policies.

 Sustained recession and shrinking International markets.

 Cheaper funds availability from international markets.

 Increasing replacement of skill and system employees by knowledge employees and

entrepreneurial employees.

 An economy in transition from the core sector to service sector to information tech-
sector to advisory sector

The Restructuring Plan

 Define the purpose

 Decide sequence of restructuring

 Operational Plan

 Cost benefit Analysis

Financial Aspects of various Re Str.

  Empolyee productivity,cost & performance
 Restructring Bussiness Downsizing

 Restr. Of Value Chains

 Strategy Formulation

 Technology, Processes, Capacities

 Ownership

 Ethical

 Accounting

WHAT IS MERGER

Merger is defined as combination of two or more companies into a single company where one
survives and the others lose their corporate existence. The survivor acquires all the assets as well as
liabilities of the merged company or companies. Generally, the surviving company is the buyer, which
retains its identity, and the extinguished company is the seller.

Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies.
All assets, liabilities and the stock of one company stand transferred to Transferee Company in
consideration of payment in the form of:

 Equity shares in the transferee company,

 Debentures in the transferee company,
 Cash, or
 A mix of the above modes.

WHAT IS ACQUISITION
Acquisition in general sense is acquiring the ownership in the property. In the context of business
combinations, an acquisition is the purchase by one company of a controlling interest in the share capital
of another existing company.

Types of merger

1. 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 as the firm’s operations in the same industry. Horizontal
mergers are designed to produce substantial economies of scale and result in decrease in the
number of competitors in the industry. The merger of Tata Oil Mills Ltd. with the Hindustan
lever Ltd. was a horizontal merger.

In case of horizontal merger, the top management of the company being meted is generally,
replaced, by the management of the transferee company. One potential repercussion of the
horizontal merger is that it may result in monopolies and restrict the trade.

Weinberg and Blank define horizontal merger as follows:

“A takeover or merger is horizontal if it involves the joining together of two companies which
are producing essentially the same products or services or products or services which compete
directly with each other (for example sugar and artificial sweetness). In recent years, the great
majority of takeover and mergers have been horizontal. As horizontal takeovers and mergers
involve a reduction in the number of competing firms in an industry, they tend to create the
greatest concern from an anti-monopoly point of view, on the other hand horizontal mergers and
takeovers are likely to give the greatest scope for economies of scale and elimination of duplicate
facilities.”

2. Vertical merger:

It is a merger which takes place upon the combination of two companies which are operating in
the same industry but at different stages of production or distribution system. If a company takes
over its supplier/producers of raw material, then it may result in backward integration of its
activities. On the other hand, Forward integration may result if a company decides to take over
the retailer or Customer Company. Vertical merger may result in many operating and financial
economies. The transferee firm will get a stronger position in the market as its
production/distribution chain will be more integrated than that of the competitors. Vertical
merger provides a way for total integration to those firms which are striving for owning of all
phases of the production schedule together with the marketing network (i.e., from the acquisition
of raw material to the relating of final products).

“A takeover of merger is vertical where one of two companies is an actual or potential supplier of
goods or services to the other, so that the two companies are both engaged in the manufacture or
provision of the same goods or services but at the different stages in the supply route (for
example where a motor car manufacturer takes over a manufacturer of sheet metal or a car
distributing firm). Here the object is usually to ensure a source of supply or an outlet for products
or services, but the effect of the merger may be to improve efficiency through improving the
flow of production and reducing stock holding and handling costs, where, however there is a
degree of concentration in the markets of either of the companies, anti-monopoly problems may
arise.”

3. Co generic Merger:

In these, mergers the acquirer and target companies are related through basic technologies,
production processes or markets. The acquired company represents an extension of product line,
market participants or technologies of the acquiring companies. These mergers represent an
outward movement by the acquiring company from its current set of business to adjoining
business. The acquiring company derives benefits by exploitation of strategic resources and from
entry into a related market having higher return than it enjoyed earlier. The potential benefit from
these mergers is high because these transactions offer opportunities to diversify around a
common case of strategic resources.

Western and Mansinghka classified cogeneric mergers into product extension and market
extension types. When a new product line allied to or complimentary to an existing product line
is added to existing product line through merger, it defined as product extension merger,
Similarly market extension merger help to add a new market either through same line of
business or adding an allied field . Both these types bear some common elements of horizontal,
vertical and conglomerate merger. For example, merger between Hindustan Sanitary ware
industries Ltd. and associated Glass Ltd. is a Product extension merger and merger between
GMM Company Ltd. and Xpro Ltd. contains elements of both product extension and market
extension merger.

4. Conglomerate merger:

These mergers involve firms engaged in unrelated type of business activities i.e. the business of
two companies are not related to each other horizontally ( in the sense of producing the same or
competing products), nor vertically( in the sense of standing towards each other n the
relationship of buyer and supplier or potential buyer and supplier). In a pure conglomerate, there
are no important common factors between the companies in production, marketing, research and
development and technology. In practice, however, there is some degree of overlap in one or
more of this common factors.

Conglomerate mergers are unification of different kinds of businesses under one flagship
company. The purpose of merger remains utilization of financial resources enlarged debt
capacity and also synergy of managerial functions. However these transactions are not explicitly
aimed at sharing these resources, technologies, synergies or product market strategies. Rather,
the focus of such conglomerate mergers is on how the acquiring firm can improve its overall
stability and use resources in a better way to generate additional revenue. It does not have direct
impact on acquisition of monopoly power and is thus favored through out the world as a means
of diversification.