Lesson 1

Corporate Restructuring – Introduction

& Concepts
LESSON OUTLINE LEARNING OBJECTIVES
The objective of this study lesson is to enable the The speed of business dynamics demands, the
students to understand business organizations not only to revamp their
internal business strategies like effective market
• Meaning of Corporate Restructuring expansion, increased customer base, product
• Need & Scope of Corporate Restructuring diversification and innovation etc., but also expects
the corporates to devise inorganic business
• Various Modes of Restructuring
strategies like mergers, acquisitions, takeovers etc.,
• Historical Background that results in faster pace of growth, effective
utilization of resources, fulfillment of increasing
• Emerging Trends
expectations of stakeholders. These restructuring
• Planning formulation execution of various strategies work positively for the business both
Restructuring Strategies during the time of business prosperity and recession.

• Role of Professionals in Restructuring Process This lesson would help you in understanding the
concept of corporate restructuring, available tools,
historical background & emerging trends in
restructuring strategies etc., the role of professionals
like company secretaries in the process of
restructuring right from the strategy development and
pre diligence stage till the post integration stage.
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INTRODUCTION
There are primarily two ways of growth of business organization, i.e. organic and inorganic growth.

Organic growth is through internal strategies, which may relate to business or financial restructuring within
the organization that results in enhanced customer base, higher sales, increased revenue, without resulting
in change of corporate entity.

Inorganic growth provides an organization with an avenue for attaining accelerated growth enabling it to skip
few steps on the growth ladder. Restructuring through mergers, amalgamations etc., constitute one of the
most important methods for securing inorganic growth.
Growth can be organic or inorganic
A company is said to be growing organically when the growth is through the internal sources without
change in the corporate entity. Organic growth can be through capital restructuring or business
restructuring.
Inorganic growth is the rate of growth of business by increasing output and business reach by
acquiring new businesses by way of mergers, acquisitions and take-overs and other corporate
restructuring strategies that may create a change in the corporate entity.

The business environment is rapidly changing with respect to technology, competition, products, people,
geographical area, markets, customers. It is not enough if companies keep pace with these changes but are
expected to beat competition and innovate in order to continuously maximize shareholder value. Inorganic
growth strategies like mergers, acquisitions, takeovers and spinoffs are regarded as important engines that
help companies to enter new markets, expand customer base, cut competition, consolidate and grow in size
quickly, employ new technology with respect to products, people and processes. Thus, the inorganic growth
strategies are regarded as fast track corporate restructuring strategies for growth.
MEANING OF CORPORATE RESTRUCTURING
Restructuring as per Oxford dictionary means “to give a new structure to, rebuild or rearrange".

As per Collins English dictionary, meaning of corporate restructuring is a change in the business strategy of
an organization resulting in diversification, closing parts of the business, etc, to increase its long-term
profitability.

Corporate Restructuring is defined as the process involved in changing the organization of a business.
Corporate Restructuring can involve making dramatic changes to a business by cutting out or merging
departments. It implies rearranging the business for increased efficiency 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 competitive and successful entity.
Corporate Restructuring as a Business Strategy
Corporate Restructuring is the process of significantly changing a company's business model, management
team or financial structure to address challenges and increase shareholder value. Restructuring may involve
major layoffs or bankruptcy, though restructuring is usually designed to minimize the impact on employees, if
possible. Restructuring may involve the company's sale or a merger with another company. Companies use
restructuring as a business strategy to ensure their long-term viability. Shareholders or creditors might force
a restructuring if they observe the company's current business strategies as insufficient to prevent a loss on
their investments. The nature of these threats can vary, but common catalysts for restructuring involve a loss
Lesson 1 Corporate Restructuring – Introduction & Concepts 3

of market share, the reduction of profit margins or declines in the power of their corporate brand. Other
motivators of restructuring include the inability to retain talented professionals and major changes to the
marketplace that directly impact the corporation's business model.

Corporate restructuring is the process of significantly changing a company's business model,

management team or financial structure to address challenges and increase shareholder value.
Corporate restructuring is an inorganic growth strategy.

NEED AND SCOPE OF CORPORATE RESTRUCTURING

Corporate Restructuring is concerned with arranging the business activities of the corporate as a whole so as
to achieve certain predetermined objectives at corporate level. Such objectives include the following:
— orderly redirection of the firm's activities;
— deploying surplus cash from one business to finance profitable growth in another;
— exploiting inter-dependence among present or prospective businesses within the corporate portfolio;
— risk reduction; and
— development of core competencies.

When we say corporate level it may mean a single company engaged in single activity or an enterprise
engaged in multi activities. It could also mean a group having many companies engaged in related or
unrelated activities. When such enterprises consider an exercise for restructuring their activities they have to
take a wholesome view of the entire activities so as to introduce a scheme of restructuring at all levels.
However such a scheme could be introduced and implemented in a phased manner. Corporate
Restructuring also aims at improving the competitive position of an individual business and maximizing it's
contribution to corporate objectives. It also aims at exploiting the strategic assets accumulated by a business
i.e. natural monopolies, goodwill, exclusivity through licensing etc. to enhance the competitive advantages.
Thus restructuring would help in bringing an edge over competitors.

Competition drives technological development. Competition from within a country is different from cross-
country competition. Innovations and inventions do not take place merely because human beings would like
to be creative or simply because human beings tend to get bored with existing facilities. Innovations and
inventions happen out of necessity to meet the challenges of competition. Cost cutting and value addition are
two mantras that get highlighted in a highly competitive world. Monies flow into the stream of production in
order to be able to face competition and deliver the best possible goods at the convenience and affordability
of the consumers. Global Competition drives people to think big and it makes them fit to face global
challenges. In other words, global competition drives enterprises and entrepreneurs to become fit globally.
Thus, competitive forces play an important role. In order to become a competitive force, Corporate
Restructuring exercise could be taken up. Also, in order to drive competitive forces, Corporate Restructuring
exercise could be taken up.
The scope of Corporate Restructuring encompasses enhancing economy (cost reduction) and improving
efficiency (profitability). When a company wants to grow or survive in a competitive environment, it needs to
restructure itself and focus on its competitive advantage. The survival and growth of companies in this
environment depends on their ability to pool all their resources and put them to optimum use. A larger
company, resulting from merger of smaller ones, can achieve economies of scale. If the size is bigger, it
enjoys a higher corporate status. The status allows it to leverage the same to its own advantage by being
able to raise larger funds at lower costs. Reducing the cost of capital translates into profits. Availability of
funds allows the enterprise to grow in all levels and thereby become more and more competitive.
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Corporate Restructuring …..an Example

ABC Limited has surplus funds but it is not able to consider any viable projects. Whereas XYZ Limited has
identified viable projects but has no money to fund the cost of the project. The merger of ABC Limited and
XYZ Limited is a mutually beneficial option and would result in positive synergies of both the Companies.

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. The various needs for undertaking a Corporate Restructuring exercise are as follows:
(i) to focus on core strengths, operational synergy and efficient allocation of managerial capabilities
and infrastructure.
(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 constant supply of raw materials and access to scientific research and technological
developments.
(v) capital restructuring by appropriate mix of loan and equity funds to reduce the cost of servicing and
improve return on capital employed.
(vi) Improve corporate performance to bring it at par with competitors by adopting the radical changes
brought out by information technology.

Planning, formulation and execution of various restructuring strategies

Corporate restructuring strategies depends on the nature of business, type of diversification required and
results in profit maximization through pooling of resources in effective manner, utilization of idle resources,
effective management of competition etc.

Planning the type of restructuring requires detailed business study, expected business demand, available
resources, utilized/idle portion of resources, competitor analysis, environmental impact etc., The bottom line
is that the right restructuring strategy provides optimum synergy for the organizations involved in the
restructuring process.

It involves examination of various aspects before and after the restructuring process.

Important aspects to be considered while planning or implementing corporate restructuring

strategies
The restructuring process requires various aspects to be considered before, during and after the
restructuring. They are
• Valuation & Funding
• Legal and procedural issues
• Taxation and Stamp duty aspects
• Accounting aspects
• Competition aspects etc.
• Human and Cultural synergies

Based on the analysis of various aspects, a right type of strategy is chosen.

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

Mergers may be
(i) 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 achieve economies of scale and result in reducing the number
of competitors in the industry.
(ii) 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 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
(iii) Co generic 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. The potential benefit from these mergers
is high because these transactions offer opportunities to diversify around a common case of
strategic resources.
(iv) Conglomerate Merger: These mergers involve firms engaged in 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 are no important common factors between the companies in production,
marketing, research and development and technology. Conglomerate mergers are merger 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. It
does not have direct impact on acquisition of monopoly power and is thus favoured throughout the
world as a means of diversification.
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2. Demerger

It is a form of corporate restructuring in which the entity's business operations are segregated into one or
more components. A demerger is often done to help each of the segments operate more smoothly, as they
can focus on a more specific task after demerger.

3. Reverse Merger

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

4. Disinvestment

Disinvestment means the action of an organization or government selling or liquidating an asset or

subsidiary. It is also known as "divestiture".

5. Takeover/Acquisition

Takeover occurs when an acquirer takes over the control of the target company. It is also known as
acquisition. Normally this type of acquisition is undertaken to achieve market supremacy. It may be 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 activity 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 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 strategic alliance.

8. Franchising

Franchising may be defined as an arrangement where one party (franchiser) grants another party
(franchisee) the right to use trade name as well as certain business systems and process, to produce and
market goods or services according to certain specifications.

The franchisee usually pays a one-time franchisee fee plus a percentage of sales revenue as royalty and
gains.
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9. Slump sale

Slump sale means the transfer of one or more undertaking as a result of the sale for a lump sum
consideration without values being assigned to the individual assets and liabilities in such sales. If a
company sells or disposes of the whole or substantially the whole of its undertaking for a predetermined
lump sum consideration, then it results in a slump sale.

CORPORATE RESTRUCTURING - HISTORICAL BACKGROUND

In earlier years, India was a highly regulated economy. Though Government participation was overwhelming,
the economy was controlled in a centralized way by Government participation and intervention. In other
words, economy was closed as economic forces such as demand and supply were not allowed to have a full-
fledged liberty to rule the market. There was no scope of realignments and everything
was controlled. In such a scenario, the scope and mode of Corporate Restructuring were very limited due to
restrictive government policies and rigid regulatory framework.

These restrictions remained in vogue, practically, for over two decades. These, however, proved
incompatible with the economic system in keeping pace with the global economic developments if the
objective of faster economic growth were to be achieved. The Government had to review its entire policy
framework and under the economic liberalization measures removed the above restrictions by omitting the
relevant sections and provisions.

The real opening up of the economy started with the Industrial Policy, 1991 whereby 'continuity with change'
was emphasized and main thrust was on relaxations in industrial licensing, foreign investments, transfer of
foreign technology etc. With the economic liberalization, globalization and opening up of economies, the
Indian corporate sector started restructuring to meet the opportunities and challenges of competition.

The economic and liberalization reforms, have transformed the business scenario all over the world. The
most significant development has been the integration of national economy with 'market-oriented globalized
economy'. The multilateral trade agenda and the World Trade Organization (WTO) have been facilitating
easy and free flow of technology, capital and expertise across the globe. A restructuring wave is sweeping
the corporate sector all over the world, taking within its fold both big and small entities, comprising old
economy businesses, conglomerates and new economy companies and even the infrastructure and service
sector. From banking to oil exploration and telecommunication to power generation, petrochemicals to
aviation, companies are coming together as never before. Not only this new industries like e-commerce and
biotechnology have been exploding and old industries are being transformed.

With the increasing competition and the economy, heading towards globalisation, the corporate restructuring
activities are expected to occur at a much larger scale than at any time in the past. Corporate Restructuring
play a major role in enabling enterprises to achieve economies of scale, global competitiveness, right size,
and a host of other benefits including reduction of cost of operations and administration.
Expanding role of professionals in corporate restructuring process
The restructuring process does not only involve strategic decision making based on the market study,
competitor analysis, forecasting of synergies on various respects, mutual benefits, expected social impact
etc, but also the technical and legal aspects such as valuation of organizations involved in restructuring
process, swap ratio of shares if any, legal and procedural aspects with regulators such as Registrar of
Companies, High Court etc., optimum tax benefits after merger, human and cultural integration, stamp duty
cost involved etc.
It involves a team of professionals including business experts, Company Secretaries, Chartered