Introduction: The process of corporate restructuring is considered very important to eliminate all the financial crisis and enhance the company’s performance. It is a step taken by corporate entity to modify its capital structure, or its operations. The corporate entity facing financial crunches hires the expert advisory people to deal with this. It involves modifying the debt and operations of the entity.
Understanding Restructuring
A company may restructure as a means of preparing for a sale, buyout, merger, change in overall goals, or transfer to a relative. For example, a company might choose to restructure after it fails to successfully launch a new product or service, which then leaves it in a position where it cannot generate enough revenue to cover payroll and its debt payments.
Depending on agreement by shareholders and creditors, the company may sell its assets, restructure its financial arrangements, issue equity to reduce debt, or file for bankruptcy as the business maintains operations.
Characteristics of Corporate Restructuring
- To help improve balance sheet of the company.
- Shifting of operations such as moving to lower-cost locations.
- Removing of underutilized assets.
- Reorganizing functions like marketing, sales and distribution
- Rescheduling or refinancing of debt to minimize interest pays.
Corporate Restructuring Types
Financial Restructuring: Here there will be a significant drop in the overall sales due to lack of proper economic conditions. In financial restructuring company’s equity pattern, holdings, debt servicing schedule and cross holding pattern, etc can be altered. This type of restructuring is done to sustain the market and profitability of the company.
Organizational Restructuring: Change or replacement in a company’s organizational structure, such as lowering its degree of hierarchy, redefining job positions, downsizing personnel and modifying reporting connections is called as organizational restructuring. It helps in reducing cost and pay off the existing debt to continue with corporate operations.
Types of Restructuring
Some of the types are:
1. Merger- Here two or more entities are merged together either by way of absorption or amalgamation or by forming or establishing a new company. It is a common strategy used by companies which are struggling financially to find a way to keep business going.
2. Demerger- Where a business merger does not work out as planned. This could happen because of an unforeseen clash of company culture or management egos.
3. Joint Venture- When two or more parties come together to form a totally new or different business. Both business will bring resources and experience and in turn split the responsibilities, expenses and profits.
4. Acquisition- When one firm takes over complete control over the target company by this way is also called as purchase or restructuring.
5. Strategic Alliance-When two or more entites agree to work to achieve a certain goal while being two different organizations is called as a strategic alliance.
Reasons for Corporate Restructuring
1. Reserve Synergy: Here the value of a merged unit is less than the value of an individual unit. This could be one of the main reasons for divesting (depriving something or someone) the assets of the company. The concerned entity or company may decide that by divesting a division to a third party can fetch more value rather than owning it.
2. Cash flow requirement: Getting rid of an unproductive undertaking can provide cash inflow to the company. If the concerned entity is facing financial crisis then disposing off an asset is an solution to raise money and reduce debt.
3. Lack of Profits: The undertaking may not be profit making to cover the cost of capital of the company and may cause economic losses. The poor performance of undertaking may be a result of the wrong decisions taken by the management to start the division or decline the profitability of the undertaking due to change in customer needs.
Conclusion: In conclusion, corporate restructuring is not just a response to financial crises; it’s a proactive strategy to enhance a company’s competitiveness. By understanding the intricacies, characteristics, and types of restructuring, businesses can navigate challenges, capitalize on opportunities, and position themselves for sustained success in a dynamic business environment. Stay informed and empowered in the realm of corporate restructuring.
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