17-06-2014, 02:45 PM
BUSINESS RESTRUCTURING
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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. Other 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.
This type of corporate action is usually made when there are significant problems in a company, which are causing some form of financial harm and putting the overall business in jeopardy. The hope is that through restructuring, a company can eliminate financial harm and improve the business
Restructuring may also be described as corporate restructuring, debt restructuring and financial restructuring.
IMPORTANCE OF BUSINESS RESTRUCTURING:
In today’s world, along with increasing focus on globalization and liberalization, there is free competition among businesses. So business restructuring helps to identify opportunities.
It helps the business to survive and stay fittest from the rest.
It plays an important role in the internal and external growth of the organization.
Improves share holders confidence in the company.
Reduces the cost of operations for the company.
1) MERGERS:
The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.
Mergers come into play in the world of business for two very different reasons.
-The first is when you've decided it makes sense to join forces with another company to reap the rewards that come from your combined strengths.
- The second reason you'd plan for a merger is when you've decided you want to sell your company and another, existing business decides it would be in its best interest to acquire your firm.
Types of mergers:
There are many types of mergers and acquisitions that redefine the business world with new strategic alliances and improved corporate philosophies. From the business structure perspective, some of the most common and significant types of mergers and acquisitions are listed below:
1. Horizontal Merger:
This kind of merger exists between two companies who compete in the same industry segment. The two companies combine their operations and gains strength in terms of improved performance, increased capital, and enhanced profits. This kind substantially reduces the number of competitors in the segment and gives a higher edge over competition.
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.”
Example:
A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs.
2. Vertical Merger:
Vertical merger is a kind in which two or more companies in the same industry but in different fields combine together in business. In this form, the companies in merger decide to combine all the operations and productions under one shelter. It is like encompassing all the requirements and products of a single industry segment.
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).
Weinberg and Blank define Vertical merger as follows:
“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.”
) ACQUISITION:
A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company's stock or a combination of both.
Acquisition is also called as a “TAKEOVER”.
Acquisitions can be either friendly or hostile.
Friendly acquisitions occur when the target firm expresses its agreement to be acquired
Hostile acquisitions don't have the same agreement from the target firm and the acquiring firm needs to actively purchase large stakes of the target company in order to have a majority stake. In either case, the acquiring company often offers a premium on the market price of the target company's shares in order to entice shareholders to sell. For example, News Corp.'s bid to acquire Dow Jones was equal to a 65% premium over the stock's market price.
DIFFICULTIES IN JV:
Inadequate preplanning for the joint venture.
The hoped-for technology never developed.
Agreements could not be reached on alternative approaches to solving the basic objectives of the joint venture.
People with expertise in one company refused to share knowledge with their counterparts in the joint venture.
Parent companies are unable to share control or compromise on difficult issues.
4) DE- MERGERS :
A business strategy in which a single business is broken into components, either to operate on their own, to be sold or to be dissolved. A de-merger allows a large company, such as a conglomerate, to split off its various brands to invite or prevent an acquisition, to raise capital by selling off components that are no longer part of the business's core product line, or to create separate legal entities to handle different operations.
For example, in 2001, British Telecom conducted a de-merger of its mobile phone operations, BT Wireless, in an attempt to boost the performance of its stock. British Telecom took this action because it was struggling under high debt levels from the wireless venture. Another example would be a utility that separates its business into two
components: one to manage the utility's infrastructure assets and another to manage the delivery of energy to consumers